Director compensation continues to gain attention in the corporate governance community. Once one of the most mundane topics of corporate compensation, director pay is becoming the topic du jour as governance experts and current board members alike debate the value of a strong, engaged board of directors, as evidenced by the fact that ISS now assesses director compensation levels on a relative basis using QuickScore, its analysis and rating system for corporate governance practices. All of this prompts the question: What is a quality board of directors really worth?
Total board cost (defined here as the sum of cash, equity, pension value changes, and all other compensation amounts as reported in the director compensation table of a company’s latest proxy statement) has emerged as another way for directors and other stakeholders to evaluate director compensation and to demonstrate the value of boards to shareholders.
Steven Hall and Partners studied the early proxy filings of 100 U.S.-based companies with revenues in excess of $1 billion. The study examined the aggregate amounts of cash, equity, and other compensation paid to directors, as disclosed in proxy tables. Among this year’s early proxy filers, the median increase of total board fees was 7 percent in 2014, bringing the median total cost to $2 million. The movement in pay was driven by a number of factors, including a median increase of 6 percent in equity awards granted, a 2 percent rise in the cash compensation, and an increase in the number of paid directors.
In addition, we found at median:
Total cash payments to directors increased 2 percent to $777,000
Total equity compensation rose 6 percent to $1.1 million
Total board fees grew 7 percent to $2.0 million
Boards were comprised of nine paid directors, up from eight in 2013
Average cost per director increased 5 percent, to $230,000
We also compared total board cost to revenue, net income, and market capitalization amounts to show the minimal financial impact of director fees. At median, total board cost equals 0.05 percent of revenue, 0.66 percent of net income and 0.03 percent of market capitalization. These figures reinforce the notion that the board continues to represent one of the wisest investments of capital, particularly in light of the experience and specific expertise that directors bring to the companies they serve.
Average Cost per Director
Among the companies studied, average cost per director ranged from $78,617 to $410,678 in 2014. Among the companies reviewed, the median increase over 2013 pay levels was 5 percent. The median average cost per director equaled $229,899 in 2014.
According to the study, the mix of pay delivered to directors remained virtually unchanged in 2014. Equity awards accounted for 55 percent of total board cost, up from 54 percent in 2013. Cash compensation decreased as a percent of total board cost to 42 percent, from 44 percent in 2013. Change in pension values increased to 1 percent of total board cost, from 0 percent in 2013, and all other compensation remained equal to 2 percent of total board cost. The increase in pension values is attributable to changes in actuarial assumptions used to value these programs, rather than a shift in approach; pension programs for directors are no longer a part of most pay programs.
Among the 100 companies studied:
Revenues ranged from $1 billion to $183 billion
Median equals $2.9 billion
Median one-year revenue growth equaled 7 percent
Net income ranged from negative $53 million to $40 billion
Median equals $269 million
Median one-year net income growth equaled 11 percent
One-year total shareholder return grew 10 percent
Action Items for Director Consideration
The recent focus on director pay by shareholders and members of the corporate governance community has prompted a number of important changes in the way directors consider and implement director pay programs. First, consider director pay issues on an annual, rather than a biennial or triennial basis. Staying abreast of market movements with small annual adjustments is generally preferable to larger, sporadic jumps in pay. While the ways of delivering pay (cash and equity retainers, meeting fees, and additional retainers for committee service) may vary depending upon the company, directors should focus on total pay per director as well as the total cost of the board. In addition, companies should remain mindful of how pay compares to that of their direct competitors as well as companies in their peer group, as defined by proxy advisory services like ISS.
As it comes time for your company to conduct its annual review of director compensation, we recommend that you consider the following questions:
Is your director compensation program fair and competitive?
Does the program allow you to attract and retain high quality director candidates?
Is the program justifiable to shareholders?
Are modifications to your director compensation program appropriate and reflective of projected market increases and company growth?
How does your director pay mix compare to the pay mix at companies of similar size and/or industry?
Is your program’s structure aligned with the current best practice of delivering at least half of total value to directors in the form of equity? If your program’s equity awards are denominated in shares, does your company account for the total potential volatility in grant value?
To what degree does your company consider total board cost when making modifications to your director compensation program?
For a more detailed analysis on director compensation, look for Steven Hall & Partners’ annual Director Compensation Study due out later this year.
Corporate directors’ mindsets regarding cybersecurity fundamentally need to change. As one participant at April’s inaugural Global Cyber Summit hosted by the Global Network of Director Institutes (GNDI) noted, “We have to go from ‘is it possible we’ll be attacked?’ to ‘it’s probable;’ from ‘how much does it cost?’ to ‘how much should we invest?’; and from ‘can we control cyber threats?’ to ‘how can we keep pace?’”
