Fish or Cut Bait
May 1 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 think that’s the other shoe waiting to drop.” He suggests that the reputations of Enron’s directors are so tarnished 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.
Batts also recommends that CEOs or nominating committee chairs visit a board candidate on his or her own turf. “You won’t have the candidate agreeing to come on board at that meeting, but it sure helps set the tone,” says Batts, who also serves on the boards of Allstate, Cooper Industries and Sprint.
Ashland’s Chellgren has recruited five directors since being named CEO in 1996, and is currently looking for three more. He takes a personal approach from the start. The search process at the Covington, Ky.-based company whose products include Valvoline motor oil and Zerex antifreeze begins with Chellgren’s meeting with his corporate governance committee to define a candidate profile for a vacancy. These include special experiences such as global business and professional talents like engineering or marketing skills.
Profile in hand, Chellgren and corporate governance committee members tap their own networks to come up with names that fit the bill. Then they choose just one person to go after. The director with the closest contact to the potential candidate makes the initial approach. Chellgren feels it is critical to have himself or a board member make the initial contact because it puts the relationship on a peer-to-peer level. If the executive says no at any point, Chellgren and his team move on to the next name.
If the candidate expresses interest, then the courting really begins. He or she receives a raft of information about Ashland, including analyst reports, board agendas and calendars. “One of the things I talk about is the excitement of being in the energy business, and about what we do,” says Chellgren. “Candidates want to see a healthy organization in a dynamic industry.”
Financial bait doesn’t hurt either. Ashland pays board members a $56,000 annual retainer and a fee, usually $500, for each meeting attended. The annual compensation comes in the form of Ashland stock and directors receive it when they retire from the board.
If the candidate remains intrigued, Chellgren and his committee members conduct a so-called chemistry check to ensure that they can fulfill the candidate’s expectations and vice versa. “Executives join boards for basically two reasons,” the CEO says. “One, after looking at his or her company, they feel they can make a contribution. And two, they think they can learn something while serving on your board, something that can benefit them.”
Minorities, Women on Board
One such group is the Executive Leadership Council, a 16-year-old nonprofit that provides African-American businesspeople with a professional network. Its 270 members are senior executives from some of the country’s largest companies. About 35 percent of the membership is women. Last year, the ELC held its first Diversity Leadership Summit with the goal of getting more African-Americans into corporate leadership and onto boards. The second summit is scheduled for October. “CEOs need to go where the talent is,” says Carl Brooks, the council’s president. “ELC is a significant resource.”
Indeed, corporate America is on the verge of seeing more African-American candidates move into boardrooms, says NFL legend Willie Davis, who joined his first board at Schlitz Brewing in 1974. Davis, now CEO of All Pro Broadcasting in Los Angeles, believes his success in football and his name recognition helped him land that seat. “The problem was that everyone said they wanted experience, and if I had [board] experience they’d be interested, but no one was interested in giving me the opportunity to get experience.” Davis now serves on several boards including Alliance Bank and Dow Chemical. He gets four or five calls a year about additional opportunities, but turns them down because he’s “all boarded up.”
For Davis, the changes occurring in business mirror the transformation in professional sports. At first it was unusual to see African-Americans on a team, and now no one thinks about it. “It used to be that affirmative action at every level was rejected out of hand,” he says. Now, he says, diversity has become part of the business lexicon.
Catalyst, a leadership group for women executives, is another nonprofit that helps companies find directors. “The glass ceiling is not broken, but boards are not looking at women as tokens anymore,” says Merle Pollak, executive director of Catalyst’s corporate board placement service, which provides companies with candidates for a fee. “Boards want women who can contribute. But they are realizing that there isn’t an abundance of women [CEOs] in Fortune 500 companies.” So CEOs and recruiters are looking for women who serve as president, CFO, CIO or who are CEOs of their own smaller companies. They are also seeking women with experience outside of business who can help grow markets.
A distinguished U.S. diplomat, Rozanne Ridgway sits on several boards at companies such as Boeing, Bell Atlantic and Union Carbide. Boeing’s was her most interesting board invitation, she says, and she initially declined it, until hearing from her old boss. “It was George Schultz, former Secretary of State on the line,” Ridgway recalls. “Boeing had asked him to give me a call.” The conversation was brief. “George talked to me about being on Boeing’s board, but I said I didn’t want a West Coast company,” she says of Schultz, who was not on Boeing’s board but knew its CEO at the time, Frank Shrontz. “He said, yes I did, and that was that. I called the CEO back and said €˜let’s talk.’” She’s been on the board since 1992.