Directors under fire
Once seen as a reward for a lifetime of achievement, the job of a board director has become decidedly less appealing.
As the economic crisis deepens and investors suffer one blow after another, it is not just activists who are demanding a look inside corporate boardrooms.
"Boards are becoming the lightening rods for public rancor," said Greg Brown, who helps manage $500 million for Cowen Healthcare Royalty Partners and sits on the board of troubled biotech firm Oscient Pharmaceuticals Corp. "Investors realize that their wealth, their future, have been jeopardized, and that's driving a huge amount of ire."
The Sarbanes-Oxley Act of 2002 raised the standards for corporate governance and financial accountability at U.S. public companies. Now, the economic crisis is putting even more pressure on boards to account for their performance.
Directors of companies receiving government bailout funds are at the forefront of investor disgust. But companies that have not received taxpayer dollars are also feeling the heat.
Pity Amylin Pharmaceuticals Inc, maker of the diabetes drug Byetta. Its directors face election challenges from two groups of alternative candidates: one proposed by activist investor Carl Icahn, and another offered by Eastbourne Capital Management LLC, which is not known as an activist.
"What we are seeing is that funds that were never activist are becoming activist or are willing to support activists," said Chris Young, director of M&A research at proxy advisory group RiskMetrics. "Investors are disgruntled, and it is human nature to want to vent and cast blame, so we expect a lot more of this."
Jack Schuler, a director of Medtronic Inc and shareholder of Irish drugmaker Elan Corp Plc, has gone so far as to set up a website, www.fixelan.com, to publicize his criticism of Elan's board, which he and some other shareholders allege is failing to exercise proper oversight. Elan denies the charge.
Based on proxy data as of May 31, 2008, the average annual cash retainer for directors of Standard & Poor's 500 companies was $75,000, according to executive recruitment firm Spencer Stuart. Stock grants and options brought the average package to more than $217,000.
But for the most part, directors are not being reimbursed for the hundreds of extra hours they are working throughout the current crisis, said Todd Leone, president of Amalfi Consulting LLC, which specializes in designing compensation packages for financial institutions.
"Now is not the time for them to be talking about it, either," he added.
For an increasing number of top executives, especially prized chief executives and chief financial officers, serving on an outside board -- much less two or three -- is no longer worth the time or trouble.
A job that might once have consumed one or two hours a week now consumes many more, experts say.
"A year or two ago, boards might look at reports on a quarterly basis," said Ralph Ward, publisher of Boardroom Insider, an online governance newsletter. "Now they want to see data on a weekly or bi-weekly basis, especially basic survival data such as cash flow, cash on hand and reports on defaults from customers and suppliers."
Last year, Raytheon Co Chairman William Swanson fled the board of phone company Sprint Nextel Corp, along with three other directors, after Sprint's 2005 acquisition of Nextel led to a messy integration, a rash of subscriber defections, and high-profile criticism.
These days, only 31 percent of new independent directors are active corporate CEOs, chief operating officers, chairmen, presidents or vice chairmen, according to Spencer Stuart. That's down from 49 percent 10 years ago.
Lawyers expect an increase in class-action lawsuits against companies and, in some cases, individual directors, potentially creating an additional headache for board members.
"The liability exposure is not worth the money," said Richard Stein, a lawyer with Nixon Peabody LLP. "Insurance may protect you against financial damage, but it can't protect your time or reputation."
For companies receiving bailout money, the risks for directors are greater still. Though it is unclear how much influence the government will have -- if any -- in choosing new directors at companies such as Citigroup, there is no shortage of speculation.
"Will we have to worry whether someone will be qualified to serve on the board because they didn't pay their nanny taxes?" asks Boardroom Insider's Ward.
"I would hate to have a board that looks like a government entity, where you are responding to political constituencies instead of responding to shareholder interests," said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.
For some, the best idea is to stay at home.
"My first question when advising potential directors is, 'Are you sure you want the job?'" said Nixon Peabody's Stein. "Board service is no longer fun."