At Virginia’s biggest companies, who sits at the table?
- October 30, 2008
by Paula C. Squires
For nearly two decades, the soft but precise voice of Anne Marie Whittemore has resonated through Virginia’s board rooms.
As a director at some of the state’s largest publicly traded companies, Whittemore has had a say on everything from CEO pay to strategic direction.
She’s easily one of the most experienced and powerful corporate directors in Virginia.
Gracious and self-effacing, Whittemore is not one to brag. Indeed, she dismisses the mention of power. Yet, she was the first woman to make partner at Richmond-based McGuireWoods, one of the country’s largest law firms. And her areas of expertise — including corporate governance and securities litigation — earned her a spot on the McGuireWoods’ team that worked on litigation involving Enron, WorldCom and Tyco. These poster-child cases of corporate fraud in the early part of the decade led to the reform legislation of Sarbanes-Oxley.
As Whittemore likes to tell clients, “I sit on both sides of the table.” As a director, she understands the importance of good legal advice. As a lawyer, she got an opportunity in the Enron-era cases “to look after-the-fact at what boards did and didn’t do and to have some understanding of how situations arose as they did.”
With those credentials, it’s not surprising that Whittemore, 62, has been recruited by companies in and outside Virginia. Currently she heads the Compensation Committees at Owens & Minor Inc., a Fortune 500 medical supply distributor based in Richmond; and Albemarle Corp., a manufacturer of specialty chemicals that’s relocating from Richmond to Baton Rouge, La. Whittemore also chairs the Nominating and Governance Committee for T. Rowe Price Group Inc., a Maryland-based global investment firm.
That her gender helped crack open the board room door is a fact Whittemore readily acknowledges. “There is no question that I have had opportunities to serve as a director because I’m a woman,” she says. “I’ve been the beneficiary of that opportunity which I greatly appreciate, and I hope that I have lived up to the expectations of those who have given me the opportunity to be — in most of these situations — the first woman who has served on these boards.”
While diversity remains a key concern, boards today are struggling with myriad issues. The economy is tilting toward recession, following huge routs in the stock market. Throw in proxy battles, shareholder resentment over CEO pay and tougher Sarbanes-Oxley regulations, and the stereotypical image of a cushy director’s post starts to fade. In fact, some boards are having a harder time getting directors.
At such a critical juncture, Virginia Business decided to examine the boards of Virginia’s largest public companies. Who sits around these tables? Are companies run by small knots of the same powerful people or by diverse groups? How much are directors paid? What is a typical term of service?
A review of the recent proxies of 38 companies with annual revenues of at least $1 billion each provided some answers. Assisting Virginia Business in the research was human resources consultant Findley Davies Inc. of Charlotte. Virginia Business also interviewed several board members to discuss their roles. Besides Whittemore, these directors spoke with the magazine: J. Alfred Broaddus Jr., retired president of the Federal Reserve Bank of Richmond who serves on four public company boards; Eddie N. Moore Jr., president of Virginia State University and a director on two boards; Linda D. Rabbitt, CEO of the private Rand Construction Corp. and a director on two boards; and Thomas F. Farrell II, chairman, president and CEO of Dominion Resources Inc. Farrell also serves on the board of Altria Group.
What did the survey reveal? A few of the takeaways:
• Virginia boards are slowly becoming more diverse. Women hold 11 percent of the more than 400 director seats on the 38 boards. This compares with 14.8 percent of board seats held by women at U.S. Fortune 500 companies. However, 32 of the 38 firms (or 84 percent) have at least one woman on the board.
• While proxies do not provide definitive information on ethnicity, they do reveal the names of directors, and several African Americans are serving. Some of these directors include Dr. Frank S. Royal, former state Sen. Benjamin J. Lambert III, Kay Cole James, Karen Hastie Williams and Moore among others.
• The average age of a director is 60.4 years.
• The average tenure for board service is eight years.
• The average annual cash compensation in fiscal 2007 for an outside director (for which Virginia Business has information) was $79,100.
In many cases, the cash component helps directors pay taxes on stock awards. Typically, a significant portion of director compensation is paid in stock to align the pay of board members with the interests of shareholders. Individuals with chairman titles (including?CEOs) who are fully employed by a company do not receive director fees. They are only paid to outside directors.
In 2007, the highest paid outside director was Shaun F. O’Malley. The lead independent director for McLean-based Freddie Mac received $323,811 in total cash compensation. In addition, Freddie Mac reported $276,068 in equity compensation for total direct compensation of $599,879, according to the Federal Home Loan Mortgage’s Corp.’s most recent proxy. (The federal government took over the mortgage finance giant in September because of financial problems stemming from the sub-prime mortgage crisis.)
