Speech by SEC Commissioner:
Remarks before the
2005 Colloquium for Women Directors
Commissioner Cynthia A. Glassman
U.S. Securities and Exchange Commission
New York, New York
November 11, 2005
Board Diversity: The 21st Century Challenge
"The New Regulatory Climate and Impact on Board Composition"
Thank you Irene, and thank you for the opportunity to be with you today for this event. I will be interested in reviewing the report announced by Irene and Toni this morning on women directors at the largest US and international banks. Given my prior work at the Federal Reserve and as a consultant to banks, I have certainly witnessed - and at times bumped into - the glass ceiling for women, directors or otherwise! However, I am pleased to note that in my current position, for the first time in Commission history, I am one of two women Commissioners! Before I go any further, I need to give the Commission's standard disclaimer that the views I express here today are my own and do not necessarily represent the views of the Commission or its staff.
To start, I would like to provide an overview of the new regulatory requirements governing Board formation and operation. That will put into context my views on how these changes have already affected Boards, and why I believe we can expect to see increasing numbers of women and minority Board members in the future.
I think all of us could agree that after the revelation of the numerous corporate scandals a few years ago, business as usual was not an option. Regarding Boards of Directors, we learned that directors were not necessarily effectively performing their role of overseeing and monitoring company management, with their fiduciary responsibility to the shareholders always guiding their decisions. A common theme emerged from many of the major scandals: the Board, as one of the key gatekeepers of management, failed to ask the tough questions and possibly stop the abuses - before they started.
Congress recognized this theme, among others, when it adopted the Sarbanes-Oxley Act, or SOx. "Improving the performance of the gatekeepers" is one of the five themes of SOx. The other four are "restoring confidence in the accounting profession," "improving the 'tone at the top'," "improving disclosure and financial reporting," and "enhancing enforcement tools." Many of the provisions of SOx directly or indirectly affect the organization and activities of the Board. As a result, we can already see the effects of the new regulatory environment - consisting not only of the requirements of SOx, but perhaps more importantly, the listing standards of the New York Stock Exchange and the NASD1- on Boards.
Starting at the top, as I mentioned, one theme of the new regulatory requirements affecting Boards is setting the right "tone at the top." We can't get much higher in the chain of command of public companies than the Board. Directors must set the example when it comes to independence and the avoidance of conflicts - both real and in appearance - and the importance of ethics and integrity, not just in name, but in action.
Regarding independence, while SOx requires the audit committee of the Board be completely independent, the listing standards take independence one step further and require that a majority of the Board be independent.2 In addition, listed companies must generally have a nominating committee and compensation committee, each composed entirely of independent directors. More importantly for the purpose of today's discussion, the independence criteria prescribed by the listing standards specifically identify various relationships pursuant to which directors cannot be considered to be independent. This requirement alone immediately opened seats in the Boardroom, and the data support this conclusion.3 A recent survey by Spencer Stuart reports that the number of independent directors in the companies they surveyed rose from 278 in 2001, to 443 in 2004.4
With respect to ethics, as a result of SOx, the US Sentencing Commission amended its guidelines applicable to companies. The guidelines specify that directors must have firsthand knowledge of their company's anticrime control policies in order for the company to benefit from sentencing leniency. The guidelines also explicitly put the onus in part on Boards to oversee, monitor and question the programs and training surrounding ethics. In addition, the listing standards require listed companies to adopt codes of conduct and ethics, and any waivers from the code given to directors or executive officers must be approved by the Board.5
I in no way mean to imply that directors serving on Boards prior to, or during, the major scandals were unethical or lacked integrity. However, the new regulatory requirements look to independent directors, who are not beholden to management, to set the proper tone and be prepared to object if management fails to observe the rules of good behavior. In search of these independent directors, companies have been forced to look outside the "old boys' network" to find and retain directors, and they are looking at a far wider and deeper talent pool, including women and minorities, than before.
