InterDigital Inc (IDCC)

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A lot of truly ignorant comments have been made about corporate governance on this board by people who apparently don't know how to google stuff like this to get the proper perspective.


Board Trends 1970s to the 1990s:
"The More Things Change..."
By James Kristie
Editor, Directors & Boards
Presentation to the
Institutional Shareholder Services
Annual Client Conference
February 26, 1999
Washington, D.C.

I'm delighted to share with you some thoughts about how boards have changed throughout the years, which I hope you will find interesting. Actually, some of the changes are quite startling. But don't be surprised when I get to the end of my review and end up at the point where I say, "The more things change, the more they remain the same."

[Moderator] Rich Koppes has just said that boards have come a long way, and they really have. It's amazing how far we've come just in the last 25 years. This following information is from data gathered over the years by the executive search firms, such as Spencer Stuart and Korn/Ferry, the Conference Board, and other assorted board observers. Let me quickly run through some of the major changes.

Trend 1: Outside Directors. The trend to having a majority of outside directors is of relatively recent vintage.

It was only in 1966, for example, that Standard Oil of New Jersey (now Exxon Corp.) added its first outside directors to its board. Even of more recent vintage, it was in 1976 that Tribune Co., the big Chicago-based media concern, added its first outside directors to its board. One of my early interviews I did at Directors & Boards magazine was with Tony O'Reilly, the head of H.J. Heinz Co. This was in 1983, and at that time the Heinz board had 18 members, nine of whom were company officers.

So within the last 25 years we have gotten to the point where the average board has two to three inside officers, and the trend that many would like to see is only the CEO on the board. I think we're moving in that direction.

Trend 2: Smaller Boards.

About 25 years ago, a good many U.S. boards were composed of 16 to 25 directors. Only five years ago, many boards had from 15 to 18 directors. We're now moving down to the 10 to 13 member range and we seem to be stabilizing there. For comparison purposes, here are the two largest-cap companies we have in the United States, General Electric and Microsoft. GE has a board of 15 -- 10 outsiders and 5 insiders. Microsoft has a board of 7 -- 4 outsiders, 3 insiders. Even more in contrast is Yahoo (which on a good trading day apparently has had a market cap exceeding General Motors): it has a board of 5 -- 3 outsiders and 2 insiders.

I am going to be doing a study of the new crop of Internet company boards. My supposition going in is that we may see some very different patterns of board composition developing among not only the Internet companies but the whole new generation of technology company boards. That should be a fun study to do and you can keep an eye out for that in a future issue of Directors & Boards.

Trend 3: Fewer Meetings.

Companies are gravitating toward an average of 8 meetings a year, down from 10 to 12 meetings -- an indication, some say, that boards are operating more efficiently than in years past. GE, for example, had 8 meetings last year; Microsoft had 6 meetings.

To the extent that smaller boards and fewer meetings lead to more focused board discussions and make a company more attractive to recruiting highly accomplished executives as directors, then these are good trends.

Trend 4: More Diversity on Boards.

Seventy-two percent of boards now report at least one woman director. This is up from 11% 25 years ago. Fifty-five percent of all boards now report an ethnic minority member. This is up from 7% in 1973, and 31% 10 years ago.

My expectation is that board diversity will increase. I think we can look to boards to start trending younger, have more international flavor, and have fewer traditional CEO types and more senior operating and financial executives and technology-oriented executives (which would also cause boards to trend younger).

Trend 5: Compensation.

The major trend here is that 25 years ago, only 4% of companies compensated their directors with some form of company stock. Today I see studies that show anywhere from 75% to 90% of companies providing some form of stock arrangement to their directors.

Trend 6: Rise of the Nominating Committee.

When I was preparing a timeline on the evolution of corporate governance for an article in Directors & Boards, my research showed that General Motors was one of the first companies to create a nominating committee of the board. That was in 1972. A Korn/Ferry study found that in 1973 only 2% of companies had nominating committees of the board. That figure rose to 60% in 1988, and today the prevalence of nominating committees is about 75%.

According to Craig Fuller, chairman of the Global Board Services Practice at Korn/Ferry, among the trends that have done the most to reshape boards over the past 25 years has been the rise of the nominating committee -- an important factor in the shift from insiders to more independent outside directors.

Other Trends. These are future trends -- trends that, according to the latest Korn/Ferry study, directors themselves believe will become generally accepted practices in the next five years.

-Formal CEO performance reviews by the board will grow rapidly and be well established in most companies by the year 2003.
Board performance reviews will increase but more slowly than CEO reviews.

-It will be the norm for a retiring CEO to leave the board. Right now only 30% of companies require the retiring CEO to leave the board.

-CEOs and directors will be required to own a specific dollar amount of company stock.

-Meetings of directors without the CEO present will be held regularly by all companies.

-Committee chairs and committee members will be appointed by a board and not by the CEO.

-The number of inside directors will continue to decline and the number of truly independent directors will continue to increase. Just recently, as an example, we saw Morgan Stanley Dean Witter reduce its board from 15 to 13 members, cutting 2 of 4 inside board seats.

-Lastly, written statements of corporate governance policy will become commonplace.

You will note that many of these trends represent structural changes to boards. The structural changes are important because of how they can lead to process changes.

A problem that we've had with our system of corporate governance is that -- as Paul Stern, one of my past authors, so well put it -- directors by law have always had all the power that they need to govern. What they have not had was the process.

As these structural trends have impacted, and continue to impact, the process that allows boards to act with optimal effectiveness, then they are worth close attention, encouragement, and applause.

That's what has changed. Now, what has remained the same? The way I see it, what has remained the same is what I call the ultimate board trend. What is this ultimate board trend? Here is my definition of it:

A board of directors...with the intelligence, integrity and courage...to exercise dutiful overview of management...and contribute meaningfully to the strategic affairs of the corporation.

If there is any agreement in the room on this definition of an ultimate board trend, then I would say this has been a trend in place since the early years of this century -- going back to the first and second decades when Congress began breaking up the Money Trusts, the J.P Morgan-backed directorships, and the atrocious interlocking of boards.

Let me conclude by reading this following passage. You might be surprised when it first appeared. The passage begins:

"In the past few years I have perceived on the boards where I serve, and from conversations with other CEOs and directors, that some fundamental changes are taking place. Directors are reexamining their roles, their functions and their responsibilities. Directors are asking questions now before they accept membership on boards. Directors are thinking about their liabilities to stockholders and to beneficiaries of company pension plans...."

The passage continues:

"An increasing number of CEOs as well have concluded that the passive roles of boards are not enough, that boards are responsible to the owners, the stockholders, that the old pattern of board practice must be changed, and that boards can be important involved elements in the top management process, setting policy and monitoring performance."

I might have published that passage 10 years ago in Directors & Boards. I might even have published that a year ago. Conceivably I could publish a variation of that a year from now.

Does it surprise you that that passage originally was published in 1976? That was the year Directors & Boards was founded -- but it did not appear in Directors & Boards, where you might expect us to say something like that. I looked for a more neutral commentator on this ultimate board trend and I found it in the Harvard Business Review. It was written by Myles Mace, one of Harvard's luminaries in the study of governance.

So that's why I say, "The more things change, the more they remain the same." This ultimate board trend has been playing out on a long and winding road. The road has gotten a little more paved and straight in the last 25 years, thanks to the structural changes I mentioned earlier.

There will always be some potholes and barriers on this road, and there will be some offramps that don't lead anywhere, and there may be no final destination on this road. But I think we can be confident that we're on the right road, going in the right direction, and that the destination is worth traveling to.

Thank you very much for your kind attention.


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