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Boards of directors: expectations elevated.

On well-run boards of directors, it's business as usual--except in a super-sized way--as new rules and heightened external expectations comingle. Outside directors talk about the gravity of this new environment, their roles, due diligence and stakeholder expectations.


Imagine the tension in the boardroom of Hewlett-Packard Co. during the seven weeks between firing CEO Carly Fiorina and hiring Mark Hurd on March 29. The board had gone through the process of parting company with the embattled Fiorina, following a tumultuous five and a half years of stock-price declines, company infighting, loss of key executives, shareholder battles and a questionable acquisition and strategy, etc.


At any time, firing and hiring a new chief for an $80 billion public company is likely to be a pressure-packed situation for all involved. "It was very intense," says Robert L. Ryan. The just-retired senior vice president and CFO of Medtronic Inc. (he retired in April 2005) had joined HP's board in 2004 and chairs its audit committee.

In the high-stakes business climate of 2005--as the case of HP illustrates--eyes are clearly focused on the actions of the board of directors, and expectations are higher than ever.

In this case, the CEO ouster was due to strategic differences between Fiorina and the board. HP's board level of involvement in the CEO selection, says Ryan, was higher than any other he's experienced in his 25 years of board service. Early on in the process, he says, there was agreement among the members that each would "do what it took" to get this done. They laid out the criteria, engaged a search firm, planned interviews and screened candidates. Each also traveled cross-country, as necessary, to personally meet with the final candidates and ultimately bring in NCR Corp.'s former CEO Hurd.

Corporate governance across the landscape of Corporate America has been notched up, and while it may be that the vast majority of boards have been well-run, now even these good boards are taking heed.

"Boards are taking their responsibilities more seriously than ever," says Ryan, who believes this new environment "is causing directors to ask a lot more pointed questions, and be a lot less tolerant. It's also causing directors to hold CEOs much more accountable." Besides HP, he also serves on the board of UnitedHealth Group, where he was the prior audit-committee chair. In total, over the past 25 years, he's served on six boards.

"Boards are certainly more robust and meetings are more robust than they were five or 10 years ago," echoes Barbara T. Alexander, an independent consultant who serves on four public company boards. A security analyst-turned investment banker and up to recently a senior advisor to UBS Securities, she was the first woman to be elected a managing director of Dillon Reed in 1992.

Alexander is on the boards of Centex Corp. (chairs the audit committee), Harrah's Entertainment Inc. (chairs the audit committee), Burlington Resources (on the audit committee) and Freddie Mac (on its finance committee and mission and sourcing committee). A board member since 1999, Alexander says she's always been associated with good boards, where "sharp questions were asked of management--in the sense of [being] very thoughtful and provocative."

Prior to the scandals, she notes that few boards had executive sessions without management at every board meeting. "That's a real difference," she says, explaining that the transition was slightly awkward at first, since management was accustomed to being in the room. "But, that's now two-plus, year-old history, and boards are very comfortable having those conversations amongst the non-executives and then having other conversations with the executives."

Also, Alexander says the boards are "asking for a lot [more] of management--whether information about competitors, academic market studies about product demand or those sorts of things."

Gone are the days when serving on a board of directors was a matter of skimming through a pile of papers you received just prior to flying in for the quarterly meeting, showing up, dining, chatting with colleagues and "rubber-stamping" management proposals. In the new environment, directors cannot afford to avoid involvement with companies on whose boards they serve. It's now a matter of accountability--which, for some, has recently had a personal-liability price tag attached, and one that can add up to a steep percentage of one's lifetime savings if things go awry under your watch.

Charles H. Noski says, "Good boards have always been challenging and questioning positions and judgments of the management team--not in a hostile or confrontational fashion, but just being sure they understand what's going on." Noski is retired vice chairman of the board of AT & T Corp. and the recently retired CFO of Northrop Grumman Corp. He serves on the boards of Northrop Grumman and Microsoft Corp., where he chairs the audit committee and serves on the finance committee.

Being on boards of what he describes as "well-managed" companies, Noski hasn't noticed much difference in board actions. However, he says he is seeing more focus on process and the breadth of what audit committees are looking at now. "A lot more attention is given to risk management and mitigation, with risk being defined quite broadly." Also, he describes a heightened level of engagement, along with questioning and debating with management, making for "an increase in boards challenging management in a constructive way."

He says directors "have got to be quite diligent, do their homework, read all materials and think about what's going on in their business." Also, he says there probably is more comparison of performance of the business to competitors, suggesting directors try to be more externally focused on how the business is doing relative to its competitors and peers.

