Whatever happened to pensions for directors? Director Retirement plans have been dismantled--for good reason.

• Author: Cook, Frederic W.
• Position: DIRECTOR COMPENSATION

THE FIRST TIME I ever heard about retirement plans for directors was in a discussion with the chairman of a large retail chain around 1976. Its proxy statement said that it had a pension plan for outside directors who met certain age and board-service requirements (e.g., age 70 with 10 or more years of service). I asked him why they had such a plan. He replied that there was a director on their board who was ill and not able to participate as well as he had previously. He said he called up that director's wife and asked why he didn't retire. She replied that they needed the money.

So, the company established a plan to facilitate board retirements, without calling out any particular individual. Incidentally, that logic was a principle factor behind the growth of pension plans for employees and managers (i.e., age-based, rather than performance-based, retirement).

Whether this was the precipitous cause or not, pension plans for directors began to be adopted by other large companies, but never became a majority practice. They peaked around 1995, as I recall, at about 10-11% prevalence among top 250 companies. That was an era when it was fairly common to provide directors with certain benefits that were also offered to employees, such as medical plans, life insurance, and charitable bequest plans funded by life insurance. It was not thought at the time that such plans interfered with directors' independence. But, of course, they certainly could.

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When the tide turned

The tide started to change, in my view, with the publication in 1995 of "Report of the NACD Blue Ribbon Commission on Director Compensation," authored by Professor Robert B. Stobaugh of the Harvard Business School. 1 was one of the 19-member panel that participated in the work that led to the report. I recall that Prof. Stobaugh's report argued against the use of pensions and restricted stock with multi-year vesting for directors because they made the director "beholden to the company."

This resonated with me and many others. And I believe it triggered the dismantling or termination of directors' benefit plans that continues to this day. The thought was that, if the director had to continue to remain on the board in order to vest in and earn the benefit, he or she might not aggressively challenge management or other board members, or might even be reluctant to resign from the board over a matter of principle, because of the potential loss of an important part...