Shareholders are placing directors under escalated scrutiny. They are concerned about corporate board approval of large bonuses and pay increases for top executives while company performance wanes, and they are anxious over the failure of boards to keep financial firms from taking the kind of risks that set off the 2008 economic crisis. Concerns also surround directors making small fortunes by sitting on multiple boards simultaneously but not being able to fulfill their obligations. Shareholders want board members to become more involved in running the company.
So how does this affect director responsibilities? Directors will no longer be able to sit on a board just for money and status. They will have to bring skills that can contribute to the future growth of the company. They must also provide real guidance to prevent management from making poor decisions. This means directors will have to spend more time preparing for and attending meetings so they can be actively engaged in discussions and make informed decisions. They will have to work much harder and tolerate more scrutiny than ever. With increased personal liability, the exposure potential for directors has increased dramatically. Fewer people may want to take on the risk.
What about compensation? Director pay has been mostly flat since the 2008 financial crisis. Since a seven percent increase in 2010, however, there are indications that director pay will be heading upward. If directors are working harder to make companies successful, it is difficult to argue increasing their earnings. In addition, candidates who are able to fit the new criteria for board members may be lured away by more lucrative job opportunities which means higher compensation will be needed to compete for the highest quality directors. All of these issues can be used to justify increases in director compensation.
How will reimbursement change? There may be a movement away from a per-meeting structure to a fixed retainer paid in the form of cash and equities with augmented fees paid to committee chairs and the lead chair for the extra work that comes with those positions. There may also be a decrease in the use of stock options. Instead, we may see full-value shares and restricted stock or preferred stock increase because it better aligns with the interests of shareholders.
What about regulation? The point at which director pay begins reaching higher levels is when concerns about regulation are raised. Corporate governance policies may be adjusted to say that directors may not sit on more than one other major board, or at most two other boards. Mandatory say-on-pay votes and new requirements that companies explain in detail how their pay plans are aligned with company performance, have directors busy making sure their companies can justify the pay schemes of their CEOs and other top executives. Over time, the expectation will be that board members be held accountable for the company’s performance.
What do you think? Should Director’s pay increase? Should compensation be results-based?