The Big Chill In the Boardroom
May 22 2005 by Chief Executive
MANY experienced executives are unwilling to serve on corporate boards because they may be financially liable for their decisions, says James J. Drury III, chairman of James Drury Partners, an executive search firm based in Chicago. A pending settlement in which the directors of WorldCom have agreed to pay millions of dollars for their role in the company’s bankruptcy has had a broad chilling effect, Mr. Drury said. Here are excerpts from a conversation:
Q. Corporate reformers have sought to increase director independence. Is it working?
A. It has provided some tools that give the board more authority and confidence.
Q. Are you having difficulty in finding directors who are qualified and who are willing to put in the extra hours?
A. The time required has caused certain good candidates to say they just can’t afford the time anymore. They can only afford one outside board, as opposed to what historically might have been two or three outside boards. I’m talking about active chief executive officers. But the day the financial settlements came down, it was like a gray veil descended over the board director recruiting market.
Q. You’re referring to the fact that, if the court approves the settlement, directors of WorldCom may, in effect, be held personally liable for decisions they made. How difficult has this made it to recruit a board member?
A. We used to put together a board book of 30 or 40 possibilities for our clients matching the criteria they were seeking. We would select maybe the five most desirable or attractive to the board and approach them. We’d maybe get two people who would express interest. We’d have a 40 or 50 percent success ratio on the first five people that we picked and called.
Today it isn’t uncommon to have to call 10 to get one who is available and willing to explore it, and sometimes as many as 20. It isn’t as though we can’t fill board positions. It’s just that the scrutiny that director-candidates now apply to board opportunities has significantly increased. Some people are leaving the playing field. They don’t want to take on the personal risk.
Q. So what is the net effect? Is there a possibility that boards will become weaker?
A. I do have a concern that we are running the risk of to some degree paralyzing or constraining American industry by weakening the quality of C.E.O.’s willing to serve in running companies and the quality of board directors willing to govern them.
Q. Are there companies with vacancies on the boards right now?
A. They will fill these board seats, but they may not fill them with their first choices. I like to look at it in terms of the weight of the board. Some boards are heavyweight boards where there are strong individuals who have their own reputations. They’ve accomplished a lot. They’re willing to tell a C.E.O.: “You’re not getting the job done. We’re going to have to move on.” Or: “We just don’t agree with the strategy. We’ve got to make a change.” That compares to the feeling 15 years ago or 10 years ago that boards were in the C.E.O.’s hip pocket.
Q. Is there more hostility between C.E.O.’s and boards these days?
A. I wouldn’t say hostility, but the communication is more intense. It is more programmatic. Boards want to be on record as having asked the right questions. If there’s a discussion of succession or how they’re doing business around the world, even if there are no real issues to suspect anything, there are a lot of questions being asked today just to make sure they were asked.
When people are under pressure, they behave differently. The pressure has never been greater.
Q. Is that intensified scrutiny good or bad?
A. If I have a concern, it is that C.E.O.’s and boards are not pushing back. I don’t hear them saying governance has gone over the edge, that there are too many regulations, too much bureaucracy, too much process, too much risk. At some point, too much of a good thing becomes a bad thing.
What has happened, up to a certain point, created more accountability, more transparency and more discipline. But at some point, you begin to dilute the American spirit that has created these great companies that have survived over the years and created a lot of wealth. You divert their attention from running the businesses to engaging in a process.
Q. So what are the risks involved in tightening up corporate governance?
A. We have high-potential executives saying for the first time, “I don’t know if I want to be a C.E.O.” That’s never happened. And since active C.E.O.’s are going on fewer boards, some people say retired C.E.O.’s will do it. They will step into the breach if there’s a crisis. They’ve got the time. But they’ve accumulated some wealth to sustain them through the years. If now, for a $100,000 annual board stipend, we’re asking them to put X millions of dollars at risk, they’re not going to do it.
Q. Can’t potential candidates assess the risk of joining a board?
A. Some people will say: “We know which boards are in trouble. There aren’t many Enrons and WorldComs out there.” But then you have people like New York Attorney General Eliot Spitzer. You don’t know where he’s going to go next. Or which industry he’s going to target and which companies and which boards might therefore be saying, “We’re at risk.”