Certainly, Noski says, "everyone understands that with the very high-profile problems (at Enron and WorldCom and others), that there is a higher level of expectation by the public, by investors and regulators as to the diligence and engagement of directors. I think everybody is re-doubling their efforts."


John M. Thompson, chairman of the board of Toronto Dominion Bank Financial Group (TD Bank), says both the regulations and the environment are causing all directors to spend far more time on all board issues--some imposed and some self-imposed. Headquartered in Toronto, TD Bank is listed on the New York Stock Exchange (NYSE), so it comes under U.S. as well as Canadian rules. Where rules differ, Canadian rules take precedence for Canadian corporations, he says, but he believes that regulators are "doing their best to harmonize things, because in a free-trade environment, it makes sense to have common rules on both sides of the border."

Thompson, who first served on a board in the 1980s when he was president of IBM Canada, says that board members are working harder now than 10 years ago. He's now on three boards: TD Bank (where he chairs the corporate governance committee and is a member of the management resources committee), Thomson Corp. (where he chairs the corporate governance committee and is a member of the audit committee); and European-based Royal Philips Electronics (where he is on the supervisory board and remuneration committee).

Increased Workloads, Especially for Audit Committees

A downside of the new rules, Thompson argues, is that with so many regulations, "if you're not careful, you can get pre-occupied by doing all the mechanics of those regulations and miss the big picture." For example, TD Bank is subject to about 24 regulators, so to the extent that those regulations are different or not harmonized, it's like paying your taxes to 24 different tax jurisdictions. All this creates a lot of conflict, he says, but he believes this downside is greatly outweighed by better performance by boards on behalf of shareholders.

A lot of TD Bank work, he says, is quite detailed, and a lot happens in committees, so committee meeting time has gone up, especially preparing for them. One step TD Bank's board took was to split the audit committee into two--the audit committee and the risk committee. As chairman, he says he's conscious of making sure that he frees up enough board time for open sessions to discuss strategic issues and things that are on the minds of directors or management.

While all directors' responsibilities have increased, those who serve on audit committees have added substantial layers to their tasks. Ryan says that given all the new regulations related to Sarbanes-Oxley, the audit committee now takes "an incredible amount of time." For example, HP has five in-person audit committee meetings a year, with each lasting around 4-4 1/2 hours, besides the preparation time (for the last meeting, he had 200 slides to go through), plus telephone calls for the 10-K, 10-Q, annual report, earnings releases and financial results before they are released to the public. And, as head of the audit committee, he says when an issue comes up, "even not a big issue, I'll make a decision on whether to get the whole committee involved. If I'm not sure, I'll take the cautious route and brief the whole committee."

A lot of what is happening is good, Ryan says, but he believes it could be implemented better. Where it's good, he says, is in defining responsibilities, which had not previously been defined. For example, about four years ago, it was not clearly understood that audit committees--in addition to the 4 or 5 annual meetings--should review the quarterly financial statements and the related press releases, and speak to the external auditors, before they are released to the public. He says he believes that for about 90-plus percent of the financial statements that went out five years ago, the audit committee read about them in the press.

Also, while Ryan believes the changes associated with Sarbanes-Oxley are good, he wishes they were implemented in a different way, and, perhaps over a two-three-year period.

Noski notes that all audit committees have upgraded their charters to include all the requirements of Sarbanes-Oxley as well as the NYSE and Nasdaq requirements, and he says everyone is taking it very seriously. "I think it was taken seriously before, but there is no question, that the amount of time devoted to audit committees has at least doubled what it was previously," he says.

Noski also says the work has increased. "As chair of Microsoft's audit committee, I am talking with the CFO and corporate controller and audit partner by phone a few times a month. The amount of material we go through and information we're asked for is greater," he says.

Is Director Recruiting Tougher?

John Thompson thinks it will be difficult to recruit directors for a few reasons. First, there is the personal liability probability (if you join the board of a company that becomes involved in a shareholder lawsuit). Second, he says, the time commitment is such that people can't join as many boards, so there are fewer candidates (one set of candidates that is scarcer is sitting CEOs whose company boards restrict how many boards they can serve on). Third is the regulations requiring financial experts who are financially literate and independent.


All this amounts to fewer candidates, he says, who are harder to recruit. As a result, there are more consultants involved, like headhunters, placement agencies and professional recruiters. Despite the problems, however, Thompson believes, "For those who are committed, interested and enthusiastic about doing it, I recommend it."

