Today's 'state of play' of governance practice.

• Author: DAUM, JULIE HEMBROCK

Drawing from the 15th annual Spencer Stuart Board Index, here are highlights of how leading companies are approaching the challenges of board composition, compensation, and director recruitment.

THE YEAR 2000 provides an opportunity, a solid benchmark, to step back and assess the current state of corporate governance. And since it is also conveniently the 15th official year of the Spencer Stuart Board Index (SSBI), our annual survey of board trends and practices at 100 leading companies, we can make some long-term observations that paint a comprehensive picture of the evolution of a variety of board activities. We say "official," because we actually have some data that go back a full 20 years, some of which we refer to in this report.

At Spencer Stuart, we have a long tradition of approaching corporate governance from a best-practices point of view. That is, there are practices that the boards of leading public companies with a long-term record of success and rewarding shareholders have undertaken that we believe have become the standard of excellence for other companies to follow. These practices, some of which were considered a bit radical when we first began publishing the SSBI, now include commonly accepted tenets such as strictly limiting insiders on boards, compensating directors at least partially in stock, and prohibiting inside directors from serving on compensation and audit committees. Many of these model practices were intended - and not by accident -- to strengthen the identification of directors with the shareholders whose interests they represent.

Fast-forward to the late 1990s and the giddy success of a pack of newly minted e-commerce companies. Many of these companies, observers note -- including us in our first report on Internet boards in 1999 -- have defied much of the conventional wisdom on best practices and achieved astounding gains for shareholders nonetheless. "The old rules do not apply to this new and different upstart group," many have said, and as long as these companies continued to produce great gains no one complained too loudly. But after the crash and burn last spring, and another sharp drop in the fall, of some Internet companies listed on the NASDAQ, and the sobering experience of others with Web ambitions, there is greater uncertainty about the path that e-commerce companies should follow with their boards.

Trend overview

For the moment, it is safe to say that the tried-and-true practices that leading traditional boards have subscribed to for a number of years are more firmly entrenched than ever. We'll discuss the precise status of these long-term practices, but first a few observations of the qualitative, not quantitative, variety based on what we are seeing in our Boards Services Practice -- which encompasses nearly 20 years in board search and more than 200 searches for directors last year alone.

More executives are choosing nontraditional boards. A board seat has traditionally been a chance to not only add additional skills and experience to one's personal repertoire but also to enhance one's standing as a professional by the board one chooses to join. For this reason, boards that were considered particularly prestigious -- those of large, traditional companies -- have always been the most sought after.

But we now see evidence that this pattern is changing. In recent board searches, we increasingly see top executives whose first priority is not getting a seat on a "prestigious" board. Rather, they are particularly intrigued by boards of younger, faster-moving New Economy companies where they can have more of an impact, learn about leading-edge technology, see strategic plans bear fruit, and have some fun in the process. These are important considerations when executives, whose dance cards are already filled, are contemplating yet another outside commitment.

Boards, too, are broadening their horizons. Spurred partially by a shortage of directors who fit the traditional spec -- that is, CEOs -- many companies are becoming increasingly thoughtful about the skills and experience they require on their boards. Necessity may indeed be the mother of invention, but boards that may never have considered certain director candidates because they were outside the CEO spec are finding a more targeted approach that focuses on specific industry, technical, or international expertise, for example, may produce great rewards. We do find many more boards thinking in strategic terms when considering whom to add to their mix, focusing on directors who have needed expertise or contacts in new markets.

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