Serving on the Board of Directors: Hard Work but Rewarding



Published on: 12/02/2013
Posted on: 12/02/2013
Tagged with:
Abstract:
Mystique shrouds the activities surrounding the board of directors. Today directors serving on boards are paid quite handsomely. In a first-of-its-kind paper, SMU Cox Distinguished Finance Professor James Linck, with Viktar Fedaseyeu and Hannes Wagner, analyze directors —who they are, what they do and how much they are paid. Many believed that the board of directors was an 'old boys network.' As far back as the early '90s, research indicated the 'appearance' of an old boys network, notes Linck. That has changed.

Mystique shrouds the activities surrounding the board of directors. Today directors serving on boards are paid quite handsomely. But what functions do they perform for their rewards? In a first-of-its-kind paper, SMU Cox Distinguished Finance Professor James Linck, with Viktar Fedaseyeu and Hannes Wagner, analyze directors —who they are, what they do and how much they are paid.

Many believed that the board of directors was an 'old boys network.' As far back as the early '90s, research indicated the 'appearance' of an old boys network, notes Linck. This earlier research indicated that directors were largely paid the same and rarely received equity as compensation as is common today. "But at some point in the '90s, this started to change," says Linck. "Regulation was not the only culprit. For example, the Sarbanes-Oxley regulations and contemporary changes to the rules on the major stock exchanges were what some institutions were also trying to push companies to do. In general, it seems as though the importance of, and certainly the focus on, the board of directors has increased over time."

In the past, there was a perception that outside directors are paid little and all paid the same, but this is no longer true. The authors find that “compensation of outside board members is substantial and varies significantly across board members, even within the same firm." The average compensation for a directorship rose from $70,000 in 1995, to $164,300 in 2006, and $188,600 in 2010.

In 2006, the SEC adopted Rule 33-8732a, which required public companies to disclose compensation of outside board members similar to the disclosure requirements for executive compensation. Linck says, "After the shocks to the financial system and post-Sarbanes Oxley (SOX) regulation, directors were being sued more. Firms were relying on their boards more than in the past — holding them responsible and accountable." Linck suggests that this inspired numerous research undertakings to understand what directors do, and what drives board structure.

What they found
The researchers put together a dataset of over 57,000 board positions from 2006 to 2010. Directors in their sample hold on average 1.2 outside directorships in S&P 1,500 firms. The average compensation that a director receives for all his/her outside directorships in S&P 1,500 firms is $220,600 per year; average compensation per directorship is about $180,000. Variation across individual directors is high, even within the same firm. Within the same board, the difference between the highest and lowest paid director on a board averages $186,000.

The research unpacks the characteristics of directors. The average director in the sample is 61 years old, and 15 percent are female, according to findings. Sixty- eight percent of the directors in the sample have an undergraduate degree, 50% have an advanced degree, 27% of which have an MBA. The following types of expertise was found among directors in the sample:

  • 53 percent have finance experience and 8 percent are CPAs;
  • Those with military experience hold 6 percent of directorships;
  • Individuals with political experience hold 4 percent of directorships;
  •  Academics secured 11% of board seats;
  • Those with legal or consulting experience hold 15% of positions;
  • Individuals with executive experience, including past or present executive positions, and current and retired CEOs, hold 28% of directorships.

Certain types of connections may be perceived as influencing the choice of directors. However, the influence of personal relationships — such as an Ivy League connection, grey director status and family connections — were not significant. Contrary to expectations, political experience was not associated with higher compensation, on average.

Drivers of compensation
Research findings suggest that a director’s skills, experiences and workload are the primary drivers of their compensation. Linck offers, "Workload is a key driver of director compensation. For example, it’s a particularly large amount of work to chair an audit committee, specific expertise is required to hold that position, and directors serving that role receive significantly higher compensation. The variance of workload driven by the various role’s board members hold contributes to the variance in compensation across directors."

Supply and demand should determine director compensation. The supply of directors should be based on the workload associated with being a director, and the value of a director’s experience and qualifications. The demand for directors depends on the firm’s needs for monitoring and advising top management. The authors found that director qualifications also increase compensation. For example, those with legal and consulting experience have 8 percent higher compensation, while those with executive experience receive 11 percent more. Other qualifications such as having academic or finance experience also increase compensation.