Noski also believes it will be harder and more challenging to get directors, since there will be a greater burden put on companies and their boards to "demonstrate that they are adopting best practices in corporate governance and doing all the things they need to do, as well as effectively running the business." He says while he doesn't believe Sarbanes-Oxley is a panacea by any means, he continues to believe that well-managed, well-governed companies will continue to operate that way. Sarbanes-Oxley, he says, improves the environment and puts everyone on notice.

However, he adds, "In companies where management is intent upon doing the wrong thing and intentionally distorting results and misleading investors, a concerted effort by enough people will allow that to occur." He comments that we have lots of laws in this country intended to prohibit crime, yet we still see lots of crime.

Higher Stakes, More 'Homework'

For those serving on boards or considering serving, there is no question the stakes are higher and new challenges abound, but there are personal rewards, particularly for experienced professionals who can both learn and contribute.

For those concerned about personal liability, Noski stresses that while he's not an attorney, he doesn't believe the law has changed. "Companies and directors are still going to look hard at directors and officers insurance." He argues also that the environment puts an additional burden on outside directors and perspective outside directors to do their homework, do their due diligence on the boards that they join, before they make that commitment.

"It's a very serious commitment and ought to be handled as such. Being on a board of directors of a public company is not becoming a member of a country club," says Noski. However, he believes it's interesting work, and can be fulfilling. "You can, as an outside director, feel that you've made a contribution to the company, to the shareholders and to the capital markets by being part of a well-functioning, effective board."

An engineer by training, with a subsequent business degree from Harvard Business School, Ryan says, "The things you have to do to think about good corporate governance don't change a lot from one company to the next." He believes that you bring your knowledge from one company to another, and he is able to apply much of what he has learned in his career to other situations, regardless of the industry. "Board members have to be involved enough and ask enough questions to understand the strategy and to understand where they don't agree. You can't really push for change unless you really understand that," he says.

Ryan says he's served on boards for so long that he feels he has a good perspective on how a board should operate and what it should do. Indeed, he says, before choosing HP, he had 13 requests to serve on boards and did a lot of his own due diligence. He says it's key to understand management and the other board members and how they make decisions.


To assess a board, Ryan says to first look at the management's integrity and basic approach. If the CEO has lots of friends on the board, he says, "run." Also, ask, "How does the board accomplish what it does?" Next, be sure you have the appropriate time to spend. Naturally, what committee you are on depends on what expertise you bring, but, for example, finance takes a lot of time--especially the audit committee. Finally, Ryan says it's better if it's an industry you like. "Loving what you do," he says, "makes a huge difference."

Thompson says that as a sitting CEO, it's useful to be on the board of a leading company, because you gain another perspective of how someone else runs a business who may be facing similar problems that you face. In addition, you create good business contacts.

Alexander says it's important to have confidence in management and the approach they are taking. It's not that there might not be something that surfaces, she says, "but you know that if the cobra sticks his head out of that hole, that management is going to be there with a mallet, beating it, because they don't want it to happen on their watch." She adds, "It's possible to come in to a situation thinking everything's been 'cleaned up,' but find there was still stuff you hadn't found out about."

She was on the board of Homestore Inc., having joined just four months before a major fraud was uncovered. "I was on the audit committee, and we did a very good investigation," she says, adding that both the SEC and Justice Department commended her committee. It turns out that a conspiracy among some of the senior people (who have already pleaded guilty) "cooked the books." She says that can happen--even in a company that gets a clean bill of health for Sarbanes-Oxley 404.

To assess a board, Alexander advises having candid conversations with a number of current board members "to really understand their perspective of the dynamics." One of the hardest things to find out before joining a board, she says, is how it really functions. Finally, she says, you can analyze numbers until you are blue in the face, but [even] a company that has financial difficulties can surmount those, and a good board can help it do that. "You can help the company hit a home run," she says.

Bottom line, Alexander concedes, "You can't be 100 percent sure you are getting the 'straight scoop,' so probably the best defense is that you have a board that is really active, engaged and knowledgeable about the company."

Related to knowing about the company you associate with, Ryan recalls that before going to Medtronic in 1993, he was CFO of Union Texas Petroleum in Houston. Owned by (then) Allied Signal Corp. (now Honeywell Corp.), it generated the bulk of Allied's earnings and cash flow. Allied sold half of the company in a leveraged buyout. He became an equity investor with KKR in the LBO, and several people that worked for him at Union Texas ended up at Enron Corp.

