Winds of Change Blow Through Boardrooms--Just Not Gale-Force

A “quiet revolution” is under way in America’s boardrooms. Outside directors are flexing their muscles and asserting more influence in major corporate decisions and overall governance. The longstanding tradition of the chief executive running the company with little interference is giving way to an era of shared power.

Contrary to the image of the corporation as an unwieldy dinosaur, unwilling to act unless provoked, these changes appear for the most part to be generated internally. They are being initiated by the more forward-thinking chief executives and outside directors rather than by pressures from institutional shareholders or regulatory agencies.

This strengthening of director authority cuts across companies large and small and across every industry and service type. Korn/Ferry International has been studying boards of directors of the largest U.S. corporations for 22 years, and our most recent study confirms that a changing of the guard is under way--that boards and directors are transforming their roles faster than the public or media perceives.

This year, for the first time, we conducted a broad-based opinion survey of more than 1,000 directors and chairmen in addition to compiling data from more than 800 proxy statements of publicly held corporations.

Two principal themes were sounded by individual directors that point to a power shift in the boardroom. First, boards are formally reviewing the performance of their chief executives and taking the lead in chief executive succession to a much greater degree than generally recognized.

Sixty-seven percent of boards now have a formal process for evaluating the chief executive. Just five years ago, few had initiated such a review.

Although the chief executive continues to have significant influence deciding on a successor, 63% of individual directors say the board now carries the most weight in this pivotal decision.

A second key finding is that outside directors are taking over how the board is run--deciding on procedures, structure and even new members. Forty-one percent now have a committee that establishes board practices and processes, and 20% now make their own committee assignments--a power historically reserved for the chairman and chief executive. While chief executives continue to have the strongest voice in selecting new directors, the board’s nominating committee is gaining equal footing.

This is a far cry from the days when board members were simply given “show and tell” by the chief executive and taken to lunch.

Boards are even taking the first tentative steps to monitor their own effectiveness. Eighteen percent told us that a director has resigned or not stood for reelection because the board nominating committee thought the individual was ineffective. Although not an overwhelming indication of board accountability, it appears to be the start of a trend toward directors insisting on performance from one another as well as from management.

Another indication that directors are shouldering accountability for their actions is seen in the fact that they are increasingly willing to tie their own compensation to corporate fortunes. Eighty-nine percent of individual directors told Korn/Ferry that they should be paid partially in stock. Another 11% would forgo a paycheck entirely for stock.

In actuality, 62% of the corporations we studied now compensate outside directors partially or entirely with stock or stock options. This is a significant change from five years ago, when only a quarter of companies reported paying directors with stock options. Of course, these moves alone do not guarantee a sea change in corporate governance. In my personal experience as an outside director, I find that the winds of change are blowing--but they have not reached gale-force.

There is one major area where changes in boards of directors continue to lag behind changes in society at large, and that is diversity. Although 44% of companies surveyed have at least one ethnic minority member--usually an African American--these minorities make up a tiny percentage of the total director population.

Asians and Latinos have been left out of the boardroom almost entirely. This will change as both corporations and leaders of these communities recognize the importance of their board participation. In fact, a prominent Latino executive is meeting with me soon to discuss a strategy for penetrating the boardroom.

Women have made the greatest progress, but they still make up only 7% of all directors. And, although 63% of companies now have at least one woman on their board, female director concentration is highest in predictable venues such as publishing and cosmetics. The numbers are far lower in what one might call traditional male bastions.

Corporations also tend to tap the same women and African Americans over and over. The average female director sits on two corporate boards, and an African American director averages three boards, including two Fortune 500 boards.

From my board experience, it is clear that diversity enriches the dialogue in the boardroom and contributes to good business decisions. Further, board diversity should help ensure that minorities and women are given equal consideration for top management posts.

Although there is much progress still to be made, as an observer of boards for over two decades, I see more than a glimmer of hope. I am beginning to see a correlation between the quality of the board and the governance structure with the performance of the company.

Clearly the attitude of the chief executive is the pivotal factor in how effective this board re-engineering will be. It is quite possible that many companies have only “shifted the chairs on the Titanic” and we will not see real change until a new chief executive is in place. In addition, much still depends on how willing directors are to act independently outside the chief executive’s sphere of influence.

One finding that particularly surprised me--and increased my optimism for the future--was that chief executives most often sided with outsiders on governance issues rather than with fellow inside directors. Insiders appeared to be more reluctant about sharing decision-making with outside directors.

In my view, the changes that are taking place are as important symbolically as substantively. They indicate a sensitivity to calls for reform that in the corporation of a decade ago would most probably have been ignored.