In 2008, according to public filings, virtually all of Standard & Poor’s 500 companies had a lead or presiding director. This hasn’t always been the case. The figure hovered at 96%, which is a four-fold increase since 2003.
What’s caused this increase? It’s a byproduct of the Sarbanes-Oxley Act, which was passed in 2002. Sarbanes-Oxley itself arose from the public’s growing distrust of management and board “insiders” -- this in the wake of such multibillion-dollar financial debacles as Enron Corp. and WorldCom Inc.
Sarbanes-Oxley mandates that independent directors on boards of U.S. public companies meet not only as part of their full boards, but also separately -- apart from management and non-independent directors. The need to have a director chair the meetings of the independent directors helped institutionalize the lead director’s role.
The new governance also required that independent directors have greater roles in their board committees’ work, along with constituting a majority of directors on every public company board. For example, companies listed on the NYSE were required to have audit, compensation and nominating/corporate governance committees consisting only of independent directors. This was a substantial change: Traditionally, the CEO and chair of the board had been the sources of influence on directors. They would identify the issues boards should address, appoint committee members and determine the board’s meeting agendas.
To understand the emerging role lead directors in U.S. public companies played, Joseph J. Penbera, a management professor at California State University in Fresno, and his research assistants examined SEC filings for S&P 500 companies. They completed a baseline study in 2005 and a more recent study in 2008.
In both studies, they found that lead directors’ duties fell into eight main categories, and that the most common duties involved chairing meetings of the independent directors and planning board meetings. However, the scope of the general lead director’s duties expanded during these years. In particular, they had to do more work in director evaluations, CEO evaluations and relationships with external constituents. Although most companies still don’t report that their lead directors have direct roles in retaining consultants or interacting with investors, the growing number that do indicates a trend.
Independent directors tend to approve of this expansion of the lead director’s role. However, as their duties have increased, independent directors are also more exposed to criticism and legal liabilities. Board processes have become more formalized, with previously routine decisions now being subject to the legal counsel’s advice. The independent directors’ workloads have also increased, as has the need for more communication between independent directors and the lead director. Perhaps not surprisingly, the 2008 study revealed that 83% of lead directors spend five more hours a month on their roles, and 48% spend more than 10 hours a month on their lead director duties.
Lead directors may help other directors in obtaining formal information, but their real value is in providing informal insights. Many times, board members worry about the decisions management did not make, or issues that were not brought to the board for consideration. Of course, while lead directors can’t know everything that goes on in companies, good lead directors who stay involved provide assurance to other directors.
The independent directors of a current board typically appoint the lead director from among themselves. They rarely appoint someone from the outside, and they tend to choose someone with whom they’re comfortable and who has demonstrated a willingness to commit to the job.
How will the lead director’s role continue to evolve? Anecdotal evidence suggests that some lead directors have taken more active roles in the recent financial crisis -- particularly in activities associated with bank loans, mergers, bankruptcies and liquidations. This pattern holds consistent with the researchers’ data, which suggests that the lead director’s role is evolving to include more direct engagement with credit partners, regulatory bodies and the media. And this may be especially true during times of crisis, when many challenges face CEOs.
This article is adapted from “What Lead Directors Do,” by Joseph J. Penbera, which appeared in the Summer 2009 issue of MIT Sloan Management Review. The complete article is available at http://sloanreview.mit.edu/smr/.