At the time, he had asked, "How did Enron go from being a sleepy, slow-growing pipeline to this company that is growing like crazy and producing no cash, just chewing up cash? What is the business model of the company?" Nobody could answer it, he says. Now, he'll say, "Ask me how Medtronic makes money, and I'll explain how it produces $500 million of free cash per quarter (and that's after $1 billion a year for research and development), etc."

As for Enron, he says, "I don't think the board understood the business model of how the company earned money, nor had the board thought about the ethics and honesty of the people running the company."

Ryan argues that you want to understand the quality of earnings, adding he's "amazed that in today's world, not enough people look at cash." While it's not the only thing to look at, he says it verifies, in some ways, the quality of earnings.

"You can't have earnings growing at 20, 30, 40 percent year after year after year, and every single year you are chewing up cash. There is something wrong with that picture," he says, and boards need to understand that. Finally, says Ryan, "Directors have to understand the strategy and link the strategy to shareholder value."

RELATED ARTICLE: Director Shortage? No Way

The president and CEO of the National Association of Corporate Directors debunks the myth of a qualified director shortage. Indeed, he says, directors are a precious, yet renewable, resource.

The events are now legendary. On Jan. 7, 2005, New York State Comptroller Alan Hevesi announced that 10 of the former directors of WorldCom Inc. (now MCI Inc.) had agreed to pay $18 million out of their own pockets to settle their part in a shareholder lawsuit. The next day 10 former directors from Enron Corp. agreed to pay $13 million of their own funds as part of a settlement similar settlement. The court denied the WorldCom settlement--but only because co-defendant bankers believed the amounts might be too small.

By March 21, it was reported that the case had been settled: 11 former WorldCom directors (the 10 plus an additional director) agreed to pay a total of $20.2 million out of their own pockets, and WorldCom's former chair agreed to pay $4.5 million from personal funds.

The cases described above were "larger than life" events, so, understandably, a myth has arisen: the myth of the qualified director shortage. "The specter of personal liability may have a chilling effect on the willingness of qualified individuals to serve on boards of directors," said the law firm of Fried, Frank, Harris & Shriver, in January, in a client memorandum. The firm further noted that the settlements may cause directors to "accelerate" the process of winnowing out their directorships.

In Directors Are Getting the Jitters, an article in one of its online publications in February, SNL Financial, a financial research and information firm, noted that "Current and prospective outside directors are thinking twice about serving on corporate boards."

And, in March, in Financial Services, an online American Enterprise Institute publication, Peter J. Wallison of AEI opined that the settlements "can only make it ... more difficult to recruit qualified independent directors to serve on the boards of public companies."


Is it true? Will there soon be a shortage of qualified directors? Based on my experience as president and CEO of the National Association of Corporate Directors (NACD), the nation's only membership organization for directors, the answer is "no."

Heightened Liability Risk Will Not Deter Directorships

Directors today do face heightened liability risk--there is no doubt about that. Although nothing has changed in their basic duties of care and loyalty, there are many more laws and rules pertaining to directorship (The Sarbanes-Oxley Act of 2002 and the New York Stock Exchange listing rules, to name just two) and far more litigation by shareholders (as tracked by Stanford University, Tillinghast, and other sources). However, this does not mean that there will ever be a shortage of qualified directors.

True, some directors currently serving on boards may reduce their public company directorships, and this is unfortunate. Boards need experienced directors, and such veterans deserve better than a forced retreat. But I believe that many existing directors will continue to serve. They will demand more targeted insurance products, and the insurance industry, seizing the opportunity of new demand, will accommodate them.

It is significant that in 2004, a time of heightened liability, directors and officers (D & O) insurance premiums actually dropped, reflecting increased market demand, and some insurers started offering new personal insurance policies. Directors will also take more time to conduct "due diligence" before agreeing to serve on boards.

This is heartening news. Directors are a precious resource indeed. More importantly, directors are a renewable resource. Even if every single current director decided to resign his or her post, others would still arise to take their places--candidates from the ranks of attorneys, accountants, management consultants, university professors and the nation's thousands of CFOs and other senior managers now being groomed for CEO positions.

These stars are rising in organizations of every size, in every industry, with every conceivable educational and professional background--and they are a veritable galaxy for nominating committees.

The Next Generation

Years ago, trying to become a director was like the old adage about getting an actors' union card: You can't get the card until you get experience, but you can't get experience until you get the card. Today, things are different. There are numerous accredited seminars and workshops on every conceivable aspect of director responsibilities and board operations. It is far easier to prepare for one's first board position than it was when I was a rookie director.

