Emerald Group Publishing Limited
Copyright © 2004, Emerald Group Publishing Limited
Emeritus directors: a job for life?
Catherine M. DaltonThe David H. Jacobs Chair of Strategic Management, Kelley School of Business, Indiana University, Bloomington, IN (firstname.lastname@example.org).
Dan R. DaltonThe Harold A. Poling Chair of Strategic Management, Kelley School of Business, Indiana University, Bloomington, IN (email@example.com).
With the exception of serving as a justice of the United States Supreme Court, there are few employment opportunities where a person might hold a position or title for life. Interestingly, however, and with increasing frequency, there is an apparent trend for corporate directors to enjoy a form of this employment immortality by being anointed "directors for life." A director with this privilege is referred to as "director emeritus." The emeritus designation is not without precedent. In fact, the term is commonly used in the academic community and occasionally found in not-for-profit organizations. The prevalence of the emeritus designation has, however, only recently gained prominence in corporate boardrooms.
An emeritus designation typically signifies one's passage into retirement. For example, a professor who has served a university with distinction for many years may have the title "professor emeritus" bestowed following his or her retirement. Individuals who have distinguished themselves in their leadership of not-for-profit organizations, too, might receive this distinction – as in "CEO emeritus" of the Red Cross. The common element in both examples is that an individual served in a position of high rank, presumably with distinction, and retired in good standing. It should also be noted that these examples represent honorary titles that usually confer no special privileges upon the honoree and do not convey continued decision-making authority.
If emeritus titles for retiring board members had this character, they would be of little consequence and of no concern to the corporate governance community (e.g. institutional investors, the SEC, NYSE, NASDAQ, Conference Board, Institutional Shareholder Services, Investor Responsibility Research Center). A review of recent proxy materials, however, clearly suggests that: (1) corporate emeritus titles have little in common with their non-profit counterparts; and (2) there is little consistency even in the corporate environment regarding the use of the emeritus title, its guidelines, and its privileges. Based on our analysis, it is apparent that directors emeritus, save the title, have little in common across organizations.
There is another fascinating aspect of the emeritus designation in the proxy materials. Beyond noting that the company does, in fact, have an emeritus director or several, there is no additional information. This is not an issue when the title is honorary. When it is not honorary, which is routinely the case, this lack of disclosure is potentially troublesome is today's governance environment. While shareholders approve the election of board members at the annual shareholders' meeting, it is the board, not shareholders, that appoints directors emeritus. To the extent that such directors enjoy decision authority or perquisites, disclosure is essential. To our knowledge, there is no general source that one might consult for guidance on the status of emeritus board members, their efficacy, or their related rights and privileges. Clearly, however, there are a host of issues that a board might consider before appointing emeritus members and deciding on their appropriate role.
Not all retiring directors receive the emeritus designation; it is not automatic. Accordingly, one of the first challenges for a board considering the use of the emeritus designation is what constitutes "distinguished service," or what other qualifications apply. Would it include length of service or having reached mandatory retirement age? Presumably, few boards would authorize this title for a person who served only briefly. Would the board be more likely to bestow the title to retiring chairpersons of the board? Or to lead directors? The chairpersons of key committees? We would not presume to prejudge a board's qualifying criteria, but would strongly suggest that these criteria be clearly stated.
Term – for life?
While Federal judges are appointed "for life," that does not mean that there are no circumstances where they can be removed from the bench. This is an entirely sensible approach for emeritus directors as well. In that spirit, there are several issues that a board may want to consider. Emeritus positions for life or extended periods may limit the discretion of future boards as well as firms' management. Remember that many emeritus-titled persons continue to serve as active board members with all associated privileges. In this case, a decision that such members would not ever be subject to reelection, or review, or some evaluative process would presumably be made with great care.
Also, under what circumstances might the emeritus title justifiably be revoked? What recourse should the corporation have, for example, if an emeritus director were to enter an employment or consulting agreement with a competitor, or disclose proprietary information, or engage in criminal behavior? Even in cases where the emeritus designation is honorary, activities such as we have described may result in embarrassment for the firm and warrant that the title be rescinded. Also, while it is not pleasant to contemplate, the board will also want to consider its prerogatives with regard to an emeritus director who develops an incapacitating disability.
Perhaps the safer course is that emeritus directors have a specified term, and then are subject to some internal review. This guideline may be particularly useful in the case of "active" emeritus directors who are essentially indistinguishable from their non-emeritus board colleagues.
The active emeritus director: participation and compensation
Our review of the proxy materials suggests that there are two basic models for emeritus director participation – "voice" versus "vote." In the voice approach, emeritus directors are invited to attend full board meetings (and sometimes committee meetings) as they wish. There is, however, no attendance requirement. In these meetings, the emeritus director may be a full partner in the discussion but does not have a vote. The alternative model provides for full participation at will and the right to vote. This is a critical distinction and one that, for us, must be fully disclosed.
Another aspect of the proxy materials is the issue of director emeritus compensation. In fact, in virtually all cases, the director compensation section of the proxy material is silent on the matter. Being specific about emeritus compensation would be the better policy. Even if emeritus directors receive no compensation but are reimbursed for reasonable expenses associated with attending board meetings, it should be properly noted for the record. Are emeritus directors eligible for health care or insurance coverage, or do their stock options continue to vest over the extended period of their board service? The point is that the compensation and benefits, whatever their nature, that accrue as a function of emeritus status should be clear, particularly when they differ from non-emeritus board members.
Sisters and brothers, aunts and uncles, and sons and daughters are among the very few lifetime titles that require no explanation, no clarification. For us, an emeritus director is not in that category and we suggest some care in adopting the designation, especially when it is not honorary. For us, the central issues are that clear and defensible criteria for the emeritus designation be articulated along with the roles, responsibilities, and compensation/perquisites of the emeritus title, and that provisions are made for the appropriate revocation of the title. Most important, though, is that the entire process should be publicly disclosed.