As I mentioned earlier, a second theme arising from the new regulatory environment is that directors are viewed as one of the key gatekeepers in our capital markets. In performing this gatekeeping function, Boards have been tasked with a series of new duties that not only require new and different expertise, but significant increases in time commitments on the part of each individual director. For example, the listing standards require that one member of the audit committee be a financial expert, and generally require that all audit committee members be financially literate.6 And this financial literacy is needed since the listing standards further state that audit committees must review and discuss the company's annual and quarterly reports (including the MD&A) with management and the outside auditor, review earnings releases and discuss policies with respect to risk assessment and risk management. As a result of these requirements, entry into the boardroom is no longer controlled by the old saying of "it's not what you know, but who you know." There is no question that it's now what you know that matters.
Serving on the audit committee requires not only increased expertise, but also increased time, as does serving as a director generally. The following litany of the new duties imposed on directors pursuant to the new regulatory climate makes this point clear. SOx requires that audit committees approve the hiring and compensation of auditors, approve all audit services and establish "whistleblower" procedures regarding the receipt of complaints pertaining to financial matters. Many audit committees also saw their responsibilities, and thus time, greatly increase as a result of the first year of reporting under Section 404 of SOx, or the internal control requirements. (As an aside, I would note that I remain very concerned about the time and costs associated with the implementation of 404. With few exceptions, I am hearing year two may simply be a continuation of year one, and that is not acceptable to me. I continue to believe that the implementation of 404 is misfocused. What should be a top-down, risk-focused exercise has become a bottom-up, check-the-box exercise.)
With respect to Boards generally, directors are meeting more frequently, and for longer periods of time. In addition, the listing standards require that independent directors meet in regularly scheduled executive sessions, without management. The New York Stock Exchange further requires that listed companies adopt and disclose on their web sites "corporate governance guidelines" addressing, among other things, the responsibilities of directors, continuing education and orientation for directors, management succession, and annual performance evaluations of, and by, the Board.
As is fairly obvious from the above, directors simply do not have the time to serve on numerous Boards. The days in which it may not have been viewed as questionable for an audit committee, overseeing a company with more than $30 billion in revenue, to meet for as little as three to six hours per year are over. (I'm not making those stats up-that was the meeting schedule for the audit committee of WorldCom).7 The New York Stock Exchange indirectly acknowledges this by requiring that if an audit committee member sits on more than three audit committees simultaneously, the company must disclose this fact, and must also disclose the Board's determination of whether or not such service impairs the ability of the member to serve effectively on the company's audit committee.
Historically, Boards preferred to look to sitting CEOs to fill director vacancies. However, like other directors, fewer CEOs are serving on multiple Boards. According to the Spencer Stuart survey, active CEOs on average now serve on less than one outside corporate Board, down from an average of two in 1998. According to the upcoming 2005 Public Company Governance Survey of the National Association of Corporate Directors, or NACD, in response to a question concerning the reasons CEO candidates have given for declining board invitations, 79% cited concerns about time, and 38% mentioned company policies restricting their number of Board seats.8
As a result of these time and expertise requirements, companies must look to a broader pool of candidates to fill director seats. In the NACD survey, 54% of companies stated they "want more diverse professional experience" as a reason why they are recruiting fewer CEOs. Companies are looking at mid-level executives and others with particular expertise, such as division presidents, finance officers and human resources executives -- a position, I would note, historically held by women and one that could gain increased importance due to the current focus on executive compensation and management succession strategies.
In conclusion, I realize increases in the number of women and minorities serving in corporate boardrooms will not occur overnight. For example, according to the NACD survey, 52% of companies responded that Board nominating committees should have guidelines or a plan in place to ensure that the Board includes one or more women and minorities. Nevertheless, only 26% of the responding companies actually have such policies in place. I believe, however, that the potential for women and minorities to move into the open Board seats created by the new regulatory climate has never been greater. The Boards of the future can no longer look like the Boards of the past. Companies are seeking to bring greater independence, higher standards of integrity, and new experiences, perspectives, and expertise to the boardroom. In short, public company boardrooms need directors like you, they are seeking directors like you, and, quite frankly, they benefit from directors like you. And events such as today's Colloquium, and groups such as Corporate Women Directors International, can only serve to increase the visibility and momentum of this movement. Thank you, and I look forward to the questions and discussion.