Annual Survey of Board Leadership

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A Korn Ferry report on the latest trends in board leadership in the 20 largest publicly traded US 17 companies. edition 2 | Annual Survey of Board Leadership |

Contents

Executive summary...... 4

Glossary...... 8

Methodology and approach...... 10

The trend to separate...... 11

Lead directors...... 22

The effect of company size...... 28

Industry...... 30

Appendix A: Companies with new chairpersons in the S&P 500 in 2016...... 35

Appendix B: Companies with non-standard leadership structure (as of year-end 2016)...... 37

Appendix C: Companies with no chairperson (as of year-end 2016)...... 37

Appendix D: Companies with CEO-chairperson and no lead director (as of year-end 2016)...... 38

Appendix E: Subsector mapping to sectors...... 38

Appendix F: Long-term board succession planning “best practices for high performing boards”...... 42

3 Directors of publicly held companies in the United States currently have the responsibility and discretion to decide whether the roles of CEO and chairperson should be combined or divided. But with many shareholder activists and regulators set against the combined CEO-chairperson model, board directors may face a future where they have less freedom to decide on the leadership structure for their companies. The United Kingdom offers an example of that extreme outcome, whereby boards are effectively required to separate their lead roles.

United Kingdom context as backdrop

In 1992, the report of the Committee on the Financial Aspects of Corporate Governance (also known as the Cadbury Report, named for the committee’s former chair, the late Sir Adrian Cadbury) expressed the group’s concern over dangers it believed were associated with the practice of combining the roles of chairperson and CEO. The Cadbury Report recommended that “there should be a clearly accepted division of responsibilities at the head of a company, which will ensure a balance of power and authority, such that no one individual has unfettered powers of decisions.” Any company that does not split the roles must explain to shareholders why they

EXECUTIVE SUMMARY do not. Since this report was issued, an estimated 95 percent of companies in the UK have chosen to split the roles.

In the United States, the proscriptive approach to board leadership has not been mandated, which has allowed companies to thoughtfully consider which board leadership model is best for their shareholders. We at Korn Ferry feel that it is critical for an organization to have the right board leadership—

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one of the two pillars of company leadership (the other pillar being a high- performing CEO). Korn Ferry is committed to developing leading practices around board leadership and working with our clients to surface and build consensus around evolving best practices.

Key takeaways from survey data, trend analyses, and evolving best practices

I. Consensus. All boards must have independent board leadership. Roles must be clearly defined and performance evaluated on a continuous basis. II. Trend. The trend to separate the roles of chairperson and CEO is slowly but clearly moving in one direction—from 26% of S&P 500 companies in 2001 to 33% in 2006, 42% in 2011, and 50% in 2016. III. Philosophy. Companies that are not separating roles may have thoughtful reasons not to do so. However, with the governance attention on this topic and trend, it is important to articulate the philosophy clearly to shareholders. IV. Lead directors. For companies that are not separating the roles, the importance of a lead director is comparable to that of a non-executive chairman, and the responsibilities are comparable as well. V. Leadership selection and board succession planning. Not all board members will make exceptional board leaders. Selection of the right leader and facilitating seamless transitions can be achieved through thoughtful, long-term board succession planning. VI. Compensation for board leadership positions. There is a strong sense from board conversations that this issue needs more attention and should be led by compensation committees to be sure it is fair, motivating, and aligned with shareholder value.

5 VII. Board leadership evaluation. Annual evaluation of a company’s CEO is an established best practice, and it logically follows that this same best practice should apply to a company’s board leadership.

VIII. Board leadership structural change. Except in a case of crisis, if a board decides to separate the chairperson and CEO roles, it is best to do this in the course of a natural CEO succession. If the company is performing well, taking the title of chairperson away from the CEO would signal to investors a lack of confidence, which would not be appropriate. When a new CEO is selected, the transition from CEO to executive chairperson for the retiring CEO can prove to be extremely helpful, as long as the role is clearly defined as well as the time frame—six months to one year is the ideal transition period.

Reminders Korn Ferry has a strong belief that each company needs two pillars of strong leadership: the CEO and the independent board leader. We are constantly examining the data and will continue to do so, but at this point we see no conclusive proof that splitting the role (versus having a strong and fully engaged independent lead director) leads to higher long-term shareholder value. As a corollary, we have seen cases where ineffective board leaders have led to a destruction of shareholder value. Take the time to get this right! A few questions for directors to consider:

n Do you have a robust long-term succession plan for your board leadership?

n Do you have strong potential board leaders in your pipeline?

n Have you defined the board leadership roles clearly and weighed the importance of each role?

n After discussion of the roles, have you gained consensus around the ideal competencies of a board leader, just as you would your next CEO?

n Have you done a thoughtful evaluation of your board leadership? And is compensation for the board leader fair, motivating, and aligned with shareholder value?

Dennis Carey Robert E. Hallagan Vice Chairman & Vice Chairman & Co-Leader Board Practice Co-Leader Board Practice Korn Ferry Korn Ferry

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7 Executive chairperson: A full-time, paid officeholder who typically leads the board and takes a hands-on role in the company’s day-to-day management. Most often this position is held by a former CEO as part of an orderly transition.

