Boards of Directors Are Doing More to Earn Their Keep
Dec 18th 2009 11:00AM
Updated Dec 18th 2009 8:11PM
Sitting on a corporate board of directors has always been great work if you can get it, especially if it's with a company that's generous with its board member compensation. But these days, directors are doing a little more to earn their keep.Among such coveted companies is Nabors Industries (NBR), which paid its six non-executive directors $420,000 last year – more than $100,000 per day of actual work, according to Reuters. On average, Intuitive Surgical (ISRG) threw $697,000 at each of its seven non-employee directors. That comes out to $139,000 per meeting in 2008. And, Apple (AAPL) shelled out an average $633,000 apiece for its five board meetings last year.
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Board member and executive compensation tends not to matter much to people until the company or the stock starts collapsing. "Up until probably a couple years ago director pay was probably not on the radar," said Paul Hodgson, an expert in compensation at The Corporate Library, an independent research firm. Investors thought: 'I'd rather have a well-compensated engaged director than one who didn't want to put in the time for the company."
The financial crisis has changed all of that. Banks that have received money from the Troubled Asset Relief Program, or TARP, are scaling back on their compensation packages to avoid the ire of stockholders and taxpayers. Goldman Sachs (GS) is being sued over its recently announced bonuses, and American International Group (AIG) has had to negotiate with the government in order to extend retention bonuses and competitive pay packages to employees.
The Fine Art of Compensating Correctly
When it comes to board member compensation, the situation is even touchier since a director's annual obligation to the company consists of only a handful of days. Arguably, there are cases where the money is well spent. Board members often play a crucial role at companies. At least in theory, they provide the oversight and control necessary to ensure that executives act in the interests of shareholders.
For companies like Intuitive Surgical and Apple, which have seen their share prices more than double this year, it appears that the generous pay packages for board members has paid off. Worth noting is that both companies pay their board members with stock options, tying their fortunes directly to those of the company.
The situation at Nabors is vastly different, however. Hammered by a decline in oil prices, the company has seen its stock tumble 60% since June 2008, when energy prices where climbing rapidly. Michelle Leder, editor of corporate watchdog site Footnoted.org, says that in the case of Nabors, paying several hundred thousand dollars a year to someone holding a part-time job offers plenty of incentive for them not to "rock the boat."
More Meetings, More Scrutiny
These days, however, it seems like board members are doing more to earn their keep. In the past two years, directors have been asked to attend more meetings and deal with more complex and sensitive issues. The $298,000 average annual compensation doled out to Goldman Sachs's board members paid for 16 board meetings in 2008, according to Reuters, for an average pay of $18,000 per board member per meeting. Morgan Stanley (MS) convened its board 28 times, bringing the average per-meeting payment down to $11,000 on $312,000 average annual compensation.
The financial crisis notwithstanding, the number of board meetings held was already on the rise. In 1999, the average company board met an average of 7.3 times; in 2008, the average climbed to 9 meetings, according to the Spencer Stuart Board Index. Meanwhile, the average fee paid increased slowly, to $76,000.
The increase in board meetings suggests not only that companies are becoming more sensitive to increased scrutiny, but also that they are placing more importance on the board's role – hardly surprising in a post-Sarbanes-Oxley world.
If a board of directors is doing its job: it shouldn't need to meet too often (except as dictated by market conditions) and it shouldn't need a substantial time commitment, when compared to full-time employees, to do its job. As long as shareholders are being protected and the stock price is going up, a corporate board of directors is earning its keep. And, if they aren't earning it, nobody will realize it until they see the damage done to their portfolios.