The Conference Board, NASDAQ OMX and NYSE Euronext jointly released The 2011 U.S. Director Compensation and Board Practices Report, a benchmarking tool with more than 120 corporate governance data points searchable by company size (measurable by revenue and asset value) and industrial sectors.
The report is based on a survey of public companies registered with the U.S. Securities and Exchange Commission. The Harvard Law School Forum on Corporate Governance and Financial Regulation, Stanford University’s Rock Center for Corporate Governance, the National Investor Relations Institute (NIRI) and the Shareholder Forum also endorsed the survey by distributing it to their members and readers.
The Conference Board’s annual benchmark series on director compensation was first released in 1939. In the last decade, the database has been expanded to report on a wide array of governance practices, documenting a steady transformation in the role of public companies’ boards and underscoring the increasing importance of directors’ monitoring responsibilities and the growing influence of shareholders.
The following are the major findings from the 2011 edition of the study.
Director compensation Cash retainers vary from a low average of $21,138 for commercial banks to a high of $78,848 in the retail trade industry. The same industries represent the two ends of the spectrum for stock awards, which vary from a low of $13,891 in commercial banks to a high of $97,742 in the retail trade industry. In addition, some variation exists within industries: for example, as many as 10 percent of financial services companies annually award to each of their directors as little as $11,200 in cash. Board compensation in the energy industry shows the largest difference ($265,600) between the 10th and 90th percentiles. Board members in the chemicals industry and in the computer services industry received the highest total compensation ($184,115 on average).
Larger companies (by annual revenue and asset value) awarded substantially higher cash retainers and total compensation to board members than smaller companies. Companies in the smallest category measured by annual revenue awarded directors $60,000 in cash retainer at the 90th percentile. This amount is much higher in the largest companies ($110,000). Median total compensation ranges from $46,843 in the smallest companies to $190,000 in the largest companies. Both measures of compensation show a direct correlation with asset value as well.
When it comes to compensation mix, computer services is the industry with the lowest percentage of total director compensation awarded in cash retainer (26.6 percent); however, it is also the sector that placed the greater emphasis on equity-based compensation (stock awards and stock options), which surpasses 70 percent of the total. Directors at smaller financial companies (with assets valued at $1 billion or less) were, on average, compensated more in cash, while larger financials were more likely to compensate their board members in stock and stock options. Across all industry groups and revenue and asset classes, most companies awarded board members additional funds to serve as members of major committees; as with other measures of compensation for executives and board members, the amount of these additional awards increases with company size. For example, in companies with annual revenue of $5 billion or greater, compensation for the chair of the audit committee was $18,242, compared to $6,583 for those with revenue under $100 million, on average.
Board size Most companies responding to the survey have 10 board members. No variation in the number of directors exists from industry to industry, but boards tend to grow larger as annual corporate revenue or total corporate asset value increases.
Age, diversity, and professional background In financial services, the average age among the youngest directors is 48 and the average age of the oldest is 72, the largest age range among all industry categories. In general, the larger the company is, the more diverse the board is. Among manufacturing companies, 14 percent of the directors are female, the lowest of the three industry categories.
Across industries, about half of board members are CEOs, presidents, or board chairs of for-profit companies. Other senior executives (CFOs, COOs, general counsel, etc.) make up more than 10 percent of the typical board.
Independence and affiliations More than 80 percent of board members across industries are independent under major securities exchange listing standards and the percentage of independent directors is correlated with the size of the company. In fact, across all industries and almost all size groups, a large majority of companies reported adopting a policy requiring the board to be composed of more than a simple majority of independent directors. In approximately one-third of companies in the financial services sector and one-fourth of those in manufacturing and nonfinancial services, the policy also sets standards on director independence that are even more stringent than those set by the security exchange on which the company is listed.
Most companies only count one board member who is also an employee, whereas directors who are otherwise affiliated with the company (e.g., through former employment or the provision of such professional services as legal or management consulting assistance) are virtually absent. Approximately one-third of currently serving board members have retired from a previous career and are professional directors.
In manufacturing and financial services, approximately 70 percent of directors also serve on the board of at least one other for-profit corporation. Across asset value groups, between four and nine directors also sit on at least one board of trustees of a nonprofit organization.
