Two years after the introduction of Sarbanes-Oxley, corporate reforms are still impacting corporate directors, according to a study by Corporate Board Member magazine and PricewaterhouseCoopers LLP.
Of course, that doesn't mean they're happy about it. Twenty percent of directors surveyed said that SOX has created an environment where management is so distracted that company performance will be affected, up from 13.9 percent in 2003, according to the third annual "What Directors Think" study, conducted by Corporate Board Member and sponsored by PwC. And 77 percent of directors surveyed think that the Sarbanes-Oxley Act should be revisited by Congress to correct some of the unintended consequences. Of the 1,279 directors and chief executives of top publicly traded companies who responded, 84 percent answered as outside directors.
As the Section 404 deadline looms, directors' confidence is increasing -- 82 percent believe that their company is prepared to implement Section 404 on internal control reporting. However, only half think that the 404 requirements will make a difference in the quality of their company's financial statements, and only 44 percent think that Section 302 certification of financial statements by the CEO and CFO will make a difference.
According to the report, an emerging trend means that search committees may have to cast a wider net to find qualified independent directors. The unofficial title of "professional director," in which individuals sit on six or more boards, is quickly fading as boards' time demands increase, according to the poll.
In 2004, 43 percent of CEOs and 29 percent of outside directors were limited to additional board seats, up from 33 percent and 16 percent respectively, in 2003. In addition, 71 percent of respondents said that there should be a limit to the number of boards on which an outside director can serve. The average number of boards on which CEOs and outside directors now serve is three.
For many directors, increased time demands coupled with new risks call for an increase in pay, particularly for lead directors and audit committee chairs. Among survey respondents, 98 percent said that audit committee chairs should get additional compensation, compared to 81 percent in 2003 and 54.1 percent in 2002. In addition, 68 percent of respondents said that lead directors should get additional compensation. More than half of respondents believe that the lead director and audit chair should get 25 percent more compensation than other directors, while almost a third believe that it should be as much as 50 percent more in both cases.
The study also found that board evaluations are becoming more commonplace. In 2004, 73 percent of respondents said that their boards were formally evaluated, compared to 50 percent in 2003 and 33 percent in 2002. In addition, 35 percent of respondents said that their boards evaluate individual directors on a regular basis, compared to 23 percent that did so in 2002.
Despite a move by institutional investors and shareholders to withhold votes against boards for various reasons, only 21 percent of directors surveyed support the recommendation to withhold votes when the audit committee has approved auditors to perform non-audit services. Of the boards represented in the survey, 51 percent have allowed auditors to perform non-audit services for their company.
The survey asked directors how much time (more, the same, or less) that they think their boards should devote to 14 different subjects. Strategic planning was the No. 1action item, with 58 percent of respondents saying that they'd like more time to discuss it. Other top responses were succession planning, meeting key managers, visiting work sites and discussing the competition. Only 17 percent thought that their boards need to spend more time on compensation issues, and only 11 percent said that they should devote more time to governance guidelines. Compliance and regulatory issues were last on the list of priorities, with 8 percent saying that they want to discuss those issues at greater length.
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