The effective use of director talent.

• Author: Fischer, Judith M.

Director consulting arrangements can certainly be allied with shareholder interests and a legitimate element in corporate governance.

In response to public criticism, a sea change is going on in how companies pay directors and the way in which companies are governing themselves. Once a bastion of insiders and golfing buddies, corporate board composition is being revamped by recruiting directors with professional, academic or managerial credentials that add value to the existing body of corporate expertise.

But - perhaps surprisingly - the increasing number of accomplished outside directors on boards seems to be raising another contentious issue. How can the director's accomplishments best be tapped in the interest of the company and its shareholders? Specifically:

* Should the role of the highly qualified director be limited to enhancing the overall qualifications of the board to govern more efficiently and effectively on behalf of the company's shareholders? Or...

* Should the distinguished outside director be asked to provide unique operational services that give the company and its management a greater competitive edge?

Many companies have sought to derive operational (as opposed to governance) benefits from an accomplished outside director's unique expertise by entering into consulting arrangements. Instead of being widely applauded, these arrangements have sparked criticism.

The critics assert that board members cannot maintain an appropriate distance from the managers they are overseeing if they are undertaking paid consulting assignments for these same managers. This is a rational concern, but to have real significance in corporate governance it must relate to sums of money large enough to buy the independence of a substantial number of outside directors.

And director independence is only one angle of attack by shareholder activists who have been successful out of all proportion to the shares they control in affecting corporate determinations on the appropriateness of not only special fees for special services but on all aspects of director compensation.

Pressure to Redesign

Some companies are responding to external pressures by eliminating or redesigning how directors are paid. A pressured American Express last year announced that, after former secretary of state and presidential advisor Henry Kissinger's current board term was up, the company would no longer pay consultancy fees to any outside members of the board.

Kissinger, a board member since 1984, has also served as a consultant to the company for over 10 years. In 1994, he was paid $100,000 by the parent company for consulting and international advisory services. Also in 1994, American Express's Lehman subsidiary paid Kissinger Associates a fee of $20,833 per month "to provide consultation and services relating to certain areas of the world where rapidly changing events have caused economic and political volatility," in addition to his compensation as a director.

In 1996, Kissinger is no longer a director of American Express. But, in "civilian status," he will be paid $100,000 for advisory services to the board plus expenses incurred in traveling to and from meetings of the current directors. These services, outlined in a February 2, 1996 letter agreement, include advising on international economic and political developments, financial market conditions, competitive developments, and other information of relevance to the company's businesses or plans. Dr. Kissinger is invited to attend all meetings of the board whenever convenient. Further in the February 2 letter agreement...