The case for cash for directors.

• Author: Kaback, Hoffer
• Position: Reprint from Directors & Boards, Winter 1996 - Putting In Place the Right Board for the 21st Century

Hoffer Kaback's article thoroughly demolishes the rationale for why companies should be required to pay their directors wholly or substantially in Stock. 'Politically correct' it is proudly not -- being as it is a bold counterpoint to the stance taken by many in the governance community who want to mandate stock compensation and stock ownership for board members. One will not read this article without coming away with afresh -- and likely head-turning -- perspective on how board members should be paid for services rendered. Kaback is president of Gloucester Capital Corp., a New York investment firm, and a corporate director, and, starting with our next issue, he will become a regular columnist for DIRECTORS & BOARDS.

IT IS BENEFICIAL for a director of a public company to think and act as if he were an owner-director of a private business. But this is a hypothetical construct. Acting as if one were a principal (say, one-third) owner of a private business is wholly different from Alignment.

For a director to own, under Alignment, a few thousand shares of a multibillion-dollar market cap public company just does not make him an "owner" in any real sense. There is simply too big a leap from the private company hypothetical.

The critical point is that whether or not he owns stock, the good director will think and act like a hypothetical one-third owner of a private company. Similarly, whether or not he owns stock (in small or large amount), the bad director will think and act like the turkey that he is. Stock certificate ink does not possess transforming, magical properties that somehow flow into the bad director to make him into Richard Coeur-de-Lion.

Indeed, the more stock the bad director owns, the greater the possibility he will be "motivated" to influence corporate action in the direction of his own selfish interests.

Under our present mode of corporate governance, the board's role is not that of a "partner" in the business. For many corporations, the board consists in substantial part of outside, independent directors who bring to the boardroom their business judgment and outside perspective but otherwise have little or no direct connection to the business. Some believe that that is its own virtue.

Tying director compensation to the performance of the company's stock, as [Stock Comp and Stock Own proponents] would have it, is superficially appealing but does not withstand analysis. Can one be a good director even though the company's stock...