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Small boards, fewer insiders: director data.

Director Data

Corporate boards today are positioned to do a more effective job of governance than they were 10 years ago, according to a report on board trends and practices at 100 large U.S. corporations issued in December by SpencerStuart Executive Search Consultants. Boards today, says the firm's president, Thomas J. Neff, are "smaller, more independent of management, more action-focused." The report analyzes proxy data from 1990 and 1980 for 100 companies that comprise the SpencerStuart Board Index (SSBI). These companies are considered to be leaders in their respective industries and trendsetters in corporate governance. The survey highlights 10-year trends in board size, composition, and compensation to suggest what may lie ahead for chairmen and their boards. An excerpt from the survey follows.

The typical board at the start of the '90s is smaller than its predecessor of a decade ago. Among the 100 multibillion-dollar companies that comprise the SpencerStuart Board Index, the median board size is now 14 -- down from 16 at the start of the '80s. Two trends worth noting:

* Reductions have occurred most frequently at the top end of the spectrum. Ten years ago, 28 of the 100 boards had 18 or more directors. Today, only 14 boards are in that upper range. In 1980, there were seven boards with 23 to 27 directors; now the largest number of directors is 22, and only three boards are that size. During the '90s, we expect this trend -- the largest boards getting smaller -- to continue, chiefly through a continual reduction of insiders.

* Midsize SSBI boards are tending to cluster at a lower level. Ten years ago, nearly a fourth of the SSBI boards were in the 14-to-15-director range. Today, a fourth of the boards are in the 11-to-12-director range. (Only seven boards had 11 or 12 directors in 1980.)

Most of the SSBI companies -- nearly 9 out of 10 -- have a different size board today than they had 10 years ago. Among the 100 companies, 27 have added directorships, while 62 have reduced the size of their boards.

In many instances, the change in board size over the past decade has been substantial. In fact, 32 of the SSBI companies -- roughly a third -- have added or subtracted 4 or more directorships since 1980.

Currently, those companies with the largest and smallest boards are:

Largest: Security Pacific Corp. (22), Chase Manhattan Corp. (22), Citicorp (22), Philip Morris Cos. Inc. (21), General Motors Corp. (20), and Southern Co. (20).

Smallest: Digital Equipment Corp. (8), PPG Industries Inc. (9), McKesson Corp. (9), Pan Am Corp. (9), Aluminum Co. of America (10), and Great Atlantic & Pacific Tea Co. (10).

As might be expected, there is a correlation overall between company size and board size. Generally speaking, and larger the company, the larger the board. The six companies with the smallest boards, for example, have sales ranging from $4 billion to $13 billion. In contrast, among the six institutions with boards of 20 or more, three companies have sales ranging from $20 billion to $127 billion, and the three financial institutions range in asset size from $78 billion to $208 billion.

Insider/Outsider Ratio: The ratio of outside to inside directorships, which climbed steadily during the '80s, reached a new high in 1990. We expect this trend to continue through the '90s, largely as the result of further reductions in inside directorships.

Ten years ago, for example, 19 of the 100 SSBI companies had a majority of inside directors. Today, that's the case at only five companies: Dow Chemical Co., General Dynamics Corp., Loews Corp., McDonald's Corp., and Wal-Mart Stores Inc. Over the same period, the number of boards with a 4-to-1 or greater ratio of outsiders to insiders had doubled from 20 to 40.

All but four SSBI boards changed their outside/inside mix during the past decade. Those that have the exact same ratio today as they had in 1980 are Dun & Bradstreet Corp., Ford Motor Co., Mobil Corp., and Raytheon Co.

Most of the shifts in board composition have resulted in a greater predominance of outside directors, often as the combined result of adding outsiders while reducing the number of insiders. Some of these shifts were substantial -- moving from previously dominant insider representation to a majority of outsiders (see Rise of the Outside Director).

As should be obvious from the examples, the principal factor underlying the shift to proportionately greater outsider representation has been the continual reduction in inside directorships at a time when boards themselves have been getting smaller.

