Academic

The latest issue of Fortune magazine has an article that begins with this provocative opener:

Here's a strong opinion right upfront: High pay for outside directors of corporations guts the whole idea of these representatives of the shareholders making independent judgments.  How does a board member challenge a CEO when the director is being paid oversize amounts likely to be important to his or her lifestyle?

The article goes on to note that data from executive recruiter Spencer Stuart's study of 491 large and important companies reveals that average director pay for non-employee directors was $213,000 in 2008.  Moreover, proxy statements companies in the surveywhose average salary, in Fortune's words, "exceeded the nosebleed level of $400,000," revealed director compensation packages ranging from $713,500 to roughly $1.5 million.  Does this kind of compensation gut the idea of director independence?

To be sure, it might give one pause, particularly when considering compensation levels at the higher end.  In certain sectors, the average director compensation package tops $300,000.  Then too, according to the Spencer Stuart study, for S&P companies with nine independent directors, "the annual price tag for board-related compensation tops $1.9 million."  That seems like a pretty hefty tag.  On the one hand, even this kind of compensation may not approach the level of what has been termed excessive executive compensation.  On the other hand, to the extent that financial ties to a company may undermine independence, these levels of compensation may be a cause for concern.  Indeed, one (though not the only) rationale for increasing the number of independent directors, and thereby decreasing the number of inside directors on a board, has been that inside directors draw a salary from a company and hence may be hampered in their ability to make independent judgments with respect to that company.  In this regard, high levels of board compensation pose problems for the independence rationale.

Of course, it may not be as dire as the Fortune article suggest.  As an initial matter, we are increasingly expecting our directors to take on significant amounts of responsibility, and one would expect that they would be compensated in light of that fact.  This triggers the all-important question: what exactly is "excessive" or "oversized" compensation in this context?  Then too, given the spotlight on directors and increased concerns about liability, being an independent director has become a risky business and that risk likely needs to be factored into the equation when considering compensation.  Moreover, the current director compensation story is much more nuanced.  Indeed, the Spencer Stuart study not only reveals that, across all industries, the average total director compensation package represents a 2% decline from last year, but also that the annual cash retainer only rose 1% from last year--the smallest annual increase since Spencer Stuart began tracking compensation data in 1998.  Then too, the number of boards paying per meeting fees has steadily declined.  It is now at 43%, as compared to 78% in 1999.  Finally, there is a significant trend away from stock options and towards restricted stock.  This additional data suggest that board compensation has changed not only to account for market conditions, but also to seek a better alignment with long-term growth.

Viewing all the data together paints a different picture, and may reduce worries (to the extent you had them!) about director compensation and its impact on director independence.  However, as Fortune notes, it seems to be an issue worthy of a second look, and worthy of keeping in our radar, especially given the kind of responsibilities we increasingly place on independent directors.