The Conference Board Governance Center Blog

When It Comes to Governance Practices, Size Matters

Last week, The Conference Board issued The 2011 U.S. Director Compensation and Board Practices Report. The report is based on a survey of 334 public companies, jointly conducted by The Conference Board, NASDAQ OMX, and NYSE Euronext between April and June 2011. The report found that, with respect to a number of corporate governance practices, company size matters.

Among the 334 companies participating in the survey, smaller companies were:

• Less likely to require that directors be elected by a majority vote, rather than a plurality (80 percent of the largest companies by revenue have a majority vote rule, while a significant majority of companies with annual revenues of less than $1 billion retain a plurality vote rule)
• More likely to have a “classified” board of directors, where directors serve for multi-year terms (less than 15 percent of the largest companies by revenue have classified boards, while a majority of companies with annual revenues of less than $1 billion have classified boards)
• Less likely to have at least an annual review of CEO succession plans (a majority of the largest companies by revenue have an annual review of CEO succession plans, while 31.6 percent of the smallest companies by revenue review CEO succession plans only upon a change in circumstance, such as illness or retirement)
• Less likely to have a management risk committee or a dedicated risk officer (57.1 percent of the largest companies by revenue have management risk committees and 30 percent have chief risk officers, while only 15.8 percent to 17.2 percent of companies with annual revenues of less than $500 million have management risk committees and none of the smallest companies have chief risk officers)
• Less likely to have a policy against “gross-ups” (40 percent of the largest companies by revenues have anti-gross up policies, while none of the smallest companies and only 18.8 percent of companies with annual revenues between $100 million and $499 million have such policies)
• Less likely to have a diverse board

On the “plus” side, smaller companies were more likely than their larger counterparts to:

• Have an independent board chair (57.9 percent to 70 percent of the smallest companies by revenue separate the roles of CEO and board chair, while 32.7 percent of the largest companies separate such roles)
• Have a formal policy on board/shareholder engagement (42 percent of the smallest companies by revenue have such a policy, while only 21.4 percent of the largest companies by revenue have such a policy)
• Require directors to attend annual shareholder meetings (78.9 percent of the smallest companies by revenue require directors to attend shareholder meetings, while 68.4 percent of the largest companies require attendance)

Directors of smaller companies, on average, had lower overall compensation than directors of larger companies. Median total compensation of board members ranges from $46,843 in the smallest companies to $190,000 in the largest. Despite the difference in compensation, the workload for these directors was similar to that of their peers at larger companies. The average number of in-person board meetings per year is six, with an average of three or four additional meetings or discussions by phone.

Directors of smaller companies were also less likely to receive a majority vote in support of their re-election (12 percent of directors at companies with revenues of $499 million or less, compared to 3 percent for all non-financial services companies).

Many of these distinctions can be attributed to the differences in resources and scale between smaller and larger companies. In a world where compensation is driven by research against peer companies and based at least in part on the size of revenues, employees and similar metrics, for example, it is not surprising that directors’ compensation at smaller companies would be lower than at larger companies, just as it is for executives.

Smaller companies often have fewer resources dedicated to governance matters than larger companies. This relative lack of resources could have contributed to the larger number of directors from the smallest companies failing to receive majority support for re-election.

In a governance world where the discussion about new measures often boils down to a debate between the need for regulation and the efficacy of “private ordering,” some might argue that the slow adoption rates of certain governance practices by smaller companies demonstrates the need for a regulatory solution. On the other hand, many of these differences in practices may be attributed to differing circumstances that a one-size-fits all approach, typical of regulation, would not support.

So what is the take-away for smaller companies?

• Expect to see greater pressure to adopt certain governance practices in the future, such as majority voting and anti-gross up policies. In 2011, ISS reports that 82 companies received shareholder resolutions to adopt majority voting. After more than two dozen withdrawals, these resolutions went to a vote at 36 companies, and averaged 59.2 percent approval.
• Know how your company’s policies and practices differ from those of its larger counterparts, and be prepared to explain the rationale for those differences.
• Understand the position of governance rating agencies and your investor base on key governance practices, including those that can impact director elections, and communicate with your shareholders before the proxy season begins about practices that differ from rating agency/investor positions.