Corporate Boards Gone Wild

For every corporate accounting scandal, overpaid CEO or episode of imprudent risk taking, there's usually one common denominator — a board of directors who signed off on it.

And while corporate boards, many of them dominated by retirees, have not had the kind of negative attention reserved these days for the Wall Street set, a new report highlights a number of questionable practices going on in America's boardrooms that are not in shareholders' best interests. The report, released earlier this month by the Portland, Maine-based independent research group The Corporate Library, raises serious concerns about just how conflicted the boards of publicly-traded companies have become.

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Among the examples of perks for directors:

At Halliburton Company, two retiring directors received lump-sum payments of $678,812 and $567,869 respectively when they left the board in May 2008. The opportunity for board members -- who attend a few meetings a year -- to cash in on such a generous retirement program calls into question their loyalties, according to Greg Ruel, author of the study. "After all, it is a rare line of work that affords one the opportunity to earn a lucrative pension without ever serving as a company employee," Ruel said.

At XTO Energy there were provisions in place that would pay board members "change of control" awards in the event of a merger or acquisition -- as much as $1 million each. "It is ultimately the director's decision whether or not a merger or acquisition comes to fruition," said Ruel, "which brings into question whether it is appropriate that they earn any incentive from the outcome."

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At the Stryker Corporation, a medical device maker, one board member was paid $4,500 a day in consulting fees, totaling around $130,000 in 2008. Ruel says it is unclear what consulting services were actually rendered, let alone why the director made more in a day than the average nurse earns in a month.

Flying High

A number of companies, including Chesapeake Energy Corporation, allow directors personal use of private aircraft. "The inclusion of such a benefit could make directors less inclined to challenge management and risk losing the comforts," Ruel said.

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While bankers, traders, government authorities, rating agencies, the financial media and a host of other contributing culprits have been fingered in the quest to find out what led to the near total collapse of the financial system in 2008, a growing chorus of voices is decrying the behaviors of boards.

"It's shocking how irresponsible boards have behaved, especially when it comes to the issue of executive compensation," said John Gillespie, coauthor of the book "Money for Nothing: How the Failure of Corporate Boards is Ruining American Business and Costing us Trillions."

In the case of Chesapeake Energy, Gillespie and his coauthor David Zweig chronicled a board seemingly out of control. (Fortune magazine had an article about it too.) Average pay for Chesapeake board members was a staggering $670,000, or three times the norm. Even assuming the members contribute 100 hours a year, that's more than $1,000 an hour, great work if you can get it.

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One "independent" director at Chesapeake was the cousin of the CEO, Aubrey Kerr McClendon. McClendon took home an outsized pay package -- approved by the board -- of more than $100 million in 2008. Additionally, the board approved the company's purchase of McLendon's antique map collection for $12.1 million. According to Fortune, Chesapeake's compensation committee rationalized the CEO's compensation based simply on the board's wish to keep McClendon as CEO. Asked by Fortune why Chesapeake compensates directors so aggressively, McClendon said, "We have a very large and complex company, and we value our directors' time."

Author Gillespie, who has worked as an investment banker and a CFO, pointed to the collapse of Lehman Brothers as an example of the role corporate directors played during the period leading up to the financial crisis. "Lehman had a risk committee that met twice a year," Gillespie said.

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Lehman's Leading Lady

One of the longest tenured Lehman board members was, up until two years prior to its collapse, a retired 83-year-old actress and heiress, Dina Merrill.

The Lehman directors, most of whom were handpicked by CEO Richard Fuld, also included a theatrical producer and a retired art-auction company executive. In a September 2008 conference call, Fuld told analysts: "I must say the board's been wonderfully supportive." Four days later Lehman filed for bankruptcy. Lehman shareholders lost more than $45 billion.

"The Lehman board wasn't merely asleep at the wheel, they were comatose," Gillespie said.

Even veteran corporate board recruiter Russell Reynolds, who has been helping companies select directors for more than four decades and who is a staunch defender of board behavior in general, admitted that in the case of, for example, Citigroup, "one does have to wonder what those directors were thinking."

Reynolds founded the giant recruiting firm Russell Reynolds Associates, and later left it to form a new company, Greenwich-based firm RSR Partners. He says that 90 percent of the board members he knows "behave exemplarily."

"Board members today work harder than ever -- the meetings take longer, there are more of them and attendance is required," Reynolds said. "There is a big demand for good directors with specific expertise, not just yes-men."

As ordinary Americans gnash their teeth over the gap between what top executives earn and the pay for rank and file employees, anyone still wondering how we got here can look, critics insist, to the boards of directors.

Large shareholders, mainly money managers such as Fidelity, technically wield more power than any board member.

Still, portfolio managers at big fund companies don't monitor boards closely because they invest in hundreds of companies and it's often not possible. In fact, the job of weighing how to vote on various proxy issues, including the election of board members, is usually outsourced by money managers to companies such as Institutional Shareholder Services. Individuals who get proxy statements in the mail tend to ignore them or throw them out.

In something of a feedback loop, the board members themselves can earn more as they approve swelling pay packages for the executives to whom they are beholden for their lucrative assignments. According to the Corporate Library, the median pay boost for board members in 2008 was 11 percent.

Bloomberg Business Week, citing data compiled by Pearl Meyer & Partners, said that the typical director of a large corporation made $216,000 last year, up from $129,667 in 2003.

For some, total compensation, including cash payments, stock grants, and other perks, has climbed above seven figures. The highest-earning board member they found was Edward A. Kangas. His 2008 board pay: $1,314,418. That includes four directorships: Intuit, which pays him $374,888; Hovnanian Enterprises, $409,007; Tenet Healthcare, $404,046; and United Technologies, $126,477.

If he could change only one thing about corporate boards, author Gillespie said he would make it illegal for the CEO of a company to serve also as chairman. Sixty-one percent of Fortune 500 companies have a CEO who is also the chairman of the board.

A version of the Senate's financial reform bill, currently being debated, would require companies to send out materials to investors explaining why their CEO is also the chairman. It is a first step, but hardly a meaningful one, said Gillespie.

"CEOs doubling as chairman of public companies should be banned, period," he said. "It shifts the power entirely to the executives. They need oversight, not a rubber stamp." ABC News' Charles Herman contributed to this report