Denver Business Journal February 20, 2004 IN DEPTH: CORPORATE GOVERNANCE The invisible board member New laws make filling board seats difficult By Cathy Proctor In the fallout from myriad corporate scandals that run the gamut from the Enron Corp. debacle to Martha Stewart’s investment decisions, who sits on a company’s board of directors is becoming more and more important. But the requirements for being a member of the board is also changing as the new Sarbanes-Oxley law and other rules take effect. The net effect is that it’s harder to find a board member these days than in the past, according to surveys and search firms. “Absolutely, its harder,” said Martin Pocs, managing director of DHR International’s Denver office. Chicago-based DHR concentrates on executive searches and is ranked the fifth-largest search firm in the U.S., and among the top 10 in the world in revenue. DHR’s board recruiting business has grown tremendously in the last few years, Pocs said—particularly searches for someone with financial expertise. “People are more aware of the potential culpability of being a board member. It has spooked some people,” Pocs said. One of the biggest changes for board members in recent years is the Sarbanes-Oxley Act, passed in 2002 in response to pervasive headlines about corporate fraud. The act was intended to offer more information to the public and tighten controls on corporate management. Among other things it requires that CEOs and CFOs certify corporate reports on financial information— or be subject to potential criminal penalties. It also requires an audit committee within the board of directors to look at the company’s financial records and use outside accountants and attorneys. “Sarbanes-Oxley has put more pressure on the financial abilities of board members,” Pocs said. “It can seem like a daunting time to be a board member with all the rules. But Sarbanes-Oxley will ultimately be a good thing with more transparency for the shareholder.” The law requires companies to disclose whether or not—and if not, why not—at least one member of the audit committee is considered a financial expert. That, in turn has changed what companies are looking for in their new board members. “It’s a pool, that’s been redefined. For years it used to be friends and acquaintances of the CEO’s and they’d serve on each other’s boards,” Pocs said. “Now they’re looking for CFOs or partners from the Big 4 auditing firms. “If you’re a retired partner from a Big 4, you can write your own ticket. Those guys are in tremendous demand,” he said. The Big 4 are considered KPMG LLP, Deloitte & Touche LLP, PricewaterhouseCoopers LLP and Ernst & Young. All the new rules mean board members are spending a lot more time on their directorship duties. Nearly two-thirds of corporate board members spent more time on their duties during the past year compared to the previous year, according to the PricewaterhouseCoopers Management Barometer. The quarterly report, release in early January, surveyed senior executives at 177 large, U.S. multinational companies and found that 62% of boards increased the time and effort spent on corporate governance during the past year—with nearly 30% of respondents saying they spent “much more time,” according to the report. Among the board audit committees, 68% reported they spent more time—including the 42% who said they spent “much more time” on their duties, the report said. Yet few board members were getting more money for their additional time and responsibilities –at least not yet, according to the survey’s findings. Board compensation increased at only 20% of the companies that responded, while 47% of companies said their board’s pay arrangements remained the same. For those companies that did raise the compensation level, the average raise was 17.9%, according to the survey. “Although there is a substantial amount of interest about increased compensation to boards, few companies are actually making the commitment to raise board pay. I don’t expect this to continue,” Garret Stauffer, leader of PricewaterhouseCoopers’ U.S. Corporate Governance Practice, said when the company announced the findings. The added work load has had a mixed effect on recruiting new board members. Some companies -- about 28 percent -- said they had no problems finding new board members, while 18 percent used "difficult" to describe their recruiting efforts. Another 27 percent of respondents didn't need new board members during the time frame covered by the survey and 27 percent didn't answer the question, according to PricewaterhouseCoopers. "There's a lot more convincing and cajoling on our part to get people to at least take a look at a board opportunity," Pocs said. Ultimately, with the higher requirements for financial expertise and the fewer people in the pool of qualified applicants, Pocs believes some boards will shrink over the years. "You'll see the 'Do we need 14 people? Let's just get by with 11,'" he said. That move could have its own fallout, with fewer people on a board reducing the diversity of the board's experience in different business fields, Pocs said. It's the smaller companies that are likely to have a harder time looking for new board members, Pocs said. But smaller companies do offer some advantages for board members. Board members can gain experience at their jobs in a smaller environment. The position also can be a stepping stone to the board of a Fortune 500 company, Pocs said. "You really need to find the motivation of the individual," he said. Sometimes board members are intrigued by the industry involved or the location of the board meetings. "Skiers like to have board meetings in Vail, golfers in Phoenix," Pocs said.