In the words of another participant, “Yesterday’s approach to cyber at many companies was compliance. Today, the approach is risk management, and the imperative for the future is resiliency.” With the passage of last week’s Protecting Cyber Networks Act and National Cybersecurity Protection Advancement Act, the nation moved one step closer to greater resiliency. Both bills made clear lawmakers’ expectation that companies should share information regarding cyber breaches not just with the government, but also with each other. By sharing information about cyber hacks with peers—via information sharing and analysis centers (ISACs) or information sharing and analysis organizations (ISAOs)—and the Department of Homeland Security, companies may be able to improve their cyber defense. Experts at the summit discussed information sharing in light of the massive threat cyber-breaches pose. While information sharing is important to an effective cyber defense, corporate directors should not view it as a panacea. Instead, “it is another tool in the company’s toolbox.”
At April’s summit, the GNDI, the National Association of Corporate Directors (NACD), and the Washington Board of Trade convened more than 200 directors and cyber experts from around the world for a three-day conference to explore the board’s role in effectively overseeing their companies’ cyber defenses. Supported by AIG, the Center for Audit Quality (CAQ), and KPMG, the event provided directors the opportunity to gain insight from experts including Shawn A. Bray, director of INTERPOL Washington; Larry Clinton, president and CEO of the Internet Security Alliance; Richard Knowlton, director of the Internet Security Alliance for Europe and group corporate security director at Vodafone; Jan Hamby, rear admiral, U.S. Navy (Ret.) and chancellor of the National Defense University; Tim McKnight, chief information security officer of General Electric; and Arne Shönbohm, president of the Cyber-Security Council Germany.
Five boardroom imperatives emerged from the event:
View cybersecurity as an enterprise-wide risk issue. Without a doubt, cyber-risk poses a significant threat to companies of all shapes and sizes. From the boardroom perspective, however, it should be viewed not as a technological issue, but as an enterprise risk that is addressed like all other risks disclosed in the MD&A. “Security—not merely cybersecurity—is the key.” Directors should ensure that the company is properly structured to respond to an attack and has plans for both breach prevention and cyberattack response. And don’t be complacent. As one participant at the cyber summit advised, “If you ask management how we’re doing on cyber-risk management and they say, ‘great,’ don’t accept that as an answer.”
Identify your critical assets. Throughout the summit, speakers noted the interdependent nature of cyberattacks. No company is an island, so achieving a perimeter-defense strategy that attempts to protect the entire enterprise is virtually impossible. Instead, management must identify what assets, if breached, would bring the company down: the “crown jewels.” Directors should ensure that defense efforts identify and prioritize them. As part of this identification process, the company also can assess its most vulnerable points, making sure to account for third-party contractors’ potential weaknesses. If a vendor in your supply chain is hacked, are your assets still protected?
Ensure adequate resources for your information technology (IT) teams. Cybersecurity should be viewed as an investment in the company’s future, not as a cost center. Panelists noted a growth in the use of a chief information security officer (CISO), separate from a chief information officer (CIO). Regardless of the leadership structure employed, however, directors must remember that cybersecurity is largely a human issue. Does the c-suite have the staff and training needed to effectively defend the company against hacks? If the company is not going to develop an internal security defense program, how will it acquire one from outside? Is the IT team staffed with both technology professionals and security experts? Broadly, the company should run ongoing employee cybersecurity education programs throughout the enterprise.
De-jargon the board dialogue. The technical nature of cybersecurity can create a formidable barrier to effective board oversight. While it is critical for the board to receive reports on the company’s cyber efforts on a continuous basis, CIOs, chief technology officers (CTOs), or CISOs may deliver the reports in jargon. Panelists noted that the solution, however, is not necessarily to invite a cyber expert to sit on the board. Instead, the entire board should comprise directors who are equipped to ask the probing questions necessary for effective oversight. The board can invite experts to speak to the board on cyber issues and ask management to provide “de-jargoned” reports in clear, actionable terms.
Incorporate cyber into your strategy and every business decision. Panelists stressed the need for directors to address cyber issues proactively—starting with prevention—rather than waiting to respond to a breach. To do so, cyber should be an aspect of the front-end of business decisions: strategy, legal, and financial. Does the CIO (or CISO, CTO) play a role in strategy and tactical decisions? Does the CIO have a working relationship with the IT teams at third-party vendors? In an M&A scenario, do you assess the cyber vulnerabilities of the target company? These questions can help bring cyber-consciousness to board decisions.
For more on guidance on the board’s role in cyber-risk oversight, download the NACD Cyber-Risk Oversight Handbook here. Kate Iannelli, Alexandra Lajoux, and Ashley M. Marchand contributed to this report.
