Trophy Directors Spark Debate Investors Question Effectiveness Of Executives Who Serve On Many Boards

To shareholders weary of watching corporate mishaps with little, if any, discernible intervention from boards, all directors are suspect. But some, to paraphrase George Orwell, are more suspect than others.

They are trophy directors who sit on many boards and can navigate corporate America’s wood-paneled board rooms as easily as their own homes. Among directors of the Fortune 1,000 companies, they include well-connected types like Frank C. Carlucci, the former Defense secretary who according to 1996 proxies sits on 14 corporate boards, and Ann D. McLaughlin, the former Labor secretary who sits on 11, as well as lower-profile executives like Raymond S. Troubh, who occupies 15 board seats, David T. Kollat (also 15), Claudine B. Malone (11) and Willie D. Davis (11).

Their clout could be enormous in corporate America. Yet, many shareholders ask, do these directors have the time to be vigilant representatives of investors? And, if they are making a bundle in the board room - five-figure retainers from each board, plus meeting fees and perks - will they challenge chief executives who prefer directors to be docile?

“A CEO who doesn’t want to be monitored closely wants a director with lots of board seats,” asserted Charles Elson, a professor who specializes in corporate governance at the Stetson Law School in St. Petersburg, Fla.

This month, a panel of governance experts questioned whether “star directors” added anything but sparkle to a board, and recommended that senior executives serve on no more than two boards and that others on no more than six.

Try as they might, though, shareholders determined to break up the cozy directors’ club that often coddles chief executives have been frustrated in their attempts to home in on individuals.

Information about directors is scarce and scattered. And boards are collective bodies, so no action, or lack thereof, can be pinned to an individual.

Analyses for The New York Times of the available data show that investors have reason to be concerned about ubiquitous directors. Many indeed have much at stake and must be hard pressed to find the time to provide the scrutiny that board service demands. Worse, they seem to cost shareholders money.

Even so, the number of people who sit on multiple boards is growing, not shrinking. Last year, 68 directors of Fortune 1,000 companies sat on nine or more corporate boards, up from 36 who did so in 1991, according to Directorship, a consulting firm in Greenwich, Conn. The number with eight board seats rose to 54, from 40.

Yet as a class these brand-name directors add no value to corporate performance and seem to be a drain on resources. When Graef Crystal, a corporate compensation expert in San Diego, looked at the performances of the 256 companies whose boards have one or more of these directors, compared with the rest of the 1,554 companies in the Standard & Poor’s indexes of large-capitalization, mid-cap and small-cap companies, he found no statistically significant difference in their returns to shareholders over three years.

Crystal did find, however, that those 256 companies paid their chief executives and directors more than the companies’ size and shareholder returns would suggest, and by a statistically significant amount: on average, the overpayment came to about 6 percent in both cases.

Tellingly, the overpayment increases, Crystal found, when two or more trophy directors adorn a board, which is the case at 64 companies including Time Warner, Kmart, Xerox, American Express, Allied-Signal, Sara Lee, Dow Jones, Fluor and Avon.

These 64 companies, as a class, overpay their chief executives by more than 13 percent, compared with their peers in size and performance, and overpay their outside directors by nearly 20 percent by the same measures.

“Celebrity directors are worse than useless,” Crystal said. “They bring more debits to the table than credits.” The likelihood of this “unmistakable pattern” of overpayment happening by chance, he added, is less than 1 in 100 with regard to chief executives and less than 1 in 1,000 for outside directors.

The pattern does not hold for all brand-name directors. Henry R. Kravis and George R. Roberts, of Kohlberg Kravis Roberts, sit on more than a dozen boards, but the five companies for which performance could be tracked tend to pay their chief executives less than their size and performance suggest. Directors’ pay at those companies came in about right.

But Crystal said he found an astounding connection between some celebrity directors and overpayments by the companies where they served. For example, Joseph A. Califano Jr., the one-time secretary of Health, Education and Welfare, is a director of nine companies. Excluding three that were not in Crystal’s data base (two are subsidiaries of a larger company), the remaining six, as a group, overpay chief executives by 281 percent and their directors by 71 percent, by Crystal’s reckoning.

Itinerant directors can make quite a haul. Various surveys show that the average company pays each outside director about $33,000 a year. But some pay much more, and the dribs and drabs add up for the superbusy.

In 1995, Allen F. Jacobson, the former chief executive of Minnesota Mining and Manufacturing, reeled in compensation of more than $785,200, including cash, pension benefits and the present value of stock options, from 10 of his 11 board seats, according to Crystal.

To shareholders worried about their investments, a trophy director’s pay is a problem not only because the money seems to be wasted, but also because these big sums create strong ties between directors and incumbent chief executives.

Shareholder questions about time constraints also appear to be legitimate, especially for people whose job schedules are already demanding.

John L. Clendenin, the chief executive of the BellSouth Corp., sits on the boards of nine Fortune 1,000 companies including his own.

All told, Clendenin is expected each year at 60 regular meetings of his corporate boards, which include RJR Nabisco, Wachovia, Equifax, Kroger and Home Depot, based on data from Directorship. He sits on 17 committees for those 9 boards, and serves as chairman for 5 of the committees.

“If you’re a CEO on eight boards, that’s eight months of the year when you’re doing someone else’s work,” said Elson, the law professor. “That means you’re not doing your work, you’re not doing your boards’ work, or a combination of the two. It’s terrible no matter how you look at it.”

Clendenin disagrees. He regularly works 5 a.m. to 7 p.m. at BellSouth, where in his 12 years as chief executive he has run up a respectable record of profits. When he attends board meetings, he said, “I do double duty,” tending business for BellSouth at his destination.

As for preparatory work, “it’s all stuff I do at night and on weekends,” he said.

In return for his service, Clendenin said he took home marketing expertise that he applied at BellSouth, which paid him $8.1 million in total compensation. He also, by Crystal’s accounting of cash, stock and benefits, earned $492,900 in 1995 from all his boards.

Clendenin does not fare too badly on Crystal’s value scale of brandname directors. While his nine boards, as a class, overpay their chief executives by 23 percent, they pay outside directors about 16 percent less than their size and performance would suggest.

Only single-minded skeptics would suggest that chief executives and boards choose trophy directors specifically to raise everyone’s pay. There are other reasons why star directors are popular.

Because their names are known from other boards, they enjoy more credibility on Wall Street than unknowns. Movers and shakers like Jordan bring glamour by association to the chief executive and to the company. And then there is access.

“If you ask CEOs, they say these directors open doors in a quiet, legitimate way,” said one consultant. “The argument is that you can buy that, and you should buy it. If you want someone to get you access, you should retain them as a consultant.”

The report’s publication could mark a turning point. “People have begun to see the makeup of boards as a management problem,” said Elson, also a member of the commission, which suggested that financial literacy should be a requirement for service and recommended limits on multiple directorships. “I think anyone who sits on seven or more boards will become inherently suspect in the financial community.”