Beyond the basics, a board of directors that functions smoothly can be heavenly for management. But, a board made up quarrelsome, nit-picking members with thin experience can be a distraction at best and wreck the organization at worst.
“It is a hard job,” said Kenneth Agee, founder, chairman and chief of technology at Tulsa-based Syntroleum Corp.
“There is so much scrutiny. It can make it difficult to get a good board,” he said.
There is the hassle, he admitted. “But, you are glad to have them commit their time, once a quarter, to read a lot of material and be aware of issues. They have to be very focused.”
It is a luxury to have “the gray hairs” that have experience in other areas be there for a company, Agee said.
“They are valuable. You are there and see things daily. They see it differently when they come in once a quarter. They are not used to the ‘day to day’ and are able to offer perspective,” Agee said.
The responsibilities for a board of directors of a public company are straight forward, according to observers and members of several boards in Tulsa.
? Ensures the organization fulfills the mission.
? Guarantees that the organization complies with bylaws and other rules.
? Reviews financial performance.
? Hires and evaluates the CEO.
Aftermath of Sarbanes-Oxley
Things have changed dramatically since 2002 with the introduction of the Sarbanes-Oxley Act, which created an umbrella of rules, codes and ethics over companies’ operations and overhauled business practices following a wave of business scandals in the early years of the decade.
Generally speaking, “Board composition had a fraternity mentality, buddy-buddy, good-old-boy approach prior to Sarbanes-Oxley,” said Jake Dollarhide, CEO of Longbow Asset Management.
The new law created a disconnect between management and the directors, he said. The board’s responsibility is to ensure that management’s decision-making ability of “what is in the best interest of the shareholders remains sound.”
“The board is supposed to be completely neutral,” he said.
But in the mid- to late-‘90s, that concept became perverted — with disastrous results. Scandals erupting – Enron, WorldCom, Tyco, Adelphia, AOL, HealthSouth, Imclone Systems and Duke Energy, to name just a few — revealed that many boards had grown lax in their oversight.
“The boards were not doing their job,” Dollarhide said. “It was pretty much, as the stock price went up, the board gave that CEO a ‘get-out-of-jail-free’ card and they could do anything they want. The board gave management a green light. That is why you saw all those scandals and all that fraud.”
Sometimes the board read their own press clippings and started believing they were somehow shielded, he said.
Selection by Committee
Today the process for nominating, selecting and picking directors has become systematic, Dollarhide said.
Things have not changed much for some public companies in Tulsa.
For example, at Syntroleum, Agee said the company has always had a nominating committee — not something that was automatic prior to Sarbanes-Oxley.
“We have not had a lot changes,” Agee said. “With Sarbanes-Oxley, the process is better documented. We have a nominating committee on the board, and any consideration of a prospective board member from the committee is done with due diligence.”
The rules are there to protect the companies and shareholders, he said.
“If everyone is more careful to document things it is all good. You need good records of why you decided a certain way. And there is the fiduciary responsibility to seek that out.”
Agee admitted that following the rules is more expensive and tedious.
“It affects your accounting system. But for the most part all those things are good to do,” he said.
Tulsa-based Helmerich & Payne Inc. is one company that created a nominating committee after 2002, said Steven R. Mackey, vice president, secretary and general counsel.
“Before, we did not commit to writing everything in such a detailed manner as what we are seeing today,” he said.
Although the process of picking a director is more formal, the end result is the same, he said.
“What we did was systematize what we had always been doing,” Mackey said. “Sarbanes-Oxley pushed us to put everything in a more complete, written policy.”
Compensation on the Climb
Average annual cash compensation has risen 72 percent in the last five years, however, Dollarhide said, and, that is without the addition of options, travel costs, cash stipend for attendance or other perks, he said.
Board members received in 2005 an average $63,594, compared with $36,937 in 2001.
“In addition, 65 percent of board members are paid stock or stock options in addition to cash,” he said.
Other company officials agreed the average cash compensation today is in the range of $50,000 to $60,000.
What happened was that Sarbanes-Oxley had the effect of eliminating many people from being eligible to sit on a board.
“The pool of eligible directors was cut in half,” Dollarhide said. “So many people were unqualified so that boards were full of fluff, full of people who had no business being on a board.”
Rarely do directors have to have advanced degrees to qualify. Typically, boards are filled with a diverse group but most have extensive business and management experience, Dollarhide said.
“If you are not a CEO, or a retired CEO, the more education and industry experience you have the better. Being the CEO or a retired CEO qualifies you.”
Often, engineers, bankers, professors and people with industry specific knowledge are on boards.
Because boards are the “guiding light of a company, they want diversification of knowledge,” he said.
“Being neutral, every board member should be a cynic as much as a cheerleader — or cynical cheerleaders,” Dollarhide said. “The rah-rah only gets you so far. But its the, ‘Hey, wait a minute,’ between the rah-rahs which can really help the company excel or, more importantly, keep the company from making a critical, drastic misstep.”