Fish or cut bait: luring directors to corporate boards has become a daunting task—one that requires ingenuity and time - Corporate Governance

Chief Executive, The, May, 2002 by Michael T. Harris

The friendly voice on the telephone belonged to a recruiter wanting to know whether Paul Chellgren, chairman and CEO of the $8 billion chemical company Ashland, would consider filling a vacant seat on another major corporation's board.

No thanks, Chellgren replied, he was "all boarded up." Recruiters hear that phrase more often these days. With extra duties such as committee meetings and crisis management piled on, serving on a board is more demanding than ever, and many CEOs simply lack the time. Today's boards also require directors to have more specialized skills, particularly in accounting. Meanwhile, corporations are increasingly placing limits on how many other boards their top executives can join.

"It used to be common for a CEO to be on five or six outside boards. Not anymore," says Robert Sullivan, who as president of Milwaukee-based Sullivan Associates specializes in finding candidates for corporate boards.

There are roughly 12,000 board seats among Fortune 1,000 firms alone. Of those, an average of 15 percent turn over annually, creating the need for 1,800 directors, estimates Charles King, managing director of North American board practices for Korn/Ferry International in New York. Factor in all the companies trading over the NYSE, NASDAQ and the AMEX and you come up with more than 60,000 board seats. Take 15 percent of that, and you have 9,000 potential vacancies each year.

Some CEOs are turning down offers to serve because they can't meet the time commitment now involved. Directors, traditionally required to attend one meeting per quarter, are being asked to attend as many as eight in a single year. With paperwork and travel, it all adds up to a yearly commitment of about 200 hours, or five work weeks, estimates Roger Raber, president of the National Association of Corporate Directors in New York.

Widening the dearth of directors is that some candidates -- even those at the top -- simply don't have the skills to meet today's demands. Audit committee directors are especially hard to recruit. In large part, that's due to a new SEC regulation requiring audit committees to have at least three outside directors who are able to read the company's balance sheet and income and cash flow statements or have accounting or financial management experience.

What's more, pressure to limit outside commitments is growing, both from institutional investors and corporations. Often, outside board membership is set by the behavior of the boss, and the CEOs at more than a dozen major, well-run companies such as The Home Depot, 3M and IBM serve on no more than two outside boards. "Many boards are telling their CEOs, and even some of their senior people, that three is the maximum number," says Ted Beck, associate dean at the University of Wisconsin--Madison School of Business. "They're saying, 'How effective can you be for our company if you're busy on a bunch of boards?'"

The tough economy is a factor as well. The recession caused prospective directors to postpone new assignments. Ashland's Chellgren says that in the past two years, two tentative oral agreements with CEOs of Fortune 200 companies to join the Ashland board were scrapped after difficulties emerged at their firms. "Their first obligation was to their own company," says Chellgren, "and I clearly understand that."

The Enron scandal has added complexity. Directors now face increased risk. "Until recently, being on a board has never resulted in a board member being held personally responsible," says Ed Lawler, director of the University of Southern California's Center for Effective Organizations and co-author of Corporate Boards. "With Enron, that may change. I thing that's the other shoe waiting to drop." He suggests that the reputations of Enron's directors are so tarnish d that they've effectively ended their board careers.

Lawler also predicts that Enron's directors could be tied up in class-action lawsuits for years. That would come as no surprise to insurance experts, who point out that losses in directors-and-officers insurance are growing, thanks in part to the large sums paid out for class-action settlements, which have thrown the liability insurance market into an upheaval. Major price hikes and contraction in coverage and services are expected, predict Fred Podolsky and Susanne Murray, executives in the risk management practice at insurance brokerage Willis North America.

So what's a depleted board to do? Well-governed, independent boards that employ a systematic recruitment process that assesses strengths and weaknesses of existing and prospective directors are more successful than those that just rely on a Rolodex, says Ted White, director of corporate governance for the California Public Employees' Retirement System.

Some companies rely on an executive search firm, which can cast a wide net, serve as a filter and provide anonymity. Regardless of the recruiting method used, CEOs must be willing to devote time. In general, it takes at least a year to lure a busy executive to an outside board. "I had to woo one person over a three-year [period]," says Warren Batts, former CEO of Tupperware and now adjunct professor of strategic management at The University of Chicago. This should include meetings between the CEO and the candidate. "Showing that you're willing to invest your own time in the search process is critical," suggests Batts. He himself joined the Sears board after receiving a call from the company's CEO.