I'm particularly enthusiastic about the untapped wealth of minority candidates that are the CEOs of the future. For the past five years, the NACD has been training members of the Executive Leadership Council to become effective directors. These are African-American men and women who serve as senior executives in the nation's largest companies. At this very moment, any one of them would be well prepared to assume the responsibilities of directorship. The Hispanic and Asian communities also offer talent pools for the boardroom.

Liability Still a Concern

The WorldCom and Enron settlements do not mean the end of directorship as we know it. As long as America remains a land of opportunity, we will never have a shortage of willing and qualified director candidates, despite the growth in liability risks. Indeed, new candidates, in their eagerness to assume the honor and challenge of directorship, may accept a very high degree of liability risk. We need to protect all of our directors--both veteran and new--from experiencing undue risk for honest mistakes. That would waste a precious resource indeed.

By Roger Raber

Roger Raber is President and CEO of the National Association of Corporate Directors (NACD), based in Washington, D.C. ( He can be reached at

RELATED ARTICLE: Testing the Winds of Reform

Patrick McGurn, a top observer of shareholder and proxy issues, talks about hot topics in governance and likely outcomes in the coming proxy season and beyond.

Institutional investors, such as major pension funds, mutual fund companies and other money managers, including hedge funds, can be a restive lot. While their focus has historically been on financial performance, the last few years have vaulted governance issues to the forefront, turning up the heat on public companies that have often paid only intermittent attention to social and religious activists seeking change through resolutions placed in corporate proxy materials.

Few observers are tracking the nexus between governance and shareholder issues more closely than Patrick McGurn, executive vice president and chief counsel at Institutional Shareholder Services (ISS). The Rockville, Md.-based firm is arguably the world's leading provider of proxy voting and corporate governance services, serving more than 1,200 institutional and corporate clients worldwide. It analyzes proxies and issues research and vote recommendations for more than 28,000 companies across 102 markets worldwide, as well as providing global proxy services and database and research tools for institutional investors.

At the same time, ISS is a leading voice for reform, frequently acting in concert with major pension funds and other activists in urging that votes be withheld from directors or resolutions that fail to meet certain criteria.

An attorney by training, McGurn serves on the advisory board of the National Association of Corporate Directors and speaks frequently around the country about shareholder issues. He commented on a variety of topics during a public conference call in March and a subsequent interview.

Much of the media attention these days has been seized by regulatory initiatives--witness the sudden, dramatic fall of iconic CEO Maurice "Hank" Greenberg at American International Group in March over alleged accounting irregularities--and McGurn maintains that turmoil in the proxy arena may actually be less intense than it was a year or two ago.


"If you read some of the reporting over the past year, you would have thought that this was the year of shareholders gone wild," he says. That started with the contentious annual meeting last year at the Walt Disney Co., where 45 percent of shareholders voted against retaining Michael Eisner as chairman. The whirlwind then moved to companies like Safeway Inc. and others. "But when you step back and look at 2004, it was actually a record year for dialogue and engagement and constructive conversation, rather than confrontation," McGurn says.

Still, he calls this spring "the first post-post Enron proxy season," with the various listed exchange reforms and much of Sarbanes-Oxley compliance in place. "The question is really, 'How high is the bar going to be raised for public issuers in the U.S., going forward?'"

ISS's own recommendations against boards fell substantially in 2004 from 2002-3 levels, McGurn notes, with proxy fight levels down and more resolutions withdrawn following successful negotiation with the companies. With that, there has been a much smaller number of majority votes showing up on resolutions and fewer recommendations against stock plans and auditors, he says.

McGurn offered his thoughts about the outlook in a number of specific areas:


McGurn expects this to be the biggest area for shareholder resolutions this year. More than 50 resolutions had been filed by late March, with shareholders asking for votes on adding performance measures, performance-based shares and indexed options. Related issues have included stock holding periods, severance agreements, pensions and retirement policies, and requests for "clawback" provisions to rescind payouts based on earnings that had to be restated.

"We see this [issue] particularly at boards that aren't making strategic changes fast enough," he says. "A lot of these [campaigns] are being led by hedge fund players," who have become assertive about trying to force changes in firms in which they invest

ISS triggered its own withhold-vote recommendations over violations of its pay-related policies about two dozen times last year and expects to do so "far more this year," he says. These policies include such requirements as: the compensation consultant has to report to the board as a whole or the compensation committee, not management; the board has to show it has reviewed all types of pay; and equity awards must be linked to performance.