Board leadership The percentage of companies that have a non-CEO chair varies from a low 43 percent in financial services industries to 50 percent in nonfinancial services. The larger the company, the less likely it is to have a non-CEO chair. A large majority of non-CEO chairs are independent, as defined by the rules of the securities exchange on which the company is listed or more stringent company standards. Across industries and almost all size groups, in most cases, the CEO/chairman separation is not contemplated by a formal policy of the board.
Analysis also shows that the percentage of companies with a lead director ranges between 61 percent in manufacturing and 64 percent in the nonfinancial services sector and generally increases with company size. As much as 73 percent of companies in the largest revenue group have a lead director, compared with only 31.6 percent of the smallest companies. Virtually all lead directors appointed by the company meet widely accepted independence standards, such as those set by national securities exchanges.
Majority voting policies A total of 44 percent of companies in the financial services industries still retain a pure plurality-voting model, while in manufacturing and nonfinancial services, only 33 and 34 percent do so. There is a direct correlation between company size (measured both by annual corporate revenue and asset value) and the adoption of a majority voting policy for director elections. In the largest revenue group, for example, 80 percent of companies adopt some form of majority voting. Of those, 86 percent supplement it with a mandatory resignation policy.
In 41 percent of manufacturing and nonfinancial services companies with annual revenue of $5 billion or greater and in 46 percent of financial companies with asset valued at $100 billion or greater, the policy is silent on the criteria on which the body designated to decide on the resignation should base its decision. Across industries, the majority of companies with a resignation policy contemplate a 90-day timeframe for the decision on the resignation to be made; similarly, across industries, corporate policies require that the decision on the resignation be made public. Finally, the vast majority of corporate policies, across industries and almost all size groups, do not contain a presumption that a tendered resignation should be accepted.
Of all survey responses, only 3 percent of companies in the nonfinancial services sector reported having one or more members of their board standing for reelection in the 2010 proxy season who failed to receive the required majority vote. An analysis based on company size shows that these cases pertained to companies in the smallest revenue groups (12 percent of companies with annual revenue of $499 million or less).
Reimbursement of proxy solicitation expenses The reimbursement of proxy solicitation expenses remains a marginal corporate practice. The sector reporting the highest level of adoption of such a policy is the financial services sector, with a meager 7 percent. The corporate size analysis indicates that the policy tends to be favored by smallest companies: 7 percent of companies with annual revenue between $100 and $499 million have instituted it, compared to 1 percent of those with revenue of $5 billion or greater and none of the companies in the two highest asset groups.
Board classification In recent years, shareholder resolutions requesting the declassification of boards have caused a steady decline in staggered structures. Findings from the 2011 survey indicate considerable variation in this area across company size groups, with the lowest percentage of classified boards (15 percent) among companies in the highest revenue categories. At the same time, 47 percent of companies in the lowest revenue group still reported having classified boards. As far as the industry analysis is concerned, the percentage of companies with classified boards is 38 percent in both manufacturing and financial services.
Shareholder rights plans (poison pills) Pressure from shareholders and proxy advisory groups has driven the recent trend toward the repeal of existing poison pills designed with the sole intent of entrenching management. As a result, more than 80 percent of surveyed companies across industries and virtually all financial companies in the largest size group reported not having a poison pill in place. At a minimum, shareholder rights plans are generally subject to a mechanism of shareholder ratification within a certain time of the adoption. Across industries and revenue groups, less than a quarter of companies do not rely on poison pills or “fiduciary out” provisions nor do they require shareholders to approve the adoption, amendment, or renewal of a shareholder rights plan. Financial services companies with asset value of $1 billion or less reported the highest percentage of adoption of net operating loss (NOL) poison pills (8 percent).
Other antitakeover practices The majority of surveyed companies in manufacturing and nonfinancial services grant shareholders a right to call special meetings that is contingent upon certain prerequisites (e.g., minimum shareholder ownership thresholds); the practice of granting such a right is less prevalent among financial companies. The majority of surveyed companies across industries do not prohibit shareholder action by written consent; companies with a policy prohibiting shareholder action by written consent tend to be larger in size. The majority of surveyed companies across industries do not require a supermajority vote of shareholders for charter or bylaws amendments, with no correlation based on revenue or asset value.
