In The Audit Committee Hot Seat
from
May/June 2002
by Sandra Ackermann, MaryJane Auer, and Julie Connelly
Asa result of the Enron scandal, directors everywhere, and particularlythose serving on audit committees, are squarely in the crosshairs ofshareholder wrath. Restated sales and earnings, or allegations of falsestatements, have always triggered class-action suits, as have insidersales of stock just before the price crashes—a combination of chargesthat has ensnared Cisco Systems’ audit committee chairman, Steven West,and four of his co-directors. But Enron, along with the disconnect ofGlobal Crossing and suspicions that other companies may crash too, hasfed the belief that Big Five accounting firms and top managementroutinely cook the books, with or without help from the board.Litigation is the best revenge.
Most board members are as repulsed by chicanery as the investor on MainStreet. Nevertheless, the widespread hostility aimed at directors ingeneral is souring the appeal of serving on a board. “What we areseeing, and what is being talked about in boardrooms, is a reevaluationof the risk-reward tradeoff,” says Charles King, managing director ofglobal board services at the executive search firm Korn/FerryInternational. “I’m predicting that directors will choose not to standfor reelection over the next six months.”
Persuading directors to remain on audit committees may be tougherstill. Even before Enron, the job had become onerous. Last year theSecurities and Exchange Commission and the major stock exchanges setnew guidelines for these committees, including a requirement that atleast three of their members be financially sophisticated. Disparagedat first as asking too much, these standards now make a lot of sense.If nothing else, somebody on the audit committee needs to know enoughto ask the right questions of auditors and the CFO.
So who are the men and women who occupy what has suddenly become thehottest seat in corporate governance? The following pages list theaudit committee members at 50 companies (the top 30 from the Standard& Poor’s 500 index and the top 10 from the Russell Midcap and theWilshire Smallcap), along with their total compensation—which variessensationally, and not always by company size. We also identify thecompanies’ auditors and show the fees they get for audit and non-auditservices.
The big challenge for corporate America will be to keep these committeeseats, and board seats as a whole, filled in the future. Recruitment isproving tough. As King points out, many potential directors areexecutives who have spent their lives building their networks andreputations. “In a heartbeat,” he says, “they can lose both by findingthemselves on the wrong board at the wrong time.” Many board members,of course, accept the risks that go with the job, correctly believingthat their service is worthwhile and honorable. One such director saysshe’s even open to an additional assignment—on an audit committee.
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Top 30 S&P 500 Companies
(Ranked by Market Capitalization)
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The Top 10 Russell Midcap Companies
(Ranked by Market Capitalization)
- The Top 10 Wilshire Smallcap Companies (Ranked by Market Capitalization)
Methodology
The information on these pages comes from company proxies, annualreports, 10-K’s and 10-Q’s, press releases, Stanford Law School’sSecurities Class Action Clearinghouse website, and interviews withcorporate media and investor-relations representatives. Stock listed assold includes exercised options and replacement (or reloaded) options.The membership of the audit committees is as of March 1, 2002, unlessotherwise noted. Methodology
