Sarbanes-Oxley rules of ’02 reshape Silicon Valley boards of directors

Silicon Valley companies have reshaped their corporate boards in the wake of the landmark Sarbanes-Oxley Act of 2002 and new stock market rules, according to a survey released today.

Chiseling away at the stereotype that tech CEOs pack their boards with cronies, virtually all directors are independent outsiders, and companies routinely are splitting the roles of chairman and CEO. Moreover, nearly half have officially appointed a lead director, according to an examination of 100 tech companies by Spencer Stuart, an executive search firm that specializes in recruiting directors.

The Sarbanes-Oxley rules, implemented after the Enron fiasco, have been controversial in Silicon Valley. Noted venture capitalist Tom Perkins – who is credited with exposing the spying scandal last year at Hewlett-Packard – has complained that many directors are fixated on complying with rules rather than guiding companies.

But John Ware, senior director of Spencer Stuart’s Silicon Valley office in San Mateo, contends the regulatory pressures have spurred companies to appoint directors with more financial expertise, train them better and weed out directors who were sitting on too many boards to be effective.

The firm’s survey indicates that five years after Sarbanes-Oxley took effect, outsiders comprise 83 percent of directors of valley companies, up from 75 percent in 2003. Ninety-seven percent of companies have a designated financial expert on their audit committees, compared with 11 percent in 2003. And almost two-thirds of valley companies split the roles of chief executive and board chairman, compared with 35 percent of Standard & Poor’s 500 companies.

“Silicon Valley is not a place for cronies,” Ware said. “It is a place to work, and it’s a place where boards are independent from the CEO. That was an evolution at some companies, and not necessarily easily done.”

Yet Silicon Valley firms have made minimal progress on the gender front. Only 15 percent of the directors added to valley boards in the past year were women, leaving less than half the companies with even one female on their boards. Overall, women make up less than 8 percent of the directors vs. 16 percent at Standard & Poor’s 500 companies.

In the valley’s defense, some have countered that women have yet to play a bigger role because they have generally steered clear of engineering and tech careers, leaving too few women in the pipeline to fill executive and director jobs.

But Nayla Rizk, co-author of the survey, dismissed such explanations, noting that women are filling the pipeline in college now.

“You can always make excuses,” Rizk said. “It’s something people have to put their minds to and do something about.”

The survey looked at valley companies with revenues ranging from less than $250 million to more than $5 billion. Data was culled from the most recent proxies filed by June 30, with data for nine companies covering fiscal year 2006. Among other highlights:

• More work: Valley boards typically meet nearly nine times a year, up from about seven times in 2003. And the audit committees meet nearly 11 times, about four extra meetings than in 2003.

• More pay: As the roles of directors have expanded, so has their pay. The average retainer has risen 42 percent to $35,600, with larger companies generally paying at least $50,000. Companies pay even more of a premium to members of the audit committee. Valley firms are more likely than S&P 500 firms to mix in stock options and restricted stock (88 percent vs. 42 percent).

Of the 48 directors whose pay was reported under rules that include the estimated value of stock options, the average director earned more than $238,000.