WCPO analyzed director data disclosed by 33 public companies in their annual proxy statements to shareholders. Findings include:
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Macy's CEO talks about his board of directors
Editor's Note: This article is part of WCPO's annual analysis of executive pay.
CINCINNATI - It’s not bad pay for part-time work: The typical Cincinnati director made $160,618 for a couple hundred hours of service on Cincinnati's public-company boards in 2013.
More than 80 percent of them can boast that their companies delivered positive returns to shareholders in both 2013 and over the last three years.
But what is it that directors actually do for their paycheck?
“The first thing to remember is that boards are elected by the shareholders,” said Gina Drosos, president of Assurex Health of Mason and former group president of Procter & Gamble Co.’s beauty care division until 2012. “They have a fiduciary responsibility to the shareholders … to act in their best interest. So that means making sure the company is continually profitably growing and it delivers on its financial commitments.”
Drosos said directors have three main responsibilities: Cultivating a strong management team, overseeing corporate strategy and managing enterprise risk, which means watching out for bad behavior or regulatory actions that could impede growth.
Drosos has a lot of experience with boards, having interacted with P&G directors when she ran the company’s $6 billion beauty business, then serving on the boards of American Financial and Signet Jewelers Ltd.
“The best boards that I’ve seen in action have a diversity of skills and they have a board dynamic of trust and confidence in each others’ skills so that collectively they have a very broad expertise,” she said. “The best board members … aren’t afraid to share their point of view. They’re great listeners. They facilitate an open and honest dialogue. They act like a team.”
'Giving Their Best Judgment'
WCPO analyzed director data disclosed by 33 public companies in their annual proxy statements to shareholders as part of an annual review of executive pay. Findings include:
View WCPO's interactive database that breaks down board pay:
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All of those represent ways of comparing one board to another. But it’s the executives who meet with directors every few months who are in the best position to judge the value of a good board.
Macy’s Inc. CEO Terry Lundgren credits his directors with giving him valuable feedback on a business strategy that has defined the company in recent years – the idea of localizing Macy’s stores with a merchandise mix defined by customer preferences in each of its 650 locations.
“We said, ‘We don’t have to do this, but if we do we think we can create a sustainable competitive advantage and if we do it right, no one’s going to copy this.’ And the board was very encouraging,” Lundgren said in a May 16 press briefing.
“(They said), ‘In this very, very competitive world, if you can make an investment and end up separating yourself from the competition, you know, place the bet.’”
It may seem like a no brainer, now that the strategy known as “My Macy’s” has produced revenue and profit growth that sent its stock price to all-time highs. But before the five-year shareholder return of 540 percent, there was $446 million to be spent on a corporate restructuring that took two years to implement.
The restructuring, announced in February, 2008, involved lots of internal reshuffling, job changes and severance packages, the consolidation of six regional operating centers down to four. For four years, Macy’s regulatory filings described the initiative as fraught with “inherent difficulties” and it was identified as one of the “risk factors” that could impair operating results.
But Lundgren said his board immediately saw the potential of My Macy’s localization initiative and urged him to make the investment.
So, the Macy’s board didn’t invent or even refine the strategy that drove the company’s stock to all-time highs. But it also knew enough not to kill it. In the end, maybe that’s all shareholders have a right to expect from public-company boards.
“They’re just looking at the deals that come through and giving their best judgment,” said Ohio State University Law Professor Paul Rose. “It’s wrong to pin the hopes on a board generating lots of value for a company. That’s really not what they’re there for. They’re really there to make sure things don’t go very badly.”
Gender Diversity Locally Lags National Average
A November survey of 1,019 directors by the National Association of Corporate Directors showed board members spent an average of 235.9 hours on board work in the past year. That’s up from 218 hours last year and the highest total every recorded in NACD surveys.
Divide Cincinnati's average salary per director by the NACD's average of 235.9 hours spent on the job in 2013 and you get an hourly rate of $680 for Cincinnati directors.
A PriceWaterhouseCoopers survey showed directors are spending more time on strategic planning, succession planning and risk management, less time on crisis management and regulatory compliance. The accounting firm said 934 directors participated in their annual director survey in the summer of 2013. Only 4 percent of directors said they’re motivated by compensation. The chief reason they seek board assignments are “intellectual stimulation” (54 percent) and “staying occupied/engaged.”
Networking and being a CEO are two of the best ways to join a corporate board. Of Cincinnati's 297 active board members, 103 are current or former CEOs. The NACD survey indicated directors are increasingly turning away from their own personal networks to find new directors. Most boards are now asking nominating or governance committee to search for executives with specific skill sets, including IT risk.
Drosos was recruited to be a board member when she ran P&G's beauty division. But she resisted those aspirations because “I really felt I needed to invest my time and effort at P&G.” All of that changed in May, 2012, when she announced her departure from the consumer-products company after 25 years. That left her free to join Assurex Health, a Mason-based startup that is developing diagnostic tests. And to entertain board offers.
“I hand-picked companies where I wanted to be part of the team,” she said. “I find the American Financial Group business inherently interesting. I was a finance major as an undergrad. So, the whole investment aspect of it is fascinating and the branding, the niche business orientation. The way they’ve been able to strategically dissect the market and create small businesses in a big company, if you will, is a really interesting business model.”
“And jewelry,” she added. “What’s more fun than that?”
Drosos is one of 44 women now serving on Cincinnati boards. They represent 15.2 percent of local public-company directors. That's unchanged from two years ago and it's lower than the national average of 16.9 percent, according to Catalyst, a global nonprofit that promotes inclusion on corporate boards.
A 2012 study by the Alliance for Board Diversity found 16.3 percent of Fortune 500 board seats held by minorities. Cincinnati’s 6.4 percent rate stems from the fact that many of Cincinnati's public companies are smaller firms, which tend to have less board diversity. There are 20 Cincinnati companies with no minorities on the board and nine with no women.
Looking for positive indicators? Inclusion rates are higher among Cincinnati's eight Fortune 500 companies. It now stands at 20.9 percent for women and 11.7 percent for minorities. And there is progress over time. In 2002, less than 9 percent of local board seats were occupied by women.
“It’s good to see the number growing,” said Drosos. “And the reason it’s good to see it growing is that diversity on a board is important, primarily diversity of thought and diversity of skills. But I think gender diversity can add to that. There are plenty of women out there who have great corporate leadership experience and could be on boards.”
WCPO analyzed compensation numbers from the annual proxy statements to shareholders of 33 Cincinnati-based public companies. S&PCapital IQ supplied numbers for all companies that filed fiscal year 2013 proxies before April 21. It also supplied figures on shareholder return andmarket capitalization, or the total value of all shares at the end of each company’s 2013 fiscal year. WCPO compiled all remaining numbers, including compensation figures for company directors.
WCPO uses the same methodology as Associated Press/Equilar in measuring total compensation, excluding changes in pension plan values. Figures on average worker salaries come from the report:May 2013 National Industry-Specific Occupational Employment and Wage Estimates.
From that report, WCPO pulled average worker salaries from the North American Industry Classification System (NAICS) codes that most closely match each company. NAICS is the standard used by federal agencies to classify businesses in order to collect, analyze and publish statistics tied to the U.S. economy.
WCPO Digital Multimedia Producer Brian Niesz compiled and created the interactive graphic and photo gallery lists.
WCPO Editorial Assistant Jane Andreasik provided research.
WCPO Digital Managing Editor Chris Graves edited this report.