So-called proxy access--a proposal from last year that would have allowed shareholders, under certain circumstances, to put forth their own director slate--looks "pretty much dead," McGurn says. The Securities and Exchange Commission has essentially shelved the issue, he says, and all the momentum behind that has shifted over to the "majority vote" area.

As McGurn explains it, under the current plurality system, if a quorum is represented at an annual meeting and a director is running unopposed, he or she needs only one affirmative vote. "That tends to undermine efforts by shareholders to register their discontent by a negative vote. Even if you had a majority vote against that director, it had no impact on whether or not that director could continue to serve."

If a company elected a majority voting policy, however, a simple majority vote against a director could imperil his or her service--at least in theory. While such resolutions would presumably be non-binding, as they are now, the pressure on boards would be greatly increased. McGurn says such votes would give shareholders "a meaningful safety valve. Boards cannot afford to continually ignore shareholders' votes--if you do so, it could put you out of office."

About 80 proposals were originally generated this year on the subject, he says; some have since dropped away. But the outlook is cloudy, since majority voting for directors would represent "a very substantial change in U.S. corporate governance" and would be "a major crossroads issue." In the United Kingdom, on the other hand, majority voting for directors is a requirement.


Speaking to the still-unknown fall-out from Sarbanes-Oxley's infamous Section 404 and its focus on internal controls, McGurn says: "The bottom line is that we're not going to see a lot of withheld votes from investors against audit committees or boards this year over disclosures of material weaknesses in internal controls. By and large, most investors are taking a 'wait-and-see' attitude here.

"In our parlance, we're calling for 'candor and cure'--that boards and audit committees get the information out there as soon as possible about any material weaknesses that exist and make it clear what their schedule is for getting a cure in place to fix those problems." He expects that 2006 will be the major confrontation year on this issue for boards that have not taken care of problems disclosed in 2005.


Major shareholder groups and activists will continue to withhold votes and recommend that others do so at companies perceived to be engaging in non-recommended practices, McGurn says. Based on last year's proxy voting, he predicts that some companies will see organized campaigns against directors or specific practices, such as those against Disney last year by the Teachers Insurance and Annuity Association/College Retirement Equities Fund (TIAA-CREF), the giant pension fund, and against giant MBNA Corp. by a coalition of unions.

"The number one issue was boards that ignored majority votes on shareholder proposals," he says. "A couple of companies this year will likely find themselves getting a high level of no votes [for such actions]."

Other hot-button issues, McGurn says, include payment of excessive non-audit fees, obvious boardroom conflicts of interest and the adoption of "dead-hand" poison pills, in which such anti-takeover rights can be redeemed only by directors who were on the board before the pill's adoption. This denies shareholders the right to replace the board with new directors empowered to redeem the poison pill.

Other issues, he says, include nonindependent directors on key committees (such as compensation or audit), attendance by directors and "over-boarded directors," those deemed to be serving on too many boards to be effective on any one. ISS doesn't believe CEOs should serve on more than three public company boards.

On the issue of independent directors, the simple majority required by the The New York Stock Exchange and Nasdaq in their listing requirements is inadequate, McGurn argues. "We have two-thirds [of independent directors] standard we like to see." Three-quarters of S & P 500 boards already exceed that standard, he adds.

He notes that there is growing agitation both in the U.S. and overseas for an independent lead director. ISS itself "puts substance over form," McGurn says. "We're not really going to care much about the structure in most instances, but we do want to make sure there is an independent focus of power in the boardroom."


The audit process will diminish as a concern for shareholders, especially the audit fee process, he thinks. "Most companies are well below the 50-50 test that we apply to audit and nonaudit fees," McGurn says, adding that many boards have elected not to buy any non-audit services from their independent audit firm.

Allowing shareholders to vote on ratification of the outside auditor is becoming more common: Companies on the S & P 500 went from 67 percent allowing such a shareholder vote two years ago to 85 percent last year, he says, and he expects that to keep rising. Middle-market and smaller-capitalization companies are lagging on this issue, however, McGurn says. Major companies "have accepted the fact that people want that choice. It's still a non-binding vote, but it gives shareholders their only opportunity to comment on the outside audit."

The surge of attention on beefing up audit committees in the past few years has brought a similar focus on their performance. "Recent empirical evidence shows that audit committees with a large number of financial experts do a better job than those audit committees that don't have such individuals serving," McGurn says.

By Jeffrey Marshall
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Author:Heffes, Ellen M.
Publication:Financial Executive
Article Type:Cover Story
Geographic Code:1USA
Date:May 1, 2005
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