James Farrell’s corporate dance card is full.
Besides his full-time job as chairman and chief executive of Illinois Tool Works Inc., a $10 billion manufacturing giant, Farrell juggles directorships at four of Chicago’s 50 largest companies plus the Federal Reserve Bank of Chicago.
Board meetings alone consume roughly a month of his year, but for Farrell, the busy schedule has its rewards: Last year, he took home roughly $220,000 in board compensation on top of his $2.2 million ITW salary and bonus.
Some wonder, however, whether the companies he serves, and their shareholders, are getting their money’s worth. Farrell serves on more corporate boards, local or not, than any other CEO in the top 50.
“Someone is getting short shrift,” said Charles Elson, director of the Center for Corporate Governance at the University of Delaware.
But Farrell, of course, is in good company: About half of the CEOs running Chicago’s top 50 companies sit on at least one other corporate board–a third are on two or more–and direct links among directors and executives of the city’s top firms create a complex web of corporate interconnections.
And while executives say they gain important insights from outside board service and want their companies’ directors to have other board experience, experts have long argued that directors who serve on a large number of boards cannot possibly find time to do them all justice. No studies have shown that boards with the busiest directors consistently deliver poor returns over the long term, but shareholders–including large institutional investors like TIAA-CREF and the California Public Employees Retirement System–are demanding directors who more carefully watch management’s activities and are willing to try to rein in skyrocketing executive salaries.
As a result, more companies now search for board members with fewer outside obligations, and ones who are not too closely connected to one another or to management. But, experts said, Chicago in many ways remains a throwback to the days when a close-knit network called the shots.
Farrell, for example, can be connected to most of Chicago’s 50 largest companies through three or fewer links. And the same names turn up on those firms’ boards of directors with amazing regularity: Big hitters like Molex Inc. co-CEO Fred Krehbiel, Chicago money manager John Rogers and McDonald’s Corp. co-founder and Senior Chairman Fred Turner each sit on four boards of top 50 companies.
Elson figures a single directorship consumes one business month a year in telephone calls, reading, board meetings and other activities.
Multiply that by five in Farrell’s case–Allstate Corp.; Quaker Oats Co.; Sears, Roebuck and Co.; and, beginning this year, UAL Corp. and the Fed–plus his board and leadership roles at Illinois Tool Works, and it is difficult to fathom how he finds time for it all. Farrell declined to be interviewed for this report.
Farrell’s directorship at Quaker would vanish if the company is acquired, as planned, by PepsiCo Inc. later this year. But for now, experts say, Quaker’s board is probably quite busy preparing for the acquisition.
Despite its rigor, Farrell’s lineup pales compared with those of board-sitting professionals nationwide.
Bill Clinton confidant Vernon Jordan, for example, serves on 10 corporate boards across the country, including that of Chicago-based Sara Lee Corp.
Indeed, Sara Lee’s board is full of busy directors–seven of 17 sit on at least four boards. Besides Jordan, there are Willie Davis (12 corporate boards), Rozanne Ridgway (six), Xerox Corp. CEO Paul Allaire (six), Sara Lee Chairman John Bryan (five), Charles Coker (four) and Sara Lee CEO Steven McMillan (four).
Experience called valuable
Bryan, who retired last year as CEO of Sara Lee, says there are benefits from choosing such active directors.
“They are good in many respects because of the broad experience they get,” Bryan said.
In his view, “no-name people working hard” do not necessarily make a board strong. “There are some perfectly useless people who spend all kinds of hours poring over your books. You want people who’ve been around the business world,” Bryan said.
Companies always prefer experienced directors, but more firms are looking for candidates with more balance between significant experience and few other commitments. Because that combination can be hard to find, companies often turn to outside search firms when they have empty board seats.
Peter Crist, head of the global board practice at Korn/Ferry International, said his group’s number of board searches has doubled in the past 18 months.
The No. 1 request from clients is for a board member who is a sitting CEO without multiple board positions. Most clients “won’t even consider somebody who’s on three boards already. Sometimes two is a stretch,” Crist said.
