CORPORATE CRACKDOWN
Tightened Rules on Board of Directors’ Makeup Encourages Turnover
By Chris Cziborr
Public companies are shaking up their boards of directors amid tighter scrutiny following last year’s corporate scandals.
New directors’ rules stem from the 2002 Sarbanes-Oxley Act, which set out a number of measures for corporate reform.
A number of scandals spurred the changes. Foremost was fallout from Enron Corp., whose directors were accused of being tied too closely to the company to address accounting irregularities.
Other rule changes, for the most part, have been proposed by the major stock exchanges,the New York Stock Exchange and Nasdaq. Reform covers company boards and their audit committees.
For instance, boards of companies trading on the NYSE would have a majority of independent directors under the changes. The NYSE also tightened the definition of what constitutes an independent director. And audit committees must have a financial expert.
Nasdaq similarly is calling for a majority of independent directors requirement, though there would be some exceptions.
Both exchanges want many other regulations, which vary according to company size. In some cases, new rules call for certain key board committees, such as a company’s audit committee, be composed entirely of independent directors.
“For NYSE companies, all audit committee members must be independent, while Nasdaq companies may have one non-independent director on the audit committee,” said Sam Wild, partner in charge of accounting and auditing at Santa Monica accounting firm Stonefield Josephson Inc.
For smaller companies not trading on the NYSE or Nasdaq, audit committee rules aren’t as clear-cut. For small companies that don’t have a separately established audit committee, the board becomes the audit committee.
Many companies already were moving to change their board structure, regardless of the new rules, according to Dean Yoost, managing partner of the Irvine office of PricewaterhouseCoopers.
“The days of the country club board of directors are gone,there’s a higher emphasis placed on having the right expertise and experience,” Yoost said. “Companies want to make sure at least some of the directors are financially savvy enough to handle some of the more complex issues. What’s emerging is a more professional board,now it’s more fashionable for consulting firms and advisors to do discussions and more consulting with boards on corporate governance issues.”
Aliso Viejo engineering company Fluor Corp. has relied on independent directors for some time, even before the new regulatory requirements by the Securities and Exchange Commission and stock exchanges in the past year.
“We have had for a long time a board composed primarily of outside directors,that’s required now, but we’ve had it in place for a long time,” said Larry Fisher, a senior vice president and secretary of Fluor’s board.
Other Orange County companies are seeing changes to their boards.
Irvine business software maker Epicor Software Corp. and Santa Ana audio software and device maker SRS Labs Inc. both in recent months added independent directors.
Epicor added Robert Smith, a retired Novellus Systems Inc. chief financial officer, as its fifth board member in May. Four of the company’s directors are independent.
SRS Labs, meanwhile, elected Winston Hickman to its board in July. Hickman is chief financial officer of Paradigm Wireless Systems and will be a member of SRS Labs’ audit committee.
Companies looking for new directors are leaning on accounting firms for help.
“Some smaller CPA firms,especially those that have former partners from the Big Four,have pitched that kind of recruiting service to some smaller public companies,” said Stonefield’s Wild. “And there are many retired accounting firm partners that are available to serve on audit committees. They’re often a good choice for companies because they understand the financial issues involved.”
And corporate headhunters, such as Los Angeles-based Korn/Ferry International, also are getting in on the action.
Korn/Ferry has seen its business recruiting directors pick up “very significantly” in the past year, said Caroline Nahas, Southwest region managing director.
Large, mature companies are looking to beef up their boards with directors who have good accounting backgrounds. That helps companies respond to tighter rules called for by the Sarbanes-Oxley Act.
Nahas said that smaller publicly held companies, which don’t have a deep base of directors, also are showing more interest for recruiting help.
“Many of them brought on directors from (small) acquisitions,” Nahas said. “But they didn’t necessarily plan the compositions of their boards. Now with the more rigorous requirements for boards, these companies are looking to bring on more sophisticated and more broad-based board directors that might have the financial expertise requirement.”
Nahas said recruiting board members is very different from filling an executive position.
“This is not a search for a job,it’s to determine whether individuals might have interest (in being a board member),” Nahas said. “But it’s also about whether they’re able to dedicate the kind of time necessary to be a contributing board member, because the time demands have really increased.”
Irvine-based SSP Solutions Inc. recently lost a board and audit committee member, Gregory Clark, because he “accepted a new position that requires an exclusive time commitment,” according to SSP. Clark agreed to serve on SSP’s advisory board.
Nahas said Korn/Ferry taps a number of different sources when recruiting directors.
“If someone is an active businessperson we generally recommend that individual sits on no more than three boards,” she said.
Chief executives are sought-after board candidates. Korn/Ferry looks at “whether they have led their companies in an effective manner,” Nahas said.
And the recruiter sometimes looks to retired executives.
“Our clients have not been as inclined toward retired executives because they want someone who is doing the job right now,” she said. “Still, since the recent regulatory changes and high demands on board members’ time, retired executives are a good source, because they are willing and have the time to dedicate to board matters.”
