Once-Cushy Board Jobs Becoming Hot Seats
Serving on a corporate board has traditionally been high in prestige, low on demands and, especially at big companies, generous in pay.
But a settlement announced this week, in which 10 former WorldCom Inc. board members agreed to pay $18 million of their own money to settle a lawsuit by investors, suggests that directors may now become a bigger target for angry shareholders.
“I’m sure right now it’s disturbing to any director,” said Richard H. Koppes, an attorney who serves on the boards of Apria Healthcare Group and Valeant Pharmaceuticals International.
“As a director myself, you kind of say, ‘Whoa.’ ”
Koppes and others add that the WorldCom payout is just the latest sign that things are getting less cushy around the directors’ table. Consider:
* The Sarbanes-Oxley corporate reform legislation, inspired by the Enron Corp. scandal, gave directors the responsibility of hiring and supervising auditors. Previously, that job was handled by management.
* The New York Stock Exchange and Nasdaq have imposed new duties on non-management directors for companies listed on those exchanges, including requirements that they meet regularly and play a major role in overseeing the chief executive’s compensation.
* The Securities and Exchange Commission is increasingly scrutinizing the role of directors in cases of corporate misbehavior, raising the prospect that more board members will face sanctions and reprimands by the agency.
“The bar has been raised,” for board service, said Theodore L. Dysart, who runs the director-recruitment practice for executive-search firm Heidrick & Struggles. “It takes a lot more time, the meetings are longer and certainly if you’re on the audit committee it’s more work than it’s ever been.”
Whereas some people often used to serve on half a dozen or more boards, most are now paring back the number of directorships they accept, in recognition of both the added time demands and the exposure to potential legal liability, he said.
It isn’t necessarily harder to find people willing to serve on boards today, but candidates are asking more questions on the way in, Dysart said. And if anything, the WorldCom settlement will make prospective board members even more skittish.
“The plaintiffs’ bar will use this settlement as leverage with clients to hold out for more and more -- and from a broader group of defendants,” predicted Jacob S. Frenkel, a former enforcement lawyer at the SEC and Washington attorney. “It will create a new level of expectations.”
At the same time, Frenkel noted, the circumstances surrounding WorldCom were extraordinary, suggesting that it will continue to be rare for board members to cough up their own money.
Some board members say that conscientious directors have little to fear anyway.
“There’s a right way and a wrong way to do things,” said William P. Clark, a former California Supreme Court justice and Cabinet member in the Reagan administration who serves on the board of SBC Communications Inc. “So long as board members are well-informed and have the facts and act according to the rules, there should not be any apprehension or anxiety.”
Several board members echoed that sentiment.
“It really is the company you keep,” said media investor Frank Biondi, who serves on the boards of Bank of New York Co., Amgen Inc. and Hasbro Inc. “If you’re doing your duty and using your good judgment, you can, to a great degree, protect yourself against whatever liability may occur.”
Ray O’Brien, a director at Los Angeles-based American Business Bank, said that board members were for many years reluctant to ask tough questions. And when they did, he said, corporate executives would often react defensively.
“Now management is much better prepared, and it’s not considered an insult anymore” to probe for explanations of things that seem confusing or “don’t smell right,” said O’Brien, an investor in several private manufacturing companies in Southern California.
Still, there are examples of board members being discouraged by the growing burdens.
Richard Heckmann, the chairman and CEO of Carlsbad sporting goods manufacturer K2 Inc. once served as a board member for five different public companies, including Waste Management Inc. and Station Casinos Inc.
He dropped off the board of MPS Group, a Jacksonville, Fla.-based staffing and consulting company last year and now serves only on K2’s board. “To me the liability just became ridiculous.”
Biondi agreed that the WorldCom decision would have a chilling effect. “If you go ask your lawyers, they’re going to tell you it’s not worth it,” said Biondi, the former chief executive of Viacom Inc.
Business groups have also shown they can push back against efforts to further change the boardroom dynamic. An SEC proposal that would give shareholders greater influence over director nominations has stalled in the face of bitter resistance from corporate lobbyists.
“If we’re going to let management retain its ability to appoint the board -- and stack it with cronies -- then there need to be some pretty serious inducements in place to get board members to take their oversight responsibilities seriously,” said Barbara Roper, director of investor protection for the Consumer Federation of America.
The WorldCom settlement, Roper added, just might be a step in that direction.
“One way to do that,” she said, “is to make them financially accountable.”
Times staff writers James S. Granelli, Jerry Hirsch and Richard Verrier contributed to this story.
