Shareholders like their corporate boards stocked with independent directors-men and women unencumbered by close ties to the company or its executives. The reasoning: Who better to act in the interest of investors?Today, most large companies can boast that their boards are overwhelmingly independent under rules laid down by the stock exchanges. Yet some of those independent directors have close ties to the companies and executives they oversee, or to one another.
John Hennessy, president of Stanford University, has served as an independent director of Google and then its new parent company for 12 years. During that time, the company has given Stanford $24.9 million in donations, scholarships and payments for research services and patent licenses.
Andrew McKenna has been an independent director of McDonald's Corp. for a quarter century and its chairman for 12 years. He was also the longtime chairman of a family-owned paper-goods company and for a time had a stake in a promotional-items maker, firms that sold a combined $71 million of french-fry bags and other goods to McDonald's over 22 years.
Charles Gifford and Thomas May serve together on the board of Bank of America Corp. Mr. May, deemed independent, once sat on a committee that oversaw Mr. Gifford's pay as top executive of another bank. Mr. Gifford serves on a committee overseeing Mr. May's pay for running a utility company.
Companies generally maintain that they follow rules about whom they label independent and that those directors are unbiased. A Stanford spokeswoman said Mr. Hennessy didn't benefit personally from Google's donations, which constitute just a fraction of the school's total. Mr. McKenna said his outside transactions with McDonald's didn't compromise his independence. Bank of America said Messrs. May and Gifford declined to comment.
Board independence has received more attention in recent years as activist investors have gotten more powerful. Activists, who build stakes in companies and push for change, have been critical of alleged conflicts of interest and have sought to unseat directors and CEOs perceived as having them. Investors and regulators alike are scrutinizing board actions more closely, and directors sometimes have been held accountable for corporate misdeeds and missteps.
Stock-exchange rules define independence as a lack of material ties to the company. The rules explicitly bar certain directors from being considered independent, including former employees who have been gone less than three years, close relatives of top executives, and anyone who has "significant" financial dealings with the company. Beyond those prohibitions, boards decide whether directors measure up as independent, subject to oversight by the exchanges.
More scrutiny
Increased scrutiny of corporate governance has meant that fewer boards are headed by company chief executives. Just under half of the boards of S&P 500 companies are led by their CEOs, down from two-thirds a decade ago, according to a Wall Street Journal analysis of data through Oct. 31 that was provided by MSCI ESG Research. Most S&P 500 companies are U.S. based.
Sixty-one percent of S&P 500 boards have an independent "lead director" to oversee consideration of issues such as CEO performance and succession planning. Nevertheless, nearly half of the S&P 500 chairmen who aren't sitting CEOs once were executives at those companies, including many former CEOs, the data indicate.