After retiring as chief executive of Sears, Roebuck and Co., Arthur Martinez made a nice life for himself.
Martinez travels frequently, for fun and as a speaker on business issues. In between, he attends board meetings at a handful of corporations where he serves as a director, including PepsiCo Inc. and Martha Stewart Living Omnimedia Inc., which is coping with the fallout of insider trading allegations against its namesake chief executive. But if another company were to approach him about sitting on its board, Martinez’s answer would be quick and concise: Forget it.
“I would say no from a time perspective,” Martinez said. “I’m already on five company boards, and that’s all I can handle.”
He also said today’s business climate will lead others to think twice. “Anybody who is approached today isn’t going to say, `Hey, great. I can’t wait to join you. Will the company plane come pick me up?'”
Indeed, after a flock of scandals running from Enron Corp. to WorldCom Inc., new board members are becoming harder to find.
Chief executives are limiting the number of outside boards on which they sit. Some lower-level executives aren’t getting permission from their CEOs to accept board positions elsewhere, a role they used to be encouraged to take on because of the knowledge they gained for their own company.
Potential candidates in academic, governmental and non-profit sectors are being scrutinized like never before. Do they know the difference between EBITDA and eBay? Do they have enough familiarity with balance sheets and income statements to detect funny business? If not, a line is drawn through their name.
Directors can be targeted
The angst is radiating from prospective board members as well. In addition to the usual burdens of overseeing company affairs and financial reports, candidates now must be worried about their own personal liability if a corporate meltdown happens on their watch.
The 7th U.S. Circuit Court of Appeals in Chicago recently revived a 3-year-old lawsuit that seeks to hold the directors of Abbott Laboratories personally responsible for ignoring quality control problems that led to a $100 million fine by the Food and Drug Administration. In the past, courts usually dismissed such lawsuits. The Abbott suit had, in fact, been thrown out by lower courts.
That the Abbott lawsuit is going forward should give pause to those who think a board position would be a nice addition to their resumes and incomes, says Jerome Crotty, a Chicago lawyer who handles corporate governance cases.
Michael Cook, the retired CEO of accounting firm Deloitte & Touche, recently told a Northwestern University conference on financial disclosure: “It is taking longer to fill the seats. It is difficult to recruit members of audit committees.”
The hardest seats to fill, logically, are the ones at corporations that need the most help. “I really don’t have any particular interest to be on their board if they need me to be on their board,” Cook said.
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James Drury, whose eponymous firm specializes in director and CEO searches, agrees that finding new board members has become an uphill slog. In the pre-Enron days, Drury would compile a list of candidates, make four or five phone calls to the top choices and find someone who was interested and qualified. “Now, we have to go through 10 possibilities to get to that one,” he said.
The task is that much harder, Drury says, if the company is in a complex industry, like telecommunications or energy, where director candidates may worry they don’t have the financial expertise to sort things out.
“The simpler the business, the easier it is to get a board director,” he adds.
Of course, fears of a director shortage have arisen from time to time over issues such as the availability of directors and officers’ insurance, which corporations take out for directors to protect their personal assets. But the seats around boardroom tables always seem to be filled.
With good reason. Directorships pay better than they ever have, and some directors have profited handsomely from stock-option awards. Others enjoy different benefits, such as lifetime free travel for directors of UAL Corp., their spouses and dependent children.
Some skeptical of shortage
That’s one reason why corporate governance activist Nell Minow isn’t buying talk of a director crisis.
“I get calls all the time from people who say, `Can you tell me how to go on boards?’ If I’m getting those calls, there are a lot of people out there, because I’m hardly the person that corporate America calls to ask for director suggestions,” Minow said.
Carol Bowie, director of governance research for the Investor Responsibility Research Center, also thinks the shortage is being overblown.
“There are plenty of capable, talented people able to serve as directors,” she said. “There will be heightened sensitivity about liability issues, but there isn’t a lack of qualified people.”
There even may be an upside to the current situation.
“It’s possible that companies will have to widen their net,” Bowie said. “That may serendipitously bring more diversity to boards.”
Drury agrees that companies will have to dig deeper to find the best nominees. Headhunters will have to do their homework to find talent at lower levels such as division president. Drury already has done so, compiling a database of what he calls “future CEOs.”
While diversity of a certain sort may be served that way, it is unlikely to yield a large crop of female and minority candidates because their presence even at that level of the hierarchy is limited, other experts point out.
In fact, it may become harder to justify recruiting women and minority board members, many of whom come from the non-profit sector today, they add.
“That’s not a good thing,” Martinez said. “because those people bring a different perspective that is helpful.”
A quick sampling of Chicago businesses illustrates how heavily corporations have relied on these individuals.
Sears’ board, for example, counts Hugh Price, head of the National Urban League, and Raul Yzaguirre, president of the National Council of LaRaza, as two of its members. Price also is a director of Metropolitan Life Insurance Co. and Verizon Communications Inc.
At Boeing Co., Rozanne Ridgway, former head of the Atlantic Council of the United States and a former diplomat, is the only woman on the board. She also sits on boards of Emerson Electric Co., 3M Co., Sara Lee Corp., Manpower Inc. and the New Perspective Fund.
A new generation of candidates will have to jump higher hurdles when it comes to hard-core business experience and financial literacy, experts say.
It all adds up to a smaller pool for companies from which to choose. Still, large, prestigious corporations likely won’t suffer. Despite questions about its accounting practices, General Electric Co. has added a new outside director: Ralph Larsen, the former chairman and chief executive of Johnson & Johnson.
Midsize companies may suffer
Midsize businesses with revenue of less than $1 billion will have the hardest time.
With increasing frequency, Drury has been hearing, “This isn’t the right company,” from a variety of director candidates. He reads that as code for, “The answer might be different next time you call me if the company is bigger.”
Some candidates are holding out for even more.
“I had one CEO tell me he wasn’t going to go on the board of any company whose products he didn’t enjoy using,” Drury said.
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