If you're a director, you can be excused for seeing the last 40 years of board history as a relentless chronology of regulatory growth. A key result has been more work and more personal risk — along with more worry about how outsiders view every move.
But what if we take a contrary view? What if we look at the historical glass as half-full instead of half-empty? The changes that have swept over the board then appear, ironically, to have also swept it forward. Directors have put shareholders at the center; introduced more structure and process; injected extra rigor into every task; and embraced shareholder and stakeholder dialogue.
More shareholder centrality. As the doldrums of the 1970s passed, the stock market took off, and companies in the 1980s embraced Milton Friedman's notion that the job of CEOs was to make money for shareholders. Investors cheered as directors refocused on shareholder value.
Rising board transparency, accountability, and independence. In the 1990s, junk-bond financing fueled leveraged buyouts and takeovers. Share prices rose in the wake of restructurings, but as companies laid off workers and manufacturing-based cities hollowed out, total CEO compensation rose. Congress, irritated, capped the deduction for executive pay at $1 million (excepting “performance-based” pay) and required new proxy disclosures on pay in 1992. More transparency failed to damp pay growth, but boards became more accountable for performance defined as shareholder gains.
More structure and processes. Investors insisted on stock gains in the late 1990s even in the absence of profits or sustainable business models. The stock market soared and then crashed. Existing governance controls proved inadequate, triggering passage of the Sarbanes-Oxley Act. The 2002 act created a new accounting oversight board and ushered in more board structure and process. Directors were obliged to give investors more accurate information, hold executive sessions, and defer more to independent advisors. Directors now rotate audit leads, and auditors give an opinion on the strength of accounting.
More rigor following the flood of litigation. More compliance triggered more litigation, raising directors' personal and reputational risk. A sharp reminder came in 2003, when Richard Grasso, fired from the New York Stock Exchange, reaped $139.5 million. Outsiders raised a ruckus. Another reminder came in lawsuits following Disney CEO Michael Eisner's firing of President Michael Ovitz in 1996. Ovitz received $109.3 million in severance. Incensed shareholders sued. The board won a 2005 final ruling, but directors more broadly felt the scrutiny under a new microscope.
A new high in transparency. In 2006 (and in 2009), regulators required the board to disclose the board's pay philosophy and decision-making in the new Compensation Discussion & Analysis section in the proxy. Shareholders applied more pressure for transparency, insisting on learning about director skill sets, board leadership, and committee charters.
The dawn of direct shareholder dialogue. After the 2008 financial crisis, the 2010 Dodd-Frank Act targeted financial institutions, but across industries it transformed compensation and the role of investors. With its say-on-pay provisions, shareholders won a nonbinding vote on executive pay. Meetings between shareholders and directors on all aspects of governance became common.
More stakeholder voices and shareholder rights. Activist shareholders, the media, and public scrutiny since 2008 have kept the focus on better governance. The result: more shareholder rights, including annual director elections, majority voting, the ability to call special meetings or act by written consent, and proxy access proposals.
On this 40th anniversary of Directors & Boards, what does the historical record foreshadow? Whither boards by D&B's 50th? Pressure for change will shift to the nominating, corporate sustainability, and technology committees. Directors will better match skills to these new needs; recruit a younger generation; and nominate more women and minority directors.
One board rising to this challenge is Lockheed Martin, where processes for board evaluation and refreshment are seen as key elements in driving shareholder value. Pfizer's board, meanwhile, is committed to shareholder and stakeholder outreach. It operates under a set of annually updated principles based on regulatory and stakeholder input.
All in all, the past suggests boards will continue to turn regulatory lemons into lemonade by continuously improving governance. Elevating the conversation — having the right dialogue at the right time with the right people — remains central. This is admittedly the view of the glass as half full, but now may be the time to take a drink.
The author can be contacted at bjones@semlerbrossy.com.