These days boards of companies listed on the New York Stock Exchange are required to have a majority of independent directors. And only independent directors can serve on audit, nominating and compensation committees. Overall, boards are charged with these key functions: oversee top management, direct strategic planning and develop policies that help the success of a company and its shareholders.
Virginia Business’ examination of the boards of the largest publics turned up plenty of retired executives, some politicians, university presidents, lawyers and entrepreneurs. Royal, a physician, is a regular on the list. He currently sits on three boards and chairs the Compensation, Governance & Nominating Committee for Fortune 500 Dominion Resources. Royal, 68, declined to be interviewed.
More diverse representation
When it comes to diversity, Moore sees change. “Diversity in the board room is moving slowly, but moving.” Moore, 59, is a former state treasurer of Virginia and former executive with Gulf Oil Corp. He serves on the boards of Owens & Minor and Universal Corp., a Richmond tobacco company.
Women’s pioneer Whittemore also sees progress. For the last five years, she has attended an annual meeting at Stanford University where directors gather from all over the country. “The first year I went, I would say there was at most 10 percent that were women,” she recalls. Every year since, though, the numbers of women and minority representatives have grown. “I would dare say the percentage is now 40 percent.”
The bottom line, say board directors, is that companies should continue to recruit diverse candidates. “It is good policy and a best practice to reflect the community that you serve,” says Moore.
So, how do boards recruit candidates? Referrals may come from a board’s own nominating committee. Sometimes, outside search firms are retained to help fill a vacancy. Who ultimately gets picked, though, to stand for election may depend upon the profile a company is looking for at a given time, says Whittemore. For instance, a board may need someone with experience in a particular industry, finances or global business experience.
Some executives are snatched up almost as soon as they retire. A case in point would be Broaddus. After leaving his post at the Federal Reserve in July 2004, several boards courted the well-known economist. Broaddus, 68, was later elected as a director at four public companies where he serves today: Markel Corp., a specialty insurer in Richmond, Owens & Minor, Albemarle and T. Rowe Price.
Directors on Virginia’s boards also include two former politicians and a current state senator. Former Gov. Gerald Baliles serves on the boards of Altria and Norfolk Southern Corp., while Lambert is a director at Dominion Resources and SLM Corp. Virginia state Sen. Walter A. Stosch is a director on the board of Universal Corp.
University presidents also are in demand. Besides Moore, VCU’s President Eugene Trani serves on the boards of Universal and LandAmerica Financial Group Inc. Richard Morrill, the former president of the University of Richmond and its current chancellor, holds a seat on Albemarle’s board.
Findley Davies’ examination didn’t turn up the same small groups of people at board after board. It did show that Whittemore and Broaddus serve on three boards together: Albemarle, Owens & Minor and T. Rowe Price.
Whittemore is former chairman of the Federal Reserve Bank of Richmond and headed the search committee that made Broaddus president in 1993. “I think that’s one of the best decisions I’ve ever been involved with,” she says. Federal Reserve presidents cannot serve on corporate boards. So when the chairman and CEOs on the boards where Broaddus now serves learned he was retiring, “whether or not they knew me, they were going to see if it were possible to have Al come on their boards,” says Whittemore. “I, knowing him as I did, encouraged them as did the other board members who knew Al. Of course Al is very prominent, very well known, very well regarded.”
A major time commitment
Sarbanes-Oxley gave audit committees increased responsibility for the accuracy of financial statements. The regulations also require compensation committees to make greater disclosures in proxy reporting. Consequently, serving as a director takes more time today than in earlier years.
Rabbitt, who sits on the boards of human resource consultant Watson Wyatt Worldwide Inc. in Arlington and Toronto-based Brookfield Properties, says she attended a conference recently on directorships sponsored by the Deloitte accounting firm. “They said, ‘If you sit on a board, you should estimate about 250 hours a year.’”
Asked how much time he puts in, Broaddus responds, “at least 40 hours a week, if you include all the background reading you need to do.”
Boards may meet in full session as many as seven times a year. Many outside directors also serve on committees, which meet separately.
Pay varies among boards and even directors on the same board. It depends on such factors as number of meetings attended, committee assignments and whether someone serves as the lead independent director, which carries more responsibility. For instance, this board member presides over the executive sessions of the outside directors and is frequently a point of contact for shareholders. A review of the directors’ pay mentioned in this story showed a range of $35,468 in total cash compensation last year for Rabbitt — her payment for serving on Watson Wyatt’s board — to $161,279 for Royal, a long-time board member and lead independent director for Dominion.
