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IRRC’s Study Shows Corporations Overhauling Boards and Director Pay

Published 12-05-03

Submitted by IRRC

Washington, D.C. — Spurred by investor outcry and more stringent stock exchange listing rules, companies made dramatic increases in board independence levels in 2003, finds the latest edition of IRRC’s annual Board Practices/Board Pay study. At the same time, outside directors’ total pay packages declined, due to lower option grant values.

IRRC’s analysis of nearly 1,500 companies in the S&P 500, MidCap, and SmallCap indexes shows that 83 percent of the firms now have a majority of independent directors on the board, up from 78 percent last year and 72 percent five years ago.

What’s more, the average board is now 69 percent independent, compared with 66 percent last year, and 62 percent five years ago. The increase appears to result from a deliberate change in the composition of boards - 13 percent of this year’s directors joined a board for the first time during the last two years, and 80 percent of those new directors are independent from the company where they now serve.

IRRC’s landmark study tracks trends in both board practices and board pay at S&P “Super 1500” companies. Despite increased demands on board members “post-Enron,” total remuneration for a typical director dropped by 4 percent in 2003 to approximately $102,000. This is the first time in five years this figure declined, triggered by a 22 percent decline in the average value of stock option grants. The value of directors’ annual retainers, consisting of cash and unrestricted shares, on the other hand, rose by a healthy 10 percent last year to about $32,000.

Meanwhile, awards of deferred stock, time-lapsing restricted stock, and stock units are on the upswing. The average annualized value of total long-term stock awards increased by 7 percent in 2003, and the prevalence of companies using these types of long-term stock awards rose from 24 percent to 28 percent. A few companies, including American Express, Bank of America, General Electric, J.P. Morgan Chase, KeyCorp, Safeco, Temple-Inland, and Waste Management recently stopped granting options to non-employee directors altogether; each of these companies adopted or boosted long-term stock awards as replacements.

“Increased scrutiny and criticism of stock options for directors has clearly had an impact,” notes Alesandra Monaco, Deputy Director of IRRC’s Governance Research Service, who led the study. “Companies are using other types of stock-based compensation more, to keep the interests of shareholders and directors aligned.”

Other important findings of this year’s Board Structure/Board Pay study include the following:

  • Board size down: The average board size decreased, from 10 to nine directors, for the first time since IRRC began tracking such information in 1997. This change appears to have resulted from many affiliated directors stepping down to allow the company to comply with more strict independence rules.
  • Independent leadership growing: 30 percent of companies now separate their chair and CEO positions—that’s up from 26 percent in 2001, the biggest three-year jump ever seen. Also up—the proportion assigning the job to an independent director (9 percent this year, versus 7 percent just last year). Even more remarkable is the upsurge in “lead” or “presiding” directors. Nearly a fifth of companies reported a lead or presiding director in 2003, up from only 3 percent last year. These board leaders are almost always independent directors. Overall, 23 percent of companies examined now have some form of independent board leadership, up from just 10 percent in 2002.
  • More than half the companies with a non-employee chairperson pay extra compensation for that service. On average, that fee ($92,389) is more than twice the typical extra amount some companies pay to a lead or presiding director ($38,000).

  • Board committees also more independent: Nearly 80 percent of audit committees are fully independent, a dramatic increase over the last five years (in 1999, only 56 percent of companies surveyed had fully independent audit committees). Also, nearly 80 percent of compensation committees are fully independent, up from about 70 percent five years ago. Only 57 percent of nominating committees are fully independent, however. On the other hand, nearly 90 percent of companies now have a nominating committee in place, compared with 74 percent last year; and a remarkable 75 percent now have committees that are assigned corporate governance responsibilities, up from just 40 percent last year.
  • Board meetings flat, but attendance - and fees - are up. Despite the increased focus and demands on board members, the average number of in-person meetings held in 2003 - seven has not changed in more than five years. Directors are receiving higher pay to attend meetings, however—an average fee of about $1,600 per meeting as of 2003, up 7 percent from the prior year.
  • Attendance is also improving - only 13 percent of companies reported having any directors who missed more than 25 percent of requisite meetings, compared with 21percent in 1999. That’s despite the fact that less than 1 percent of study companies have disclosed that they penalize absentee directors.

  • Other director “service” pay also rises. In response to the increasing demands on members of key committees, companies are paying these directors more for their time and services. As of 2003, 82 percent of companies pay additional compensation to a member of the audit and/or compensation committee, up from 77 percent in 2002. Also, 70 percent of companies now pay additional compensation to the chair of an audit and/or compensation committee, up from 56 percent last year. The average chair retainer ranges from approximately $5,700 on the compensation committee to about $7,200 on the audit committee. Disparities are not as pronounced with respect to meeting fees, however, which range from about $1,100 for attending a compensation committee meeting to almost $1,200 for audit committee attendance, on average.
  • Stock ownership guidelines are spreading, slowly. About 15 percent of study companies disclosed stock ownership guidelines for directors, up from 11 percent last year. Whether expressed in a dollar value, a number of shares, or a multiple of retainer, the average value of ownership thresholds among these 190 companies is approximately $139,000.
  • About the study:

    Board Practices/Board Pay, 2004 Edition, reviews and evaluates the latest board structure and compensation practices of 1,275 U.S. companies, and examines a total of 12,065 directors, making it the most comprehensive comparative tool available. The study is based on disclosures of board structure and compensation amounts reported in proxy statements for S&P 1,500 companies that held annual meetings between January 1 and July 31, 2003. Each company’s practices and compensation packages are summarized, with numerous benchmarks presented for three S&P indexes, 10 revenue bands, and 10 economic sectors.

    For more than 30 years, IRRC 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 nearly 500 clients including institutional investors, corporations, law firms and other organizations.

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