Frequency of board meetings and attendance policies Across industries, the average number of board meetings is six, with three or four additional discussions among all board members held by phone. The average company also held six executive sessions in the surveyed year. This finding highlights the practice of beginning or ending virtually all meetings without the CEO and other members of management in the boardroom. In general, boards of small companies meet just as often as those of large companies. Meeting fees are awarded by 57 percent of corporations in financial services and by 60 of those in nonfinancial services; however, only a small percentage of surveyed companies reported that they penalize low attendance (for example, by means of a policy requiring directors to forfeit a portion of their compensation if they miss more than a certain number of meetings). The percentage of companies paying meeting attendance fees varies by revenue and asset group, with a peak among midsize companies.
Internet use for communication among directors Less than the majority of corporate boards across industries use a board portal, where directors can securely access board documents and collaborate with other board members electronically. However, this technology is more widespread in the financial services sector, where it has been introduced by almost 73 percent of companies with asset value of $100 billion or greater.
Say-on-pay frequency Survey findings show that 82 percent of manufacturing companies, 81 percent of those in nonfinancial services, and 76 percent of those in financial services are currently holding annual say-on-pay voting. Ten percent of companies in the financial services industry and 47 percent of manufacturing and nonfinancial services companies in the smallest size group ($100 million or less in annual revenue) avail themselves of the temporary exemption from the advisory vote granted by the SEC rules to smaller issuers. There is direct correlation between the annual revenue of surveyed companies and the annual frequency of their say-on-pay vote, but that is mostly explained by the large adhesion to the rule exemption by smaller companies in manufacturing and nonfinancial services. Across industries and size groups, virtually no companies adopt a biennial say-on-pay policy.
Clawback provisions Approximately 50 percent of companies across industries reported that they only adopted the type of clawback policy mandated by the Sarbanes-Oxley Act; the number is slightly higher for nonfinancial services companies (59 percent). Approximately 28 percent of financial services companies indicated that they also introduced a clawback policy of the type mandated by the Dodd-Frank Act and, at the time of the survey, not yet regulated by the SEC. There is no clear correlation between the use of clawbacks and the size of companies.
Other compensation policies A range of one-fourth to one-third of surveyed companies have an antigross-ups policy in place. The percentage of companies adopting such policy increases with corporate size, as measured both by annual revenue and asset value. Approximately 24 percent of financial services companies impose a retention period for stock awarded to employees as part of their annual compensation, with a concentration among the largest companies (73 percent in the group of those with asset value equal to or greater than $100 billion). Despite growing interest in the practice among compensation experts and advisers, bonus banking remains uncommon outside of the financial services sector: only 7 percent of financial services companies reported having such policy in place.
Stock ownership guidelines Across industries, a large majority of companies adopt formal guidelines requiring minimum stock ownership for board members. When in place, those guidelines may require board members to acquire, over a certain timeframe, a minimum number of shares, a minimum dollar amount worth of stock, or a multiple of the annual retainer worth of stock. Among surveyed companies, the most widely used type of guideline is the one based on a multiple of the annual retainer. When adopted, stock ownership guidelines are almost always disclosed to the market.
Compensation benchmarking disclosure More than three-quarters of surveyed companies indicated that their proxy statement contained the names of individual companies composing the peer group used for executive compensation benchmarking purposes; the larger the company size, the higher the percentage of companies providing this type of disclosure. The compensation committee is most frequently charged with the responsibility of determining the compensation peer group; however, 45 percent of manufacturing companies and 47 percent of nonfinancial services companies reported that their senior management was also directly involved in the selection process. Industry and company size are the most frequently used features to identify the companies that should be included in the compensation peer group: the larger the company size, the more relevant these features become to the selection process. Across industries and company size groups, annual base salary is the aspect of senior executive compensation that is most tied to the analysis of the compensation peer group; however, 23 percent of manufacturing companies use compensation peer benchmarking to determine annual equity-based incentives, and 12 percent for cash-based bonuses contingent upon performance.
