Data show that the longer someone serves on a company’s board of directors, the less committed that director is to their primary tasks, according to Jim Westphal, a professor at the University of Michigan’s school of business. They ultimately turn into “zombie directors,” according to Patrick McGurn, special counsel for Institutional Shareholder Services.
And as their oversight begins to falter, shareholders (as individual investors, mutual funds, and pension funds) are often the ones who ultimately suffer.
Long live the board!
So let’s take a look at five companies that are lining their directors’ and executives’ pockets — and could have detrimental long-term effects on the business:
| Company | Average Board Tenure | Average Board Compensation | 5-Year Absolute Stock Return | Problem |
|---|---|---|---|---|
| Tootsie Roll Industries, Inc. (NYSE:TR) | 30 years | $84,533 | 49% | CEO Melvin Gordon and his wife, President Ellen Gordon (ages 93 and 81, respectively), who are also board members, own the bulk of the company’s stock and receive some cushy perks, including access to a company plane valued at more than $1 million and $10,000 a month to assist with the cost of an apartment. They have established what The Wall Street Journal calls a “secret empire” of board members who refuse to share information with analysts and shareholders. |
| Oracle Corporation (NASDAQ:ORCL) | 14.8 years | $615,866 | 56% | Oracle’s board — chock-full of insiders — has some of the highest-compensated board members in the world. |
| Abercrombie & Fitch Co. (NYSE:ANF) | 8.4 years | $214,546 | -24% | These heavily entrenched board members continue to lavishly pay the company’s CEO, regardless of the company’s performance. CEO Michael Jeffries was paid $8.2 million last year, despite the stock dropping more than 30%. |
| Fidelity National Information Services (NYSE:FIS) | 5.8 years | $1,802,249 | 114% | The average board compensation for this company is inflated because they agreed to convince 68-year-old director William Foley II to stick around another three years. The tab for that move? $9.5 million cash. |
| Goldman Sachs Group, Inc. (NYSE:GS) | 5.7 years | $419,958 | -8% | Pay for board members at Goldman has steadily risen since the financial crisis. The company says it’s to reflect the high level of experience needed, but — as mentioned above — rising pay makes it less likely for directors to shake things up, regardless of how necessary it may be. |
Source: Author’s calculations based on SEC filings. Board tenure includes employee directors; board compensation does not include employee directors.
Of course, when a board of directors is so entrenched with a company’s management — monetarily, through tenure, and through personal friendship — replacing a board of directors can be a tough battle. So it may be a lost cause.
Nevertheless, it serves as a good reminder to be cognizant of how independent the board of directors really is before investing in shares of any publicly traded company.
The article 5 Companies That Need to Put Their Board Members Out to Pasture originally appeared on Fool.com.
Adam Wiederman has no position in any stocks mentioned. The Motley Fool recommends Goldman Sachs. The Motley Fool owns shares of Oracle.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