Rabbitt, 59, founder and CEO of Rand Construction in Alexandria, says she wasn’t drawn to board service because of the money. “My own company provides me with a very nice lifestyle.” Instead, she thrives on the challenge and the collaborative benefits of being with other business-savvy directors. “It makes you think bigger thoughts about your own business.”
As CEO of a company that generates $200 million a year in revenue, Rabbitt brings experience in operational skills. But, she adds, CEOs have to use good judgment. “You really can’t sit on but a couple of boards and do everyone justice.”
Corporate governance policies may require CEOs to get board permission before accepting outside directorships. In Virginia, 12 of the 38 large public company CEOs sit on at least one outside board. John A. Luke Jr., CEO of Richmond-based MeadWestvaco, sits on three boards, in addition to his own.
Dominion’s Farrell says one other for-profit board is enough for him. “Everybody has to make their own judgment about that,” he says. “Some boards can be very active, and there is a danger that it could take up too much of your time.” Farrell, 53, was elected to Altria’s board this year. Openings on the board occurred after the company spun off cigarette manufacturer Philip Morris International.
“I was contacted by the chairman of the Nominating Committee,” recalls Farrell. After getting the okay from Dominion’s board, Farrell agreed to sit for election. “Altria is extremely well run,” he says. “Its business is different in many ways than Dominion’s, and similar in many ways. So I thought it would be a good experience for me …” Dominion is one of the country’s largest energy producers.
Serving as a director, says Farrell, gives him a different perspective. “Your role is to represent the interests of the shareholders and to support the management team … There’s no question that I’ve brought back valuable lessons.”
In some cases, boards are having a harder time recruiting directors because of greater exposure to personal risk. “Now granted that WorldCom was an extreme situation, but those directors had to contribute personally to the settlements that occurred,” says Whittemore. “In all of this major litigation, it’s not unusual that the insurance runs out, and directors are sitting there with their assets on the line.”
The remedy? “Do your due diligence and know the company. Know the executives. Know the other board members,” she advises.
Still, many directors are saying yes to the opportunity to serve. Perks include prestige, stock grants — whose values are anything but guaranteed in today’s volatile markets — and sometimes foreign travel. Albemarle, a global company with operations in Europe and the Far East, took its board to China last month. Broaddus was looking forward to meeting with Chinese officials in Shanghai and Beijing, the site of this year’s Olympic Games.
With proxy fights on the rise, board service at times might feel like an Olympic competition. Last month, Circuit City CEO Philip Schoonover resigned abruptly amid pressure from activist shareholders. He was replaced by James A. Marcum, a turnaround specialist elected to the company’s board in June at the insistence of investor Mark Wattles, one of the largest shareholders of the struggling consumer electronics retailer.
Media General Inc., owner of Virginia Business magazine, saw three new directors elected to its board this spring after Harbinger Capital Partners, a hedge fund, bought a chunk of stock and sponsored a dissident slate. While Harbinger didn’t have a majority, it called for changes in the company’s operations.
Whittemore has served on Owen & Minor’s board for 17 years, Albemarle’s board for 12 years, and T. Rowe Price’s board for 13 years. Not surprisingly, she sees institutional knowledge as a positive. “Wholesale changes on boards do not promote good functioning,” she says.
As for activist shareholders: “Shareholders certainly have the right and should be heard,” she says. Yet, Whittemore worries about “a tension between groups of shareholders who have short-term goals — who are in it for the quick profit — versus shareholders who are longer term and committed to the company.”
As seen in the government’s $700 billion bailout of the financial services industry, CEO pay continues to be a sore subject. Some activist groups were sponsoring “say on pay” proposals even before the bailout and huge downtowns in the market. After hearing from angry constituents, Congress added language to last month’s bailout legislation to prevent CEOs of failed companies from walking away with golden parachutes.
“Given some of the abuses that we’ve had, it’s not hard to understand why many people feel that way,” Broaddus says of public sentiment about CEO compensation. [In 2007, the average annual pay package for CEOs of large public companies in Virginia was $6 million.]
VSU’s Moore ventured that it may be time to rethink executive pay. While quick to note that he doesn’t feel executive compensation is out of line with the responsibilities at the companies where he serves on the board (Universal and Owens & Minor), Moore did offer this thought: “What I do think is contributing to the problem is the emphasis on increasing earnings, increasing earnings per share, better cash flow position. When you start tying incentives to that, you’re about dictating a higher level of risk. I think we should consider some other measures than the absolute profit measures as the basis of pay of executives.”