Boardrooms Yesterday, Today, and Tomorrow
Ferry, Richard M., Chief Executive (U.S.)
Charting trends and policies in America's boardrooms since 1973, the Korn Ferry International study is one of the nation's longest running analyses of corporate governance. More than 14,000 CEOs, chairmen, and directors have participate, including 1,020 this year. Results from the regular questionnaire paint a dramatic portrait of the past 25 years, with comparisons from 25 and 10 years ago as well as year-to-year. Looking back over 25 years. CEOs and directors cite the changes in boar composition as the single most compelling factor in altering corporate governance. Beyond illustrating of boardroom evolution, the study asks CEOS and directors to grade their performance on management succession and executive compensation and to look over the horizon at what changes they expect in the next five years. The result is an intriguing comparison of boards past and present, as well as an indication of what changes loom ahead.
Insiders vs. Independents
Insiders, including corporate officers, consultants. and others beholden to the company who did little more than rubberstamp the CEO's actions, dominated boards in 1973. The number of inside directors has dropped steadily ever since, particularly in the last decade. In 1973, 57 percent of U.S. boards were composed of between 10 and 15 members, and almost all reported between four and six directors who were true "insiders"-executives who worked for the corporation. In addition, another two or three directors would be classified as insiders today because they were consultants or provided services to the company, such as investment bankers, commercial bankers, and attorneys.
The number of inside directors has dropped steadily, particularly in the last decade, according to the Korn/Ferry reports. Ten years ago, the average board comprised 14 members-four of whom were insiders. Today the average U.S. board is dominated by outside directors who hold nine of 11 seats. Only two are inside directors. Furthermore, outside directors today-in almost all cases-are barred from doing consulting, legal, or other business with the company.
The trend away from inside and affiliated outside directors has accelerated competition for outside directors who are most sought after-CEOs and retired CEOs. Further heightening the competition is the fact that more companies are limiting the number of boards on which their CEOs can sit, and many people who are approached are declining offers because of the time commitment involved.
The second major corporate governance development of the past quarter century noted by CEOs and directors is the emergence of independent audit, compensation, and nominating committees. Ten years ago, only the audit committee was made up entirely of outside directors. Only 2 percent of boards had a nominating committee in 1973 and, just five years ago, it still included one insider. Today, 74 percent of all boards have a nominating committee entirely composed of independent outside directors.
Dramatic Gains in Diversity
Since its very first report, Korn/Ferry has looked at diversity on boards. The typical U.S. board in 1973 was all white and all male. Now, in 1998, 72 percent of all boards report at least one woman director-a stunning gain from only 11 percent 25 years ago and even up significantly from 53 percent in 1988.
Ethnic minority members have had similarly dramatic leaps. Only 9 percent of boards in 1973 reported an ethnic minority member. This number moved up to 31 percent in 1988 and 55 percent in 1998.
Another sea change is the trend from paying directors totally in cash to payment in company stock-a move designed to tie directors more closely to company performance and shareholder interests. In 1973, only 4 percent of companies compensated their directors with some form of company stock. Today that number has grown nearly 20 times-with 78 percent of companies paying all or partially with stock. …