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Dan R. Dalton and Catherine M. Daily
Institute for Corporate Governance
Kelley School of Business
Indiana University

The Enigma of the Emeritus Director

Let’s unravel the elusive nature of this board position and the important issues to be considered before someone is designated a director emeritus.

Editor’s Note: In the settlement reached in July in the bitter battle between the Walt Disney Co. and dissidents Roy E. Disney and Stanley Gold, one of the provisions called for Roy Disney to be named a director emeritus of the Disney company. The governance literature is exceedingly sketchy on the role of an emeritus director. Two years ago Directors & Boards asked governance experts Dan Dalton and Catherine Daily of the Kelley School of Business at Indiana University to explore the director emeritus position. The following is an excerpt from their longer analysis published in the Fall 2003 issue. (A copy of the full-length article is available to e-Briefing readers by e-mailing editor James Kristie with your fax number.)

Informed by the Sarbanes-Oxley Act and guidelines enacted by the Securities and Exchange Commission, the New York Stock Exchange, and Nasdaq, we have all improved our corporate governance vocabulary. Most observers would recognize the distinction between inside and outside directors, the notion of an affiliated director, the issues regarding the same person serving simultaneously as CEO and board chairperson, and the role of lead directors.

There is, however, yet another director, about whom all of these sources are silent -- the director emeritus. Indeed, the director emeritus is something of a mystery.
The expression "emeritus" is an honorary title conferred after a person's retirement, usually corresponding to the last title held during active service. The designation is used commonly in the academic community, occasionally in the not-for-profit sector, and, now, more frequently in the private sector. While a cursory review of proxy materials and other relevant documents indicates that the emeritus title is reserved for relatively few directors, those numbers are increasing.

Three Models
We have identified at least three models of emeritus status.

There are cases in which the emeritus designation seems to be wholly honorary and suggests no formal, continuing relationship with the company. William R. Hewlett, co founder of Hewlett Packard, was perhaps an unexpected example. He was named director emeritus in 1987 but appears to have had no further formal role with the H-P board in the years that followed.
Another approach, especially relevant for emeritus board chairpersons, seems to belie the very notion of the emeritus designation. In this case, the board confers the emeritus title on a former board chairperson, but the honoree continues on the board with full status and privilege.
What may be referred to as a hybrid approach is the case in which board members have retired from the board but are granted the emeritus designation. The distinction here is that while such emeritus directors are at liberty to attend board meetings and participate as equals, they are unable to vote. Kathryn Albertson, until her passing in 2002, served as director emeritus of Albertson's Inc. and was invited, but not required, to attend board meetings for the rest of her life. This appointment, however, was without vote, and her presence would not be counted toward a board quorum.

A Host of Issues
Perhaps the lack of consistency in the matter of emeritus corporate officers and board members is not surprising. We are not familiar with any general source that one might consult for guidance on the status of emeritus personnel on the board, their efficacy, or their related rights and privileges.

There are, however, a host of issues that a board might consider before appointing emeritus members and deciding on their appropriate role. Please note that the analysis that follows is relevant only if the emeritus title is something other than honorary.

1. Is a Director Emeritus Independent?
Obviously, a director's independence is an important element in the current governance environment and is repeatedly invoked in a variety of recitations of formal SEC and stock exchange requirements and best practice. If directors were "independent" before they were appointed as emeritus, their status will not have changed.
Some would argue that if a director emeritus has only voice but no vote, the notion of independence is rendered essentially moot. We would not subscribe to that view: We can imagine "voice" being a compelling factor in boards' deliberations.

2. What Is the Term of an Emeritus Director?’
A review of proxy materials reveals a very interesting aspect of emeritus directors. Their term of office, like justices of the U.S. Supreme Court, appears to be for life.
There are potentially troubling issues here. Such a policy may unnecessarily limit the discretion of future board members and company management, and, also, it would seem that the board and the company would be well served by some language providing recourse for unacceptable conduct.   

We are aware of one example in which emeritus directors may be subject to a term provision. In a description of one of its emeritus directors, Intel Corp. proxy materials include an entry that a particular emeritus director's term would end on a certain date, although it did not specify the actual length of terms for emeritus directors. Descriptions of other Intel emeritus directors did not include this provision, so we are uncertain about the term lengths and whether the policy is uniformly applied.

3. Should the Director Emeritus Be Compensated?
Director emeritus compensation is an intriguing issue because there is so little guidance. Intel, for example, which is a prolific user of emeritus directors, is silent on the issue of compensation. By contrast, Franklin Resources (which has since discontinued its director emeritus policy) once provided an inclusive statement:
“The Board of Directors has adopted a policy that when a director reaches the age of 75, the Director will not stand for reelection. The retired Director is then eligible to serve as a Director emeritus, without voting authority. The Board of Directors determines the amount and type of compensation and benefits that a director emeritus is entitled to receive. The director emeritus provides services to the board as may be mutually determined between the director emeritus and the Board of Directors from time to time. Currently, the director emeritus receives compensation equal to the compensation paid to a director who attends each meeting of the Board.”

In fairness, it is possible that many firms are silent on this issue because their emeritus directors do not receive compensation or benefits. Even so, perhaps it is a better policy to be specific about emeritus compensation.

4. Is the Age of Emeritus Directors a Potential Concern?
For many corporations, a director's age does not disqualify her or his individual service. There are those, however, who believe that there is signal value in the profile of directors' ages on a given board. It has been suggested, for example, that two or more directors on a board who are described as "retired," "former," or "emeritus" may be a matter of some concern.
There is a related issue. The ISS provides a corporate governance score, the "Corporate Governance Quotient." While it is composed of many elements, it includes a positive indicator for boards that have a mandatory retirement age for directors. While it is not true that emeritus directors will have, by definition, reached the age range one might anticipate for such a mandatory retirement guideline, we would expect that the overwhelming majority would be in that range.
There is a counterargument regarding emeritus programs and mandatory retirement. Most firms do not automatically confer nonhonorary, emeritus status on retiring directors. Given that, it seems that an emeritus process may provide a vehicle for retaining the services of exceptional directors who would otherwise have been escorted into mandatory retirement.
Disclosure Guidance
This is a period of much greater scrutiny for corporate governance. While there will be honest differences of opinion regarding best practices as boards and their processes are carefully examined and reconfigured, there will be far less debate about the need to comprehensively report the resulting changes. This will surely be the case for emeritus directors' practices.
Accordingly, for those firms relying on emeritus directors, proxy material might include that the board of directors has authorized the director emeritus designation and an explanation of eligibility requirements (e.g., distinguished service, years of board service, reaching mandatory retirement age). These materials should also define what the term is for emeritus status (lifetime designation? to be reviewed every five years?) and grounds for withdrawing emeritus status.
Such disclosure should also include the roles and responsibilities of emeritus directors (voting privileges? board attendance at will or by invitation? both full board and committee meeting participation?). And, of course, the compensation and benefits that accrue as a function of emeritus status should be clear, particularly to the extent that they differ from compensation and benefits awarded to non-emeritus board members (advisory or consulting services?).

Dan R. Dalton is the former dean of the Kelley School of Business, Indiana University, and is now director of the school’s Institute for Corporate Governance, http://www.kelley.iu.edu/icg. Catherine M. Daily is the David H. Jacobs Chair of Strategic Management at the Kelley School of Business and is the institute’s research director. Their research interests include corporate governance, executive and director compensation, ownership structure, and corporate social responsibility. Dr. Dalton can be contacted at dalton@indiana.edu. A longer version of this article originally appeared in the Fall 2003 edition of Directors & Boards.

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