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Key organization issues for the board.

Long-term planning is the most critical issue directors say they face today. And companies are increasingly turning to noncash compensation for their boards of directors. These and other findings are contained in the 1991 Organization and Compensation of Boards of Directors, a recently released study conducted by Ernst & Young, the international professional services firm. The study reflects the thinking of 450 publicly held companies in 24 industries. An excerpt from the study follows.

Across corporations of all sizes and industry groups, board members agree that serving the shareholders' interest is the most important function of the board. In that context, ensuring long-term corporate survival and viable growth are concerns frequently cited by board members. The accompanying table displays what directors state as their primary responsibilities.

Directors see boards as being most influential on decisions regarding:

-- Compensation of top management;

-- Mergers and acquisitions;

-- Management succession;

-- Counseling top management;

-- Selection of senior executives;

-- Long-range strategic planning;

-- Capital expenditures.

Boards continue to focus time on the strategic planning process. Fifty-five percent of all companies report special sessions devoted exclusively to long-range strategic planning. However, only 23% of the directors report having strong influence in this area, and only 22% report that their approval of long-range strategic plans is required.

Board Evaluation. Despite calls for increased accountability of board members, this year's study shows that 10% of the reporting companies have formal mechanisms in place to evaluate the performance of the board as a whole (up from 7% in our 1988 study) and 9% of responding companies have a mechanism for evaluating the performance of individual directors (down one percentage point from our 1988 survey).

Service on Other Boards. As arguments for stronger boards continue to be voiced, demands placed on board members are likely to increase, and corporations are becoming more stringent in their expectations for commitment on the part of their directors.

Overall, 25% of the companies responding require approval before a director can serve on another board. As a sign that board members themselves are treating their existing commitments seriously, 25% of the respondents report rejecting service on other boards. Reasons cited include:

-- Lack of time;

-- Conflicts of interests; and

-- Travel requirements.

On average, the CEO sits on 1.6 other boards.

Corporate Issues. In the view of the director participants in this study, the most important issues that boards must face today and in the near future include:

-- Strategic long-term planning;

-- Financial results and profitability;

-- Viable growth and expansion;

-- Management succession; and

-- Long-term viability.

Since our 1988 survey, concern over the threat of hostile takeover attempts has dropped from the list of the most pressing issues. Not surprisingly, board members of financial services organizations frequently cited the overall condition of that industry as a key area of concern.

In summary, directors are recognizing the growing need for strategically and financially astute boards to guide company decisionmaking in an increasingly competitive and volatile environment in which room for error is shrinking.

Governance. Despite the fact that fewer board members now list concern about hostile takeovers as a key issue, corporations continue to protect themselves against unsolicited offers.

This year, 77% of participating companies report having some form of takeover defense, compared with 63% in our 1988 survey. Consistent with our 1988 survey, the ranking of the most frequently reported defenses is:

-- Staggered boards (74%);

-- Shareholders' rights plans (55%);

-- Super majority provisions (50%);

-- Poison pills (50%);

-- Fair price provisions (37%).

The number of companies reporting these defenses has increased significantly since our 1988 survey. In 1988, for example, only 24% reported having super-majority provisions or shareholders' rights plans, less than half the prevalence noted above.

Board Organization. In terms of size, composition, number of meetings held, and time spent on board activities, the organization of publicly held boards has remained remarkably stable over the past decade. They: * Average 11 members, a size that has remained relatively stable over the last 13 years. * Average 74% nonmanagement directors, consistent with our 1988 study. * Hold an average of seven meetings per year, also consistent with our 1988 study. * Require approximately seven hours of a board member's time per month, an hour less than was reported in 1988. This includes time spent on committee duties.

The most common committees are the:

-- Audit committee (99%);

-- Compensation committee (88%);

-- Executive committee (70%);

-- Nominating committee (56%);

-- Finance committee (27%);

-- Pension review committee (20%);

-- Stock option committee (17%).

Board Compensation. Virtually all study participants compensating their nonmanagement directors. Directors typically are compensated with:

-- Annual retainers and meeting fees (79%);

-- Annual retainers only (11%);

-- Meeting fees only (7%).

Directors receiving both annual retainers and per-meeting fees earn average total compensation of $21,832. Using this method, the average compensation board members received if they attended all meetings is:

-- Nondurable goods manufacturers: $25,130;

-- Durable goods manufacturers: $21,331;

-- Nonmanufacturing companies: $21,857;

-- Financial services firms: $18,828.

This year's study confirms the increasing use of stock-based compensation. Forty-one percent of the companies responding provide some form of stock-based compensation, a dramatic increase from 25% in 1988. Where provided, these firms make:

-- Stock awards in addition to retainers and fees (84%);

-- Awards instead of retainer and fees (16%).

The most popular forms of stock-based compensation are:

-- Stock options (65%);

-- Restricted stock grants (16%);

-- Unrestricted stock grants (14%).
COPYRIGHT 1992 Directors and Boards
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Title Annotation:board of directors
Publication:Directors & Boards
Date:Jan 1, 1992
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