Compensation risk disclosure Across industries and size groups, a large majority of companies, after reviewing its compensation policies and practices, concluded and disclosed that such policies and practices are not reasonably likely to have a material adverse effect on the company. Most often, the disclosure on compensation-related risk is included in the Compensation Discussion & Analysis (CD&A) section of the proxy statement: in particular, this is the case for 82 percent of financial services companies with asset value between $10 billion and $99 billion. Companies reported adopting a wide array of measures to mitigate compensation-related risk: across industries and size groups, the most widely cited mitigation measures are multiyear vesting periods for equity grants (used, for example, by 76 percent of surveyed companies in financial services) and an executive compensation policy requiring a mix of cash and equity and of an annual and longer-term incentives (84 percent, also in financial services). Often, such measures are combined with others, including shareholder guidelines requiring employees to retain award shares for a specified period or through retirement and a cap on maximum incentive award payouts for top executives. The least cited among mitigation measures is the use of performance review processes where the evaluation is conducted over an extended period of time as opposed to only annually (20 percent of financial services companies). Not surprising, for the greatest majority of surveyed companies, the duty to assess and oversee compensation-related risk is formally delegated to the compensation committee.
Compensation consultant fee disclosure Of the surveyed financial companies, 59 percent reported in their 2010 proxy statements the names of the compensation consultant(s) from whom they obtained advice. The number of reporting companies increases to 72 percent and 80 percent of the largest size groups measured by annual revenue and asset value, respectively. Not surprising, for the greatest majority of surveyed companies (and virtually all companies across industries), the compensation consultant(s) were retained by the compensation committee. Across industries and size groups, a large majority of companies did not disclose the aggregate fee paid during the reportable fiscal year for compensation-related services and for additional consulting services, since the fee amount was lower than the $120,000 threshold for which securities laws mandate disclosure.
Risk oversight practices The majority of surveyed companies across industries and size groups reported that their risk management procedures are based on a widely accepted enterprise risk management (ERM) framework. The popularity of ERM increases among the largest organizations, especially in the financial sector—in which 73 percent of the largest survey participants have adopted some form of ERM. In FY2010, prior to the effectiveness of the new Dodd-Frank Act provisions requiring financial institutions to establish a risk committee of the board, approximately one financial company out of 10 had already formed such a committee. However, the survey also detected a wide variation within the financial sector, with 40 percent of the largest companies by asset value reporting assignment of the risk oversight function to a dedicated risk committee; at the time, only 10 percent of financial companies in this size group were continuing to delegate risk oversight responsibility exclusively to the audit committee.
Findings show that financial companies also constitute the only industry group analyzed in which more than half of surveyed companies engaged in the practice of reporting on risk at each board meeting and as part of the regular board agenda. The percentage decreases to 24 in manufacturing companies and 36 in nonfinancial services companies; in both industries, the relative majority of respondents indicated that their boards of directors receive information on risk from management at least annually.
When analyzed by size, virtually all of the financial companies with asset value equal to $10 billion or greater do avail themselves of a dedicated chief risk officer (CRO), and in most cases (70 percent) the CRO reports directly to the CEO. Approximately 46 percent of companies in nonfinancial services and 41 percent of manufacturing companies reported having instituted an ERM committee at the management level.
CEO succession planning practices Virtually no companies across industries and size groups assign CEO succession planning oversight responsibilities to a dedicated standalone committee of the board. Instead, these functions are performed either by the full board (44 percent of financial services companies and 57 percent of both manufacturing and nonfinancial services companies) or through delegation to the compensation committee or the nominating/corporate governance committee. There is a direct correlation between revenue size and assignment of succession planning oversight responsibilities to the compensation committee: the delegation to the compensation committee is reported by as much as 33 percent of financial companies with asset value of $100 billion or greater and 41 percent of the remaining sample with annual revenue of $1 billion or greater.
Across industry and almost all size groups, a large majority of companies reported that their boards review the CEO succession plan on an annual basis, whereas the revenue analysis reveals an inverse correlation between the frequency of the review and the company size—with 32 percent of companies with annual revenue of $100 million or less indicating that their boards reviews the CEO succession plan only when a change in circumstances warrants it (e.g., retirement, sudden death or illness, or other emergencies).