In earlier work, Linck documented that larger and more complex firms have larger boards. Hence, size and complexity should increase the demand for outside directors.  "Google needs a different board of directors than ExxonMobil or Citi," Linck mentions. He notes that firm size always matters in finance. There is also ‘evidence that top directors are attracted to largest firms,' as noted in earlier research. These directors are therefore paid more.

Serving on a board is more demanding than in times past. "The directors serving on boards today work, are often ‘on call’" states Linck. The potential liability placed with directors today has elevated the demands and risks of the role — and corresponding to the workload —increased compensation as well.

The paper "The Determinants of Director Compensation" by James Linck of Cox School of Business, Southern Methodist University, and Viktar Fedaseyeu and Hannes F. Wagner of Bocconi University is under review.

Written by Jennifer Warren.

Resource Tags
Bruce Bullock SMU Cox Maguire Energy Institute Mickey Quinones Mike Davis Zannie Voss Bud Weinstein Richard Briesch Edward Fox Robert Dudley SMU Cox School of Business Bill F Maxwell W Michael Cox Frank Lloyd Albert W Niemi Uskla Igaly Mel Fugate Christine Cook Cary Maguire Brian Bruce Dan Howard WMichael Cox SMU Cox Caruth Institute for Entrepreneurship Scott MacDonald Robert Puelz Carl Dorvil Marci Armstrong Dean Niemi Michael Cox hina union of concerned scientists green infrastructure sustainability CRM Jacquelyn Thomas Journal of the Academy of Marketing Science darius miller sec 12g302(b) foreign regulation pink sheets yankee bondglobal bond investment apple glenn voss google zannie giraud voss communal sharing idiosyncratic communities Walter Williams O'Neil Center ONeil Center peak theory fuel energy Maguire Institute James Smith Marketing Relationship Social Marketing information overload China sustainability green infrastructure S Scott MacDonald Southern Methodist University's business school Albert Niemi The O'Neil Center for Global Markets and Freedom Lynda Oliver Cox Executive Education Maguire Energy Institute Cox School of Business (Cox Full-Time MBA Profile Maria Minniti Charles Dannis Dallas MBA Best MBA Top 25 SMU SMU Cox MBA Top-ranked MBA Dallas Texas best Business BusinessWeek Cox School of Business Jerry White entrepreneurs levesque branding ward jonah berger avatar social presence telepresence second life virtual worlds inance hedge funds best mba derivatives executive compensation swami kalpathy Giving EMBA Second Century GLP Brazil Amit Basu Richard Alm Entrpreneurship health care yunwei gai Asia MBA Ernst&Young Management Briefing Series Richard Templeton Intrapreneurship Finance Economics Collins Education Center NHCC CEDP HYI workshop Bud Weinstein Steve Denson Albert W Niemi Jr W Michael Cox and Richard Alm found Alan Bromberg NHCC Executive Education Sarbanes-Oxley SOX Reg FD Management SMU Cox MBA in Dallas Real Estate William Maxwell New York Times Albert McLelland Marty Flanagan brand commitment MA-MBA Bernard Weinstein Ed Easterling Lewis Wang Luke Longhofer Robert Lawson Michael Hinson BBA Global Leadership Program Negotiations Kitt Investing and Trading Center Ethics Free Market O'Neil PMBA Ed Cox Edwin L Cox Allen Gwinn SMU MBA Ed Fox Cox in the News David Lei Banking Quinones Rasberry Entrepreneurship Caruth Albert Niemi ITOM Social Media FTMBA MSA MSF Morgan Ward Cox Relay Challenge Dr Pepper Management and Organizations BLC Communications MAMBA Al Niemi Risk Management Insurance Chuck Dannis Master Negotiations Statistics Kitt Center Hayek Keynes Dean Albert Niemi false memories Caruth Institute Mike Lysko Robin Pinkley Don Vanderwalle Hemang Desai Bud Weinstein, Bruce Bullock Mike Davis, Bud Weinstein Southern Methodist Business Harvey Rosenblum Robert Rasberry Cox School of Busines Wayne Shaw Judy Foxman Immigration Paula Strasser W Michael Cox, Richard Alm Johan Sulaeman Julie Lynch Tom Tan Southern Methodist Don Shelly Business SMU Edward JFox Don Shelly Zannie Voss, Glenn Voss Ann Marie Gan