The Board of Directors: A Key to Company Success

Shareholders Push for Term Limits, Greater Accountability

For many investors, a board of directors is little more than a collection of names and photographs in an annual report. But the average board member in an S&P 500 company serves for 8.4 years — almost two years longer than the average chief executive’s tenure.¹

That’s a long time to influence company policy and management’s performance. Given the wide and important role that the board plays, it is a good idea to look beyond the glossy portraits and become familiar with the individuals tasked with guarding shareholder wealth.

Selected by Shareholders

Although a board must operate within a framework of laws, regulations, and ethical restraints, it pursues one primary goal: protecting the interests of shareholders. It does this by scrutinizing management’s performance and making important decisions such as whether to pay dividends, split or repurchase stock, and merge with or acquire other companies.

Directors are typically elected by shareholders, who tend to prefer executives and business professionals, both active and retired.² It is generally a good sign when a board is made up of a majority of independent outsiders: individuals who have never worked for the company, are not related to anyone working for or with the company, and don’t have any other conflicts that could cause them to behave in ways that are not in the shareholders’ best interests.

Renewed Scrutiny

Many directors of large companies are facing new pressures and scrutiny, especially in such matters as executive pay. Directors increasingly find themselves held accountable when profit evaporates and missteps occur. In addition, some major shareholders and other independent blocs are seeking expanded roles in choosing board members and instituting governance changes.

As a reflection of this demand for greater accountability, 68% of S&P 500 companies require their directors to win reelection every year in order to remain on the board, with 65% of companies requiring directors to offer their resignations if they don’t win a majority of shareholder votes.³ A decade ago, only 38% of S&P 500 companies had annual term limits in place.

Washington, D.C., has given corporate boards a healthy dose of scrutiny in recent years. The Sarbanes-Oxley Act of 2002 introduced a range of strict new accountability rules for boards and backed the standards with criminal penalties. Board audit committees, for example, must have a majority of independent members and are personally responsible for the accuracy of company financial statements.

Much attention is focused on a corporation’s individual leader, whether that person is the chief executive officer or the chairman of the board. But it’s also a good idea to watch the board of directors because they have a tremendous influence on the company’s health and future.

1–3) 2009 Spencer Stuart Board Index

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2010 Emerald.