“They’re saying, `If they’ve got three boards, there’s no way for them to pay attention to us,'” he said.
Often, CEOs already serving on outside boards will decline offers for further directorships–or their boards will forbid them from joining additional boards–to avoid becoming overbooked, Crist said.
In general, CEOs and other senior executives should sit on no more than two public-company boards outside of their company, according to guidelines from a 2001 “blue ribbon commission” report from the National Association of Corporate Directors. Others with full-time jobs can serve effectively on three or four boards, while people without full-time jobs, such as retirees, should limit themselves to six public-company boards.
One high-profile Chicago CEO who chooses to focus on his company rather than others is Sears Chief Executive Alan Lacy, who sits only on Sears’ board.
“I don’t do outside boards,” said Lacy, who explains that he simply does not have the time, given the strategic challenges Sears faces.
Directors tend to serve on fewer boards now because more is demanded of them on each board, and because corporate governance issues have become a greater concern for shareholders in recent decades.
One frustrated USG Corp. investor launched an unsuccessful but illuminating proxy battle last year to rid the board of three directors with strong Chicago ties. The investor, Tom Hacker of Santa Monica, Calif., believed a slate of outsiders would be more likely to tie executive pay to stock performance. USG defended its “strong and experienced” board as being instrumental in the company’s results.
Nell Minow, a longtime shareholder activist, said directors now have more to fear than they once did from overextending themselves or getting cozy with management.
“It’s not just that they might be embarrassed, but they are going to get sued at some point,” Minow, editor of The Corporate Library, a Web site devoted to corporate governance, said of directors who serve on too many boards.
In cracking down on directors who are “overboarded,” Minow once blew the whistle on her own father, Newton Minow, former chairman of the Federal Communications Commission and a Chicago lawyer and author.
Because Newton Minow sat on too many boards, she recalls, he missed more than 25 percent of the board meetings at Chicago-based Aon Corp. and therefore was not recommended for re-election by Lens, the activist shareholder organization where she worked.
“How can you do this to your father?” Newton Minow recalled asking his daughter.
“I haven’t told you the worst,” his daughter said. “The California Public Employees Retirement System owns a lot of Aon stock, and they always follow our recommendation.”
According to Nell Minow’s version of the story, her father compared himself with King Lear: “How sharper than a serpent’s tooth it is to have a thankless child.”
Newton Minow was elected anyway, and later said that he “raised her right.”
He retired from the Aon board at its most recent annual meeting, years after the run-in with his daughter’s activism.
Before he retired, one of Newton Minow’s fellow directors at Aon was John Rogers, who defends his own busy board schedule.
“Four is a perfect number, where I feel like I can contribute, and the things I learn at one board help me be a better director on another board,” said Rogers, founder and chief executive of Chicago-based Ariel Capital Management and portfolio manager of the Ariel Fund.
He is a director for Aon, Bank One Corp., Exelon Corp. and GATX Corp., in addition to a host of civic boards. He’s not the only busy member of GATX’s board–its nine directors sit on a total of 25 other corporate boards.
Rogers points out that as part of his job at Ariel, he already does much of the substantial background reading needed to prepare for board meetings. Conversely, Rogers said his directorships are not a distraction, but rather help him with his full-time job.
“I can’t tell you how much I learn. It’s making me a better business person,” said Rogers, who has turned down opportunities to sit on other large corporate boards.
Rogers laments that some critics are too focused on the number of boards on which people sit rather than the experience they bring.
“It’s important [for directors] to know each other well and have the kind of conversations that help with good corporate governance,” he said.
Benefits of tight circle
Crist agreed, adding that Chicago as a city used to benefit from the tight circle of executives who sat on its top boards.
“It’s harder to get people in a big room talking about the civic issues of Chicago than it was before,” Crist said. “Chicago has lost a bit of that cohesiveness.”
Minow argues that Chicago remains “a small town when it comes to corporations.”
On one hand, that means people know and trust each other, and can work things out in a direct manner. But when boards are too insular, she said, “it’s kind of a closed information loop where you’re almost looking into a mirror when you talk to each other.”
