June 15, 2012 at 7:59 AM ET
Often, the media discuss the issue of high CEO pay, but what about high pay for members of the board? More than a dozen public company boards had directors whose compensation averaged more than $500,000 in 2011. That is greater than the compensation of some S&P 500 CEOs — CEOs who work full-time while board members do not.
Can these directors really be worth so much to the companies they govern? 24/7 Wall St. examined the issue and found that many of these highly paid boards share several traits, which offer clues as to what differentiates them from boards that are paid modestly.
The debate over board governance practices and the value of boards as an important part of large company management has been prominent in the news recently. A multibillion trade at JP Morgan raised the question of whether board risk-management practices are effective at this and other banks.
Aubrey McClendon, the CEO of Chesapeake Energy, took out hundreds of millions of dollars in loans to buy into many of the company’s drilling operations. McClendon stood to make several times his annual compensation if these investments paid off. The board of Chesapeake did not question this conflict — a decision that contributed to the board’s restructuring by outside investors, including corporate raider Carl Icahn. At least five current Chesapeake directors lost their positions. Coincidentally, the Chesapeake board pay level is high enough to make this 24/7 Wall St. list.
Many of the boards on this list govern corporations in which the current CEO is also the founder, including Amazon.com, Oracle, Chesapeake Energy and Salesforce.com. At Tyson Foods, the CEO and directors are members of the founding family. So it could be that CEOs who control their companies’ management also control their boards and how these boards are treated.
In many other cases, the companies on this list have one board member who received an extremely large compensation in 2011. Often, these are former CEOs or other high-ranking executives who now serve as chairmen, do part-time consulting work with their former employer or both.
However, just because a company pays its board a lot does not necessarily mean it is excelling financially. Of the top 12 companies, six have lower stock prices compared to two years ago (as of June 4). Seven of the companies had lower profits in 2011 compared to the year earlier.
To identify the highest-paid boards of directors, 24/7 Wall St. relied on a special screen generated by GMI Ratings, a corporate governance ratings firm. GMI ranked the top 50 companies with the highest average board of director compensation. The screen also included the number of directors, the company’s position in the Fortune 500 and whether the company is on the Russell 1000 and/or S&P 500 stock indices.
24/7 Wall St. then took the compensation of the top 12 companies, verified the company data through their proxy statements, vetted directors who deviated from the trends and considered director backgrounds to gain insight into pay practices. We also noted each company’s change in share price over the past two years, along with the net earnings in 2010 and 2011.
These are the 12 companies with the highest-paid board of directors.
Hewlett-Packard is an unlikely company to be at the top of companies with highest board pay. HP shares plummeted more than 50 percent in the past two years. Part of the company’s woes stem from a decline in demand for many of HP’s products, notably its PCs. Furthermore, the company has struggled to keep a permanent slate of executives and board members. Former HP CEO Mark Hurd was fired in August 2010, following discrepancies in his expense accounts. Former CEO Leo Apotheker served less than a year in his position before being terminated by the board in September 2011.
Board members have changed just as quickly as have the CEOs. Four members resigned shortly after the Hurd scandal, while directors Lawrence Babbio and Sari Baldauf both departed earlier this year. The average compensation is greatly inflated due to Executive Chairman Ray Lane’s payment of $10,648,366 in fiscal year 2011.
The CEO and founder of Amazon, Jeff Bezos, is also its largest shareholder (19.5 percent of common stock), which gives him considerable leeway in determining the compensation of the board members. Amazon directors are not paid in cash but do receive restricted stock and options awards exclusively, which is unusual for a publicly traded company.
Three independent directors did not receive compensation for their board services in 2011: John Seely Brown, Alain Monie and Jonathan Rubinstein. However, Brown and Monie received 3,600 restricted shares in February 2012. Meanwhile, Rubinstein was the only director paid in 2010, receiving $883,350. The only paid director not to receive $927,100 was Blake Kirkorian, who joined the board of directors in September 2011. He was paid $786,564.
3. Fidelity National Information Services
Fidelity National Information Services is the surviving entity of a 2005 merger between Certegy and Fidelity National Financial, or “Old Fidelity.” The board is composed of members from both Old Fidelity and Certegy.
The clear outlier in this case is William Foley, who made $3,488,791. He is currently the vice chairman of the board and was executive chairman of the board until February 2011 and chairman until March 2012. Still, even without Foley in the mix, the average director compensation would be well over $300,000, a sizable pay package for a part-time job.
Oracle’s co-founder and CEO, Larry Ellison, has significant power to shape the board due to his large ownership of common stock (22.4 percent). Donald Lucas, the highest-paid director, made $1,023,231 from Oracle in fiscal year 2011. He has served on the board of directors since March 1980. He was chairman of the board from October 1980 through May 1990 and served as chairman of the executive committee from December 1985 through June 2008, when the position was eliminated. Oracle has a board beefed up with insiders. The chairman is a former CFO, and both co-presidents, including former HP CEO Mark Hurd, serve on the board.
5. Northrop Grumman
Unlike many other companies on the list, the outlier at Northrop Grumman is not a current or former executive. Rather, the average compensation figure is skewed because of the compensation of the lead independent director, Lewis Coleman, who was paid $5,652,356 in 2011. Most of his payment was not in cash or stock. The company shelled out a whopping $5,203,559 in costs “related to security protection related to Mr. Coleman.” This included $1,515,536 for “personal and family member travel on company aircraft” and a $174,953 “tax-gross up.” That’s a pretty good deal, given that he probably gets paid a pretty penny to serve as president and chief financial officer of DreamWorks Animation.