Report says 25% of S&P 500 lack newly mandated nominating/governance committees

One-quarter of S&P 500 corporate boards lack newly mandated nominating/governance committees, according to Spencer Stuart, the leading privately held, global executive search firm, in its just released 17th Annual Spencer Stuart Board Index (SSBI) report.

Spencer Stuart said firms without nominating committees need to move quickly to establish them and find independent directors to staff that committee. The nominating/governance committee identifies directors for a corporate board -- a job CEOs used to do. The urgency arises from proposed new SEC and stock exchange regulations regarding director independence and the shrinking pool of directors willing to sit on boards.

In addition, just two percent of audit committee members are accountants, and just three percent are Chief Financial Officers while 48 percent are active or retired chairmen, presidents or CEOs, the SSBI report revealed. This raises questions about compliance with the SEC and legislative and stock exchange proposals that require strong financial expertise on the committee.

"This year's SSBI numbers provide an in-depth portrait of boards and board governance on the cusp of an historic change wrought in U.S. board governance by the Sarbanes-Oxley Act and pending stock exchange rules. Boards have a long way to go to reach SEC, exchange and legislative mandates, and we would expect to see movement in next year's data toward greater compliance," said Julie Daum, U.S. Board Services Practice Leader for Spencer Stuart.

Spencer Stuart's SSBI has been the authoritative statistical source on board composition, governance and compensation since 1985, annually tracking changes based on analysis of proxy statements submitted by S&P 500 companies to the SEC and surveying these companies on key governance issues.

Demand for New Directors

The SSBI report shows a 44% increase in the number of new directors added to S&P 500 boards during 2001, but Spencer Stuart estimates several hundred directors will have to be added during 2003 and 2004 to comply with new regulations mandating committees which will need to be staffed with independent directors. The firm is already seeing a sharp spike in demand for directors with strong financial backgrounds to serve on audit committees.

"There have been frequent requests for active and retired Chief Financial Officers and retired senior partners from accounting firms," said Daum. "Companies are struggling to interpret the proposed regulations and definition of financial expertise. They would rather be conservative and staff their audit committees with directors who have accounting certification than risk not being in compliance."

New Kinds of Directors

Traditionally, boards want active CEOs to advise senior management and serve as shareholder representatives, but Tom Neff, Chairman, U.S. of Spencer Stuart, said an alarming increase of CEOs today turn down requests to serve as directors. SSBI data show that CEOs sit on an average of 1.2 boards, in addition to the boards of their own companies. This is down from an average of two outside directorships in 1997.

"Large companies still look for active CEOs," said Neff, "But mid-sized corporations understand they will have a difficult time getting them and are more open to recruiting individuals with different backgrounds, including retired CEOs, presidents and CFOs. CEOs, for example, who have recently stepped down bring a first-hand appreciation for stresses of the top job, an up-to-date view of the marketplace and time to devote to serving on a board."