In 2003, the year after the passage of the Sarbanes-Oxley Act, Spencer Stuart set out to examine the board composition and practices of the top technology companies in Silicon Valley. Given the challenging economic landscape and governance changes that were afoot as a result of Sarbanes-Oxley and new stock exchange listing requirements, we wanted to track the implementation and impact of the new governance requirements to better understand how Silicon Valley companies would change. We wondered at the time how the composition and governance practices in Silicon Valley differed from the S&P 500, if at all, and whether companies in the region were keeping pace with compliance milestones at a similar rate.
With those questions as a backdrop, we examined data and trends in board composition, board practices and director compensation for 100 of the top technology companies in Silicon Valley, paying particular attention to data that we anticipated would be impacted by the regulatory changes. This information was presented in our annual Silicon Valley Board Index.
In fact, we did see some differences between the 100 Silicon Valley boards we surveyed and S&P 500 boards in adopting corporate governance best practices. However, we observed many similarities as well. Silicon Valley boards were on par with their S&P 500 counterparts in outside director representation, frequency of board meetings and the creation and independence of mandated board committees (audit, compensation and governance).
We have continued to track changes in board operation and corporate governance and their impact on Silicon Valley boards over the years. Corporate boards, including those in Silicon Valley, look very different today than they did 10 years ago. They are more independent from management, more financially savvy and more diverse. We highlight below some of the ways Silicon Valley boards have changed in the past decade and how they are — and are not — different from companies in other industries and regions.
Board independence
Although Sarbanes-Oxley did not expressly address board composition, increasing the independence of public company boards was a primary objective of the legislation. New NASDAQ and New York Stock Exchange listing requirements established definitions for independent directors and required that independent directors make up a majority of a listed company’s board of directors. Boards also have adopted board leadership models intended to increase the independent oversight of the board.
- The percentage of independent directors on Silicon Valley boards has increased from 75 percent in 2003 to 80 percent in 2012. Silicon Valley trails the S&P 500 in this area; 84 percent of S&P 500 directors today are independent.
- Silicon Valley boards have been much more aggressive in moving to a leadership model that divides the chair and CEO roles than the S&P 500. In 2004, the first year we looked at this data, 45 percent of Silicon Valley companies split the roles between two people; today 74 percent do. By comparison, 43 percent of S&P 500 boards separate the roles.
- On the other hand, Silicon Valley boards have been less likely to specify a lead or presiding director. Forty-seven percent of Silicon Valley boards today have a lead or presiding director, compared with 92 percent of S&P 500 boards. In 2003, only 12 percent of Silicon Valley boards had a lead or presiding director.
Director recruiting and board composition
Board nominating and governance committees assumed the primary responsibility for director recruitment in the wake of Sarbanes-Oxley and new listing rules requiring these committees be composed solely of independent directors. The need for finance expertise for the audit committee and the decision by many CEOs to curtail their outside board activity also contributed to the changing mix of directors around the board table.
- In 2003, just 11 percent of Silicon Valley boards had identified a financial expert for the audit committee; a year later, 77 percent had. By 2005, all but one board had an audit committee financial expert.
- Boards have aged in the past 10 years. The average age of independent directors increased from 57 in 2003 to 61 today, although Silicon Valley boards are younger than their S&P 500 counterparts. Among the S&P 500, the average age of independent directors increased from 60.1 in 2002 to 62.6 today.
- One reason for the trend: boards are pushing back mandatory retirement ages to keep experienced directors. Ten years ago, 2 percent of S&P 500 boards set their mandatory retirement age at 75 or older, compared with 22 percent today. Meanwhile, the average mandatory retirement age for Silicon Valley boards rose from 69 in 2003 to 73 today.
- Silicon Valley also has seen a noteworthy increase in female representation on boards. Sixty-three percent of boards have at least one female director, compared to 41 percent in 2003. Despite the increase, Silicon Valley trails the S&P 500, where 91 percent of boards have at least one female director.
Director compensation on the rise
As board responsibilities have grown, director compensation has increased.
- The average annual cash retainer for Silicon Valley directors more than doubled from $24,972 in 2003 to $50,720 today, which is a little more than half of the S&P 500 average of $96,649.
- Fewer Silicon Valley boards are providing meeting attendance fees to directors: 52 percent in 2003 versus 23 percent today, mirroring a similar decline among S&P 500 boards.
- Stock options also are a less common component of director compensation in Silicon Valley. In 2003, 91 percent of boards provided stock options to directors, compared with 46 percent today. Even as their use has declined, stock options continue to be more prevalent in Silicon Valley than in the S&P 500, where only one-quarter of boards grant stock options to directors.