Directors wary of stepping up to the Board

Mar 27 2006 by Nic Paton Print This Article

Companies are struggling to find directors prepared to step into board positions because of growing fears about the risks and problems they might encounter, new research has said.

The study of more than 1,200 directors from 15 countries by executive recruitment group Korn/Ferry International found that company directors were becoming increasingly nervous of accepting additional board positions because of the potential risks involved.

Among the UK directors surveyed, more than half felt the Combined Code on corporate governance made Boards more cautious rather than promoted better governance, while 47 per cent believed it merely paved the way for more rules.

Under the code, directors now face greater scrutiny through individual and full board evaluations.

More than eight out of 10 UK directors now conducted regular board evaluations and a growing number of boards in Germany (three quarters) and France (more than half) have followed suit.

The increasing incidence of corporate scandals, growing shareholder activism, and regulatory complexities had contributed to an elevation in directors' risk.

In the UK, 61 per cent of directors surveyed had declined a Board seat
The percentage of directors in Europe who had declined a directorship because of perceived risk had increased this year, and was now in line with the US, said Korn/Ferry.

In the UK, 61 per cent of directors surveyed had declined a Board seat compared with 51 per cent in 2004.

Increasing demands on directors' time plus mandatory retirement policies was compounding this reduction in the pool of experienced candidates.

More than half of European directors surveyed indicated they have found it more difficult recently to recruit high quality directors.

As a result, 44 per cent of UK boards had added a "first time" director in the past three years. In Germany the number was even higher at 57 per cent.

More than eight out of 10 UK directors did not believe the former chief executive should be in the boardroom, compared with 63 per cent last year. This trend was also reflected in the German and French survey results, said Korn/Ferry.

The impact of greater shareholder activism and desire to eliminate potential conflicts also explained the significant percentages of boards requesting directors to leave, it argued.

Nearly 60 per cent of European companies had asked a director to resign or not stand for re-election.

Mina Gouran of Korn/Ferry said: "Three years have passed since the introduction of the Combined Code, and directors still hold diverse views about good governance practices.

"The study suggests that a significant number of directors worry that the code has made Boards act more cautiously and inhibits calculated risk taking, something that is not always in the interests of their shareholders," she added.

"Only 46% of directors said that they believe the benefits of the Code outweigh the costs.

"Despite this, we are seeing a shift in the behaviours of boards in the UK and continental Europe," she explained.

"In the past year, we have seen changes to the internal workings of the board; for example, a growing number of European boards are instituting formal full board performance evaluations.

"This is in accordance with the UK's Combined Code and quickly becoming best practice in Germany and France.

Over the next few years we may see increasing guidance from Brussels in order to create homogenous governance framework for European companies," Gouran concluded.

An average annual retainer and per meeting fee of $76,707 (£44,000), was awarded to directors from Fortune 1000 companies last year, 35 per cent higher than in 2004, the report stated.

Women were found in 84 per cent of boardrooms last year, up from 82 per cent in 2004.