Mandatory retirement policies based on age remain a marginally used element of CEO succession plans. Only 13 percent of manufacturing companies and 11 percent of nonfinancial services companies adopt an age-based mandatory retirement policy for CEOs, and the number is even lower in the financial sector (9 percent). There is a direct correlation between the size of companies (both by annual revenue and asset value) and the adoption of the policy: companies with asset valued at $100 billion or greater report the highest level of adoption (20 percent). Across industries, the large majority of surveyed companies indicated that they do not have a formal policy on whether the retiring CEO should continue to serve as a member of the board and remain involved in the business leadership for a limited time following the appointment of the new CEO. However, there is a clear direct correlation between the adoption of such policies and the size of the company: approximately 21 percent of companies with annual revenue of $5 billion or greater and as many as 60 percent of those with assets valued at $100 billion or greater formally require that the CEO leave the board as part of his or her succession plan.
From the industry analysis of survey responses, approximately 27 percent of companies in the financial sector include in their annual disclosure to shareholders information on succession planning. The number is lower in manufacturing and nonfinancial services (20 percent and 24 percent, respectively). There is a direct correlation between disclosure practices and company size, with larger companies being more prone to include this type of information in the annual report: approximately 40 percent of respondents in the largest asset group indicated that they provide the disclosure.
Director attendance of shareholder meetings Across industries, a large majority of companies reported having a formal requirement for nonexecutive directors to attend the annual shareholder meeting; the lowest percentage (55) is registered in the financial services sector. However, the corporate size analysis shows that the requirement is not prevalent in certain groups: for example, only 36 percent of the largest financial companies (with asset value of $100 billion or greater) have instituted it.
Board/shareholder engagement policies Only about a quarter of surveyed companies adopt a board/shareholder communication protocol, with the highest percentage found in the financial sector (27 percent) and among the smallest size groups (42 percent of companies with annual revenue below $100 million and 23 percent for companies with an asset value between $1 billion and $9.9 billion).
Mandatory director retirement policies Retirement policies, whether based on tenure or director age, are being adopted to ensure periodic change and innovation in the makeup of boards. For organizations reporting a mandatory retirement policy based on age, the average and median age limit across industries is 72 years. For companies reporting a mandatory retirement policy based on tenure—a practice that appears to be adopted by virtually no respondents in the financial services sector and only by 5 percent and 8 percent of respondents in manufacturing and nonfinancial services, respectively—the maximum permitted tenure varies from 12 to 15 years.
Restrictions on multiple board service The majority of the respondents (approximately 56 percent) across all industries have a policy limiting the number of public-company directorships that their board members may concurrently hold. Of those, approximately 80 percent of companies in manufacturing and nonfinancial services allow board members to serve on three or more additional for-profit boards; these policies appear even more frequently among the largest companies. However, they are stricter for directors who also are employed as senior executives of the company.
Director education A large majority of surveyed companies reported that they organize an orientation program internally for their newly elected directors, with help from other board members, senior executives, and key employees. None of the surveyed companies hire outside parties for these programs. As for the continuing education of seasoned directors, most companies avail themselves of accredited outside roundtable programs that directors attend on their own schedule. There is a direct correlation between size groups and the percentage of companies using in-house programs provided by management to meet the board’s specific knowledge gaps and informational needs: in the largest asset group, 73 percent do so. It is interesting to note that approximately one-quarter of manufacturing companies do not have continuing education requirements for their board members.
Director performance assessment Of companies in the nonfinancial services industry, 34 percent assess their directors’ performance on an individual basis. Individual performance assessment is particularly infrequent in the largest size groups: for example, only 18 percent in the largest asset group conduct such this evaluation type. The evaluation of board performance is typically organized internally, through written questionnaires (used by 81 percent of companies in manufacturing and as many as 86 percent midsize companies) and without the assistance of an outside contractor. Most often, the coordination of the process is delegated to the general counsel or a senior member of the legal team; however, for financial companies, there is a direct correlation between company size and the cases in which one or more board members are assigned the responsibility for leading the assessment process.
Board committee practices While almost all companies that responded to the survey have committees in charge of financial, audit, compensation, and director nomination issues, a few respondents also have dedicated committees for a variety of other board duties—finance, social responsibility, technology, and human resources oversight, among others. Of course, these activities may be subsumed into other committees because companies assign risk oversight duties to the audit committee or succession planning responsibilities to the nominating/governance committee. There is a direct correlation between company size measured by asset value and findings on the institution of executive committees and finance committees of the board. As company size increases, so does the size of the committees of the board. Across industries, the average number of audit, compensation, and nominating/governance committee members is four.