U.S. Firms Improve Corporate Governance Practices
April 10, 2006
Companies are making a greater effort to increase the independence of their boards of directors, improve transparency and shareholder communications and tie executives' compensation to earnings. And it is safe to say that this trend to strengthen corporate governance policies will continue, according to a member survey conducted by the Business Roundtable, a Washington-based association of chief executive officers from leading U.S. companies. The survey was completed by 105 of the association's 160 members.
Altogether, these policies should improve earnings, according to the association.
"Companies continue to make great strides toward" improving corporate governance, said Steve Odland, chairman of the Roundtable's corporate governance task force and chairman and CEO of Office Depot. "Of particular note this year is the continuing upswing in pay-for-performance, a positive sign in the area of executive compensation."
When it comes to board independence, the country's top companies all seem to be moving toward greater independence in both boards and board leadership, with 91% of the Business Roundtable CEOs reporting that the boards of their companies are led by an independent chairman, lead director or presiding director. This is an increase of eight percentage points from 83% in 2005, and an impressive 20 percentage point increase from 71% in 2004. However, only 11% of firms have an independent chairman, up from 9% in 2005, the survey reveals.
Eighty five percent of companies are anticipating that four-fifths of their boards will be made up of independent directors in 2006. At the same time, 98% believe that three-fifths of their boards will be independent. A little less than half (42%) believe that their boards will be fully (100%) independent.
Further, these independent directors are increasingly holding separate, executive session meetings from other members of the board. Sixty-nine percent of companies said their independent directors met in executive sessions at every board meeting in 2005, and 75% expect them to do so this year. This compares to 68% in 2004 and 55% in 2003.
Companies are also restructuring the compensation packages of their top executives to be more closely tied to performance. Fifty-seven percent of companies said pay-for-performance for senior executives has increased, compared to 49% in 2005 and 40% in 2004. Of these, 20% said part of the guidelines are tied to long-term goals, and 73% reported a mix of short- and long-term goals. Only 7% said their pay-for-performance policies were based solely on short-term goals.
Ninety-three percent of Business Roundtable members reported that their compensation committees have stock ownership strategies or requirements for high-level executives, and 88% of companies have stock ownership strategies or requirements for directors, with 32% launching these director guidelines within the past year.
A majority of companies, 85%, have retained an independent compensation consultant, and 53% have hired an executive recruiter to work with their nominating committees.
Shareholder communication is another important element of corporate governance, the survey shows. Ninety-one percent of companies have established a procedure for shareholder communications for their directors, as opposed to 90% last year and 87% in 2004.
Eighty-three percent of nominating committees have a procedure for communicating information and responding to shareholder nominations of board candidates, up from 78% in 2004 and 75% in 2003. Additionally, 93% of these committees said they are willing to consider board nominations from shareholders, up from 85% in 2005.
Aside from improvements in corporate governance, another factor that could boost profits is the cost of implementing the Sarbanes-Oxley law - an act passed by Congress to protect shareholders from fraudulent accounting by corporations - has stabilized at many companies, Odland said.
The portion of companies reporting the cost of complying with Sarbanes-Oxley to be more than $10 million a year has dropped to 40% from 47% in 2005. In addition, the survey found that 94% of companies believe that their Sarbanes-Oxley law compliance costs will either stay the same (42%) or decrease (52%) in 2006. Only 6% of companies believe that their Sarbanes-Oxley compliance costs will go up in 2006.
"While these results are encouraging, we must continue to monitor the costs associated with the Sarbanes-Oxley to ensure that they are not hindering business growth," Odland said.
(c) 2006 Money Management Executive and SourceMedia, Inc. All Rights Reserved.