Since 1980, for example, the combined total number of inside directorships for all the SSBI companies has fallen from 584 to 410. That's a decline of nearly 30%.

As the table on the facing page shows, today there are 27 SSBI boards with 1 or 2 inside directorships, whereas only seven boards had such little insider representation in 1980. At the other end of the spectrum, just over half of the SSBI boards in 1980 had 6 or more inside directors; today, less than a fourth have that many.
 More Boards Are Moving to Fewer Insiders
 100 SSBI Companies
Inside Directors 1980 1989 1990
1 or 2 7 21 27
3 to 5 42 50 49
6 or more 51 29 24
Source: SpencerStuart Board Index survey

We expect that a reduction of similar magnitude will continue to occur with inside directorships over the next 10 years.

Rise of the Outside Director

Here is a selection of companies spotlighted in the recent SpencerStuart Board Index survey for having increased, in many cases substantially, the representation of outside directors on their boards over the past decade. The first group of companies below had primarily insider-controlled boards at the start of the 1980s.

Coca-Cola totally transformed the composition of its board, moving from a 2-to-1 ratio of insiders to outsiders to more than a 6-to-1 preponderance of outsiders. Since 1980, the company has added 8 outside directorships and eliminated 8 inside directorships.

Bethlehem Steel added 4 outside directorships (from 6 to 10) and eliminated 6 inside directorships (from 8 to 2), moving from a majority of insiders to a 5-to-1 ratio of outsiders to insiders.

Johnson & Johnson added 3 outsiders (from 7 to 10) and cut 5 insiders (from 10 to 5). The company now has a 2-to-1 ratio of outsiders to inside directors.

McDonnell Douglas, which had 6 outside directors and 10 insiders in 1980, added 3 outside directorships and cut 6 inside directorships. It now has a slightly greater than 2-to-1 outsider ratio.

Philip Morris has added 5 outside directors (from 10 to 15) and eliminated 5 inside directorships (from 11 to 6), moving from a narrow majority of insiders to an outsider ratio of 2.5-to-1.

Sara Lee has gone from a 9-to-6 majority of insiders in 1980 to a 14-to-4 preponderance of outsiders in 1990.

3M eliminated 3 insiders (from 8 to 5) while adding 4 outsiders (from 6 to 10), thereby evolving from an insider-controlled board to one with twice as many outsiders as insiders.

Dayton-Hudson, which a had a narrow (8-to-7) majority of outsiders 10 years ago, has added 4 outside directorships and cut 5 inside directorships to achieve a 6-to-1 outsider ratio.

Honeywell has moved from a 2-to-1 to a 10-to-1 preponderance of outsiders by adding 2 outside directors (from 8 to 10) while eliminating 3 insiders (from 4 to 1).

Monsanto added 2 outside directors and eliminated 5 insiders, increasing its ratio of outsiders to insiders to nearly 6-to-1.

A number of other companies that began the decade with a majority of outside directors have significantly increased their ratio of outsiders to insiders, both by adding outsiders and by cutting insiders.

American Express went from a 2-to-1 ratio of outside directors to more than an 8-to-1 preponderance of outsiders, by adding 5 outside directors and cutting 4 insiders.

CIGNA, which had a 2-to-1 majority of outsiders in 1980, added 3 outsiders and eliminated 4 inside positions. giving it a 14-to-1 ratio of outsiders to insiders.

Ryder System, which began the 1980s with a nearly 3-to-1 outside majority (8-to-3), has added 5 outside. directorships and cut 2 inside directorships, giving it a 13-to-1 majority of outsiders.

United Technologies has added two outsiders (from 9 to 11) and eliminated 6 insiders (from 7 to 1), moving from a narrow majority of outsiders to an 11-to-1 outside dominance.

Union Pacific eliminated 5 inside. directorships (and 1 outside position), going from a 4-to-1 ratio of outsiders to a 15-to-1 majority of outsiders.
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Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Title Annotation:includes related article; limited board of directors membership means corporate efficiency
Publication:Directors & Boards
Date:Jan 1, 1991
Previous Article:The inevitability of getting involved.
Next Article:Consultants get the nod.

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