Understanding the behavior of investors, employees, and consumers is a critical success factor for all companies. This can be difficult for corporate directors, however, as America’s demographics are constantly evolving. At this year’s second Directorship 2020® event, NACD partnered with Broadridge Financial Solutions, KPMG’s Audit Committee Institute (ACI), Marsh & McClennan Cos., and PwC to provide an in-depth look at today’s social and demographic trends and how boards can harness the opportunities these often-disruptive forces create.
In his keynote address, Scott Steinberg, CEO of TechSavvy Global and author of Make Change Work For You, affirmed that change is the “new normal.” He emphasized that companies must constantly innovate in order to survive in today’s volatile business environment. Some companies, such as Apple, Amazon, GE, and Samsung, have maintained their competitive edge by mastering the art of “sustainable innovation.” Steinberg pointed out that these companies foster highly collaborative relationships with their employees, who also represent the company’s customer base. By creating avenues for employees to share their observations on emerging threats and opportunities, these organizations are simultaneously constructing platforms to prototype new business products. These collaborative relationships thus enable management to harness the full range of talents that allow an enterprise to continually adapt and grow.
In the second keynote speech, Paul Taylor, former executive vice president of the Pew Research Center and author of The Next America, focused on two major demographic trends that are happening in the United States. First, the bulk of the country’s population is aging. Older generations have always needed the younger ones to drive the economy; the millennials, however—the youngest generation in today’s workforce—are collectively experiencing great difficulty in launching their careers and remain largely dependent on their forebears. Taylor observed that businesses need to mimic these new domestic norms and similarly nurture and invest in millennials to ensure the success of their firms’ future leaders.
Second, Taylor pointed out that by 2050, immigrants will comprise the largest-ever share of the American population: while 20 percent of Americans were of immigrant descent in 1960, that proportion is projected to climb to 37 percent. Not only will this expand the workforce and brainpower of the American economy, but it will also change the demographic complexity of the country’s consumer base. Furthermore, this modern immigration wave has begun to alter traditional attitudes toward racial and ethnic boundaries. For example, children of immigrants are more likely to marry someone of a different race or ethnicity. These trends are already driving business behavior, as contemporary television commercials clearly demonstrate: in an ad for Coca-Cola, the anthem “America the Beautiful” is sung in several languages; and two recent Cheerios ads featured a multi-racial family.
The presentations and discussion in Atlanta generated three key takeaways for directors:
Assess your corporate culture. Corporate culture can often be a significant roadblock to innovation, and many companies stumble because they fail to periodically rethink their identity. A corporate culture that allows for evolution is, by definition, resilient and adaptable. Regard your employees as a wellspring of innovative ideas, because they have the most direct interaction with your customers. Their insights into evolving consumer demands can, in turn, generate your business’s next game-changing idea. A big challenge for many firms is how to encourage employees to speak up, especially at established companies where a the corporate culture has been in place for some time. (FedEx, for example, has a 40-person team that is charged with driving innovation throughout the entire organization.) By contrast, the smaller size and absence of inhibiting precedents at start-ups enable them to be more adept at mining creative solutions from their entire employee base. Spurring and sustaining innovation is about institutionalizing a love of change within your organization. Create forums through which everyone—from the mailroom to the boardroom—feels free to share ideas.
Make educated bets. A lack of risk tolerance is a major barrier to innovation. For companies that are doing well, staying the course may seem like a safe bet; but as the competitive landscape shifts, this approach will ultimately cause the company to falter Create systems that allow the company to take smart risks. In line with the company’s established risk appetite, it’s acceptable—and expected—that a company will have to weather some level of failure. The board can openly discuss unsuccessful ventures with management, leveraging those experiences as learning opportunities instead of viewing them solely as a misstep.
Embrace diversity of all types. According to the Report of the NACD Blue Ribbon Commission on The Diverse Board:
[A] company’s ability to remain competitive will rely on its understanding of global markets, changing demographics, and customer expectations. Diversity is a business imperative, not just a social issue. The new business landscape will require boards to cast a wider net to find the very best talent available. As a natural corollary, the board’s mix of gender, ethnicity, and experiences will likely increase.
In his speech, Paul Taylor addressed the issue of age diversity specifically. Younger directors with relatively little board experience may be passed over for a directorship because seasoned directors perceive them as lacking the experience and credibility necessary to be effective. However, seeking out non-traditional director candidates (whether that status is determined on the basis of age or other criteria) can be critical to effectively managing a board’s talent pipeline. Established directors have the ability to mentor and develop the next wave of board leadership and, in turn, benefit from the perspectives of new directors who bring varied backgrounds and skill sets into the boardroom.
Look for full coverage of this NACD Directorship 2020 session in the May/June 2015 issue of NACD Directorship magazine.