Nov. 18 /CSRwire/ - Washington, D.C. -- A significant number of companies face structural changes to their boards in light of proposed stock exchange listing rules that set new requirements for director independence and board committees, finds IRRC's latest study Board Practices/Board Pay 2002: the Structure and Compensation of Boards of Directors at S&P 1,500 Companies. Under the NYSE proposed rules, for example:
- All listed companies must have committees that deal with corporate governance matters, but only 51 percent of NYSE companies currently have such committees.
- All listed companies must have audit, compensation, and nominating committees and they must be fully independent. IRRC finds that 29 percent of the audit committees, 25 percent of the compensation committees and 48 percent of the nominating committees at NYSE companies are not completely independent. About 20 percent of NYSE companies do not even have nominating committees.
- All listed companies must have a majority of independent directors on the board. Thirteen percent of the largest NYSE companies did not have a majority of independent directors (based on IRRC's standards) as of 2002.
The study tracks trends in both board practices and board pay. Despite some spectacular corporate failures, companies generally continued to implement practices commonly associated with "good" governance, including record levels of companies with majority independent boards and an increase in the independence of audit committees. However, some disturbing features persist, such as a lack of independent directors serving on nominating committees and in positions of board leadership, a shortage of corporate governance committees, and little diversity on boards.
The study also finds that elements of director compensation continue to rise as the demands and responsibilities on corporate directors increase. Areas of significant change in director compensation practices include an increase in the value of the annual retainer and board meeting fees and an increase in the proportion of companies that grant stock options to directors on an annual basis. In addition, IRRC has identified companies that have begun to pay extraordinary compensation to audit committee members.
Highlights of the numerous findings of IRRC's new study includes the following:
- In all, 85 percent of study companies had at least a majority (50 percent of more) of independent directors serving on the board--the independence threshold proposed by the major U.S. stock exchanges. Only 48 percent, however, had boards that were two-thirds independent--the threshold encouraged by many institutional shareholders.
- Both the prevalence and independence of key board committees generally reached record levels this year.
- 71 percent of audit committees are comprised solely of independent directors, up from 51 percent just three years ago.
- The proportion of companies with nominating committees jumped to 74 percent from 68 percent in the prior year. Only 50 percent of nominating committees are fully independent, however.
- 41 percent of study companies disclosed that they have a committee with corporate governance responsibilities, up just more than 10 percentage points from five years ago.
- The recruitment of women and minorities to the boards of U.S. companies has not changed in the last three years. Women account for 10 percent of all directorships and minorities account for about 9 percent. A striking finding is that women and minorities are more likely to be independent than directors overall. Eight-six percent of directorships held by women and 82 percent of minority directorships are classified as independent, compared with 70 percent generally.
- The value of a board retainer--that is the annual fee paid in cash and/or unrestricted shares--is up nearly 4 percent from last year, now averaging $29,350. Ninety percent of companies pay a retainer.
- The average board attendance fee among all companies¾$1,468¾has increased by 4 percent since 2001 and 8 percent since 2000.
- The proportion of companies making annual option grants to directors rose a hefty 10 percentage points this year, from just 58 percent in 2001.
- The average total remuneration of a typical non-employee director is $106,584, of which about one-third is paid in cash.
- The practice of granting benefits to directors continues to decline.
About the study:
Board Practices/Board Pay 2002
reviews and evaluates the latest board structure and compensation practices of 1,245 U.S. companies, and examines a total of 11,833 directors, making it the most comprehensive comparative tool available. The study is based on disclosures of governance features and board compensation amounts that were reported in proxy statements for S&P 1,500 companies that held annual meetings between Jan. 1 2002 and July 31, 2002. Each company's governance practices and compensation packages are summarized, and benchmarks are analyzed for three S&P indexes, 10 revenue bands, and 10 economic sectors.
IRRC, for over 30 years, has been the leading source of high quality, impartial information on corporate governance and social responsibility issues affecting investors and corporations worldwide. Today, IRRC provides research, software products and consulting services to more than 500 clients including institutional investors, corporations, law firms, foundations and academics.