Director's Cut? No Way: Board Pay Going Up

As Congress, the Securities and Exchange Commission, and investors look more closely at corporate conduct—and misconduct—companies are making substantial changes to their board of director programs, plans, and policies

According to consulting firm Hewitt Associates, 29 percent of 70 large companies surveyed plan to increase the percentage of outside directors in 2003. By comparison, just 12 percent of companies added to the percentage of outside directors in 2002.

"There is a struggle taking place between the growing need for qualified directors and the reluctance by some candidates to join boards due to increased time requirements and potential reputational and financial risk issues," said Michael Powers, leader of the executive-compensation group at Hewitt Associates.

The upshot? Powers said it's getting tougher to land qualified board members, particularly candidates who are standing CEOs or have deep financial experience. "This, in turn, will impact outside-director compensation," he noted.

So, what are the most common ways companies compensate outside board members? Number one on the list is an annual retainer (91 percent), followed by equity compensation (87 percent), committee-chair fees (78 percent), and board-meeting fees (76 percent).

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Of the companies planning to make changes to outside-directors pay, 78 percent said it was in recognition of the greater demands on directors and 33 percent attributed it to the competitive market for highly qualified board members.

The survey also indicated that companies have made huge changes when it comes to their compensation.

Virtually all of the companies that participated (91 percent) have only outside directors sitting on their compensation committees. In addition, 89 percent of the companies' compensation committees now have written charters, which include the committee's purpose (98 percent), duties and responsibilities (98 percent), and reporting relationship to the board (81 percent).

Even so, a number of these charters are still coming up short in a few key spots. For example, 61 percent of the committees are not subject to an annual performance evaluation through their written charter, 31 percent don't have a documented executive-compensation philosophy, and 31 percent don't have a policy requiring the compensation committee to be made up of outside directors only.

"There's no question that boards are headed in the right direction with formal compensation-committee charters," added Powers. "However, recent proposals by the New York Stock Exchange require that the compensation committees of NYSE-traded companies have an annual performance review, a documented compensation philosophy for executives, and an outside-director requirement. So, there's clearly a lot of room for improvement in these areas for many organizations."

Swartz Hit with Another Charge
Mark Swartz has more legal troubles.

The former Tyco International Ltd. chief financial officer was indicted in New Hampshire on federal tax-evasion charges, according to published reports.

Swartz is accused of failing to report a bonus of about $12.5 million from Tyco and evading federal taxes of almost $5 million for the tax year 1999, according to Bloomberg.

If convicted, Swartz faces up to five years in prison and a fine of up to $250,000, according to the Associated Press.

In September, Swartz and former Tyco chairman L. Dennis Kozlowski were indicted for allegedly stealing $170 million from the conglomerate and pocketing $430 million from fraudulent sales of Tyco stock.

Swartz left Tyco in August.

BellSouth Changes Accounting Method
On Wednesday BellSouth Corp. said it will take a onetime charge of about $500 million during the first quarter of 2003 due to a change in its method for recognizing revenues and expenses in its directory-publishing business.

"The change in method relates solely to the timing of the recognition of revenues and expenses and does not affect the amounts recognized," the company noted in a press release.

BellSouth's management said the company will change from the issue basis method to the deferral method.

The issue basis method recognizes 100 percent of the revenues and direct expenses at the time the directories are published and delivered to end users.

Under the deferral method, revenues and direct expenses will be recognized ratably over the life of the related directory, generally 12 months, the company added.

CEOs: Recession Over
Most chief executive officers expect the economy to grow at the same rate this year as it did last year, according to a survey of the 180-member Business Council.

Most of the surveyed CEOs also believe that President Bush's proposed tax cuts will boost economic growth.

More specifically, 72 percent of the CEOs expect the economy to grow at about 2.4 percent this year, the same as 2002. And 75 percent said corporate profits will grow about the same as or less than last year.

More than half (56 percent) believe the economy has emerged from the recession.

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