Sarbanes-Oxley Remains A Force To Be Reckoned With In The Boardroom.

Two years after the introduction of the Sarbanes-Oxley Act of 2002, corporate reform continues to impact corporate directors, according to a recent study by Corporate Board Member magazine and PricewaterhouseCoopers LLP.

The third annual “What Directors Think” study measures the opinions of directors and CEOs of the top 2,000 publicly traded companies. The 2004 survey findings, which the magazine will highlight in its special year-end “What Directors Think” issue, reveal continuing changes in directors’ attitudes and actions.

Key Findings, Trends, and Implications:

As boards’ time demands continue to increase, the unofficial title of “professional director” in which individuals sit on six or more boards is quickly fading. In 2003, only 33% of CEOs and 16% of outside directors were limited to additional board seats, compared to 43% and 29%, respectively, in the 2004 survey findings.

This trend will likely continue—71% of survey respondents said 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 can now serve is three. These statistics imply that search committees will have to cast a wider net to find qualified independent directors.

For many directors, increased time demands coupled with new risks call for an increase in pay, particularly for lead directors and audit committee chairs. Of survey respondents, 98% said audit committee chairs should receive additional compensation, compared to 81% who said so in 2003 and only 54.1% in 2002. In addition, 68% of this year’s survey respondents said lead directors should receive additional compensation. More than half of the respondents believe the lead director and audit chair should get 25% more compensation than other directors, and almost one-third believe it should be as much as 50% more in both cases.

Board evaluations are becoming more commonplace. In the 2004 survey, 73% of respondents said their boards were formally evaluated, compared to 50% in 2003 and only 33% in 2002. In addition, 35% of respondents said their boards evaluate individual directors on a regular basis, compared to only 23% that did so in 2002.

The survey asked directors how much time—more, the same, or less—they think their boards should devote to 14 different subjects. Strategic planning was the number one action item, with 58% of respondents saying they’d like more time to discuss it. The other top responses were succession planning, meeting key managers, visiting work sites, and discussing the competition.

While executive compensation and governance are hot topics in the press today, only 17% of respondents thought their boards need to spend more time on compensation issues, and only 11% said they should devote more time to governance guidelines. Last on the list of board priorities was compliance and regulatory issues, with only 8% of respondents saying they want to discuss these issues at any greater length.

“There is a clear movement from form, structure and checking boxes to issues of substance, like planning and growth, in the boardroom,” said TK Kerstetter, president of Corporate Board Member. “In that light, boards are taking a step back and determining what are the important issues to spend time on going forward.”

90% of directors surveyed agreed that determining board scope is an important exercise for directors in the post corporate reform era.

Corporate governance reform is a burden for many companies. One out of five (20%) directors surveyed said Sarbanes-Oxley has created an environment where management is so distracted that company performance will be affected; this number is up from 13.9% in 2003.

But even with Section 404 looming, confidence is increasing—82% of directors believe their company is prepared to implement Section 404 on internal control reporting. However, only 50% of directors surveyed think Section 404 internal control reporting requirements will make a difference in the quality of their company’s financial statements; and less than half (44%) think Section 302 certification of financial statements by the CEO and CFO will make a difference.

Despite the movement by institutional investors and shareholders to withhold votes against boards for various reasons, only 21% 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% have allowed auditors to perform non-audit services for their company.

More than three-fourths (77%) of directors surveyed think the Sarbanes-Oxley Act should be revisited by Congress to correct some of the unintended consequences.

As Garrett L. Stauffer, partner and Corporate Governance leader at PricewaterhouseCoopers LLP, indicated in speaking about the effect of the initial year of adoption of Section 404 on internal control, “Reporting on internal control is a watershed event for many companies, especially those that had decreased their focus on control systems over the years. Directors recognize that companies are being forced to devote significant resources to documenting and testing controls so that they’ll be ready to report to their shareholders this year end. The significant efforts required for first year compliance have, in some cases, shifted directors’ and management’s focus away from addressing corporate strategy and performance. The challenge in future years will be to ensure 404 compliance efforts don’t divert management’s attention from growing shareholder value.”

Of the 10,000 directors surveyed, 1,279 responded for a 12.8% response rate. Of the respondents, 84% answered as outside directors. The survey was sponsored by PricewaterhouseCoopers and conducted by Corporate Board Member. The purpose of the research was to gain insight on the challenges directors face as they operate in a post-reform environment.