Web-Centric Boards Must Cast A Much Wider Net

By Marc J. Lane
Posted Thursday, November 25, 2004

Every public company stands to benefit from embracing the twin principles of diversity and accountability in the composition of its board. Many publicly owned high-tech companies lavish praise on their small and nimble boards of directors, without which, they insist, entrepreneurial success surely would have eluded them. The company line is that small boards, especially those packed with insiders, move faster and compete more effectively than the independent, larger and more diverse boards that govern most mature companies.

But agility doesn't guarantee accountability to shareholders, and the agile may not be committed to growing shareholder value. In fact, the smaller the board, the greater the risk that it will uncritically follow the company founders' marching orders. And some boards consist only of corporate officers and a few others closely tied to the company.

Worse still, when a company's board of directors does its founders' bidding, so too will the board's compensation and audit committees.

Now that stock prices are under pressure, dissatisfied shareholders, mutual funds and even hedge fund managers are pushing companies to unlock shareholder value. And they are particularly incensed when executives "earn" enormous paychecks at the same time their companies' stock prices tank. This spring's round of annual shareholder meetings is seeing more demands than ever for independent board seats and revisions to executive compensation packages.

For their part, the New York Stock Exchange, the American Stock Exchange and Nasdaq have adopted new rules aimed at strengthening the independence of corporate boards' audit committees, making the committees more effective and increasing accountability of audit committees, outside auditors and management. The rules become fully effective June 14.

The self-regulatory organizations mean well, but they're just tinkering at the margins. It's left to the boards themselves to improve the way they do business.

A recent study of Internet company governance makes a statistically compelling case. It confirms that Internet firms' boards are surprisingly small.

The average Web-centric company has only 6.6 directors, while the average S&P 500 company has 12.

What's more, outside directors sitting on Internet company boards outnumber insiders by only 2.2 to 1. And those who are described as "outside directors" often include venture capitalists, whose independence is compromised by a financial stake in the company. By contrast, outside directors outnumber insiders on S&P 500 company boards by 3.5 to 1.

Internet boards are dominated by financial professionals and techies. They're relatively young and inexperienced, and almost all of them are white and male.

The result is that directors of high-tech companies tend to have shorter-term, narrower perspectives than most other shareholders. They're also likely to be less than diligent when sitting on board committees charged with oversight responsibilities.

High-tech company directors see little distinction between management and oversight. Roles blur as they share decision-making with the very managers they're hired to monitor. But they don't even spot the problem because they're more focused on high price-earnings multiples than on excellence in governing.

How much oversight hands-on yet tightly controlled directors can really provide is anyone's guess. And how much accountability will become the norm among wired-world companies is open to question.

But few can disagree with the proposition that no public company is the private fiefdom of the few.

And every public company stands to benefit from embracing the twin principles of diversity and accountability in the composition of its board.

About the Author
Marc Lane is a business and tax attorney, a Master Registered Financial Planner, a Registered Financial Consultant, and a Certified Investment Specialist. Marc is the author of 30 books on business organization, taxation, and personal finance. His newest book, "Advising Entrepreneurs: Dynamic Strategies for Financial Growth" draws from his experience working with those who have successfully built their businesses. Marc is an Adjunct Professor of Law at Northwestern University and an Adjunct Professor of Business at the University of Illinois. His practice areas include Individual Taxation, Corporate Tax Planning, Business Tax Planning, Estate Planning, Investments, Retirement Planning,Elder Law, International Trade, Business Law, and Wills, Trusts and Estates. Additional articles, case studies, and a free email newsletter are available at (www.marcjlane.com).