Non-executive chairperson: A non-employee chairperson of the board who does not serve as an executive for the company and has no day-to-day management responsibilities. For the purposes of this report, we used the following criteria to classify a non-executive chairperson:

n He or she is an independent director of the board, and is neither currently nor formerly an executive officer of the company, and does not have the formal title of “executive chairman” as indicated in the company’s proxy file.

n Not included are those who have the formal title of “non-executive chairman” or “independent chairman” but currently or formerly served as an executive officer of the company, for the purposes of our analysis.

Lead director: A non-management director of a public company who serves as an independent chief among other board directors and thereby helps ensure board relations run smoothly. This individual acts as an ombudsman for the outside directors and presides over executive session meetings (those held without management present). The lead director role has evolved, and may include helping to set the agenda for board meetings and serving as a liaison between the CEO- chairperson and outside directors. GLOSSARY

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Presiding director: An independent, non-management director of a public company whose chief responsibility is to preside over executive sessions of independent directors and communicate on behalf of independent directors to the chairperson and CEO. The role of presiding director is likely to rotate on a two- or three-year cycle among independent committee chairs, and is typically filled by a member of the nominating/governance committee.

Throughout this report, when referring to a specific chairperson, we will preserve his or her title as it appears in the company’s proxy statement. However, for the purposes of being inclusive, when referring to the role of “chairman” or “chairwoman” (rather than the title), we will use the term “chairperson.”

9 This study examines changes to and trends in board leadership structure for 500 US companies, the constituents of Standard & Poor’s Large Cap 500 Index (S&P 500) as of December 31, 2016. The S&P 500 Index represents a barometer of the state of the largest publicly traded US corporations, and all research and analysis in this study focuses on this group.

In previous years, we looked at the type of board leadership structure in place for S&P 500 companies at the end of each calendar year between 2008 and 2012. Because of the slow pace of change, we decided to lengthen the period between analyses, resuming our study this year with a focus on leadership change in 2016.

This report focuses primarily on the leadership structure in place as of year-end 2016, and examines each company’s overall leadership approach as it pertains to the roles of chairperson, CEO, and lead director (if applicable). Proxy filings, annual reports, and the corporate governance section of company websites comprise the source documents for these determinations. Please note that the numbers shown in this report reflect actual statistics and not data projected from a random sampling of companies.

In addition, each company that had a change in its leadership (by replacing either CEO or chairperson) between January 1, 2016, and December 30, 2016, was investigated to understand the reason for the change, and additional details—such as tenure, age, education, and committee responsibilities—were sought for the incoming chairperson. Company documents and outside press reports were used to determine the reason for an executive’s departure, and executive biographical and company data were culled from secondary sources, including Reuters, Bloomberg

METHODOLOGY & APPROACH METHODOLOGY Businessweek, MarketWatch, and Morningstar.

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The trend to separate roles remains steady, deliberate and moving in just one direction.

Though board composition is not likely to be an area marked by rapid, significant change, the slow and steady trend to separate the chairperson and CEO roles continued in 2016. By the end of 2016, 50% of S&P 500 chairpersons also held the position of CEO. This marks a decline from 2012, when 56% of chairpersons were current CEOs, and a continuation of a more than decade-long trend toward separation. The change came almost equally from increases in non-executive chairpersons and chairpersons who have some past affiliation with the company; additional analysis in this report will examine what types of companies are likely to favor these different approaches.

Note that throughout this report, analysis of chairperson representation in 2016 will exclude three companies among the S&P 500 that currently have no chairperson: NVIDIA Corporation, Boston Properties Inc., and Lennar Corporation.

Figure 1. The trend toward separation, S&P 500, 1998–2016

9% 9% 10% 13% 16% 20% 16% 16% 19% 21% 23% 26% 25% 23% 23% 27% 17% 20%

THE TREND TO SEPARATE SEPARATE THE TREND TO 23% 22% 23% 21% 20% 21% 20% 24%

84% 80% 77% 74% 75% 77% 74% 71% 67% 65% 61% 63% 61% 58% 56% 49% 2011 2012 1998 1999 2016 2010 2001 2007 2002 2003 2005 2008 2006 2009 2004 2000

CEO Former executive Non-executive

Source: Korn Ferry Institute and HawkPartners analysis 2008–2016. Deloitte, Center for Corporate Governance, 1998–2007. Base: Companies of the S&P 500. Notes: Due to the slow pace of change, we decided to lengthen the period between analyses, resuming our study this year with a focus on leadership change in 2016. Data from 1998–2003 did not track non-executive chairpersons. Numbers do not always add up to 100 due to rounding error.

120 100 80 60 40 20 0 Chairpersons must meet several criteria to qualify as truly “non-executive” or independent. They must not currently hold an executive role (CEO or other), must not be former executives, and must not be founders or family members of founders. From time to time, companies may characterize these types of chairpersons as “non-executive” in the language of their proxy reports or even in the chairperson’s title, but our analysis re-characterizes them per the criteria above. The idea of an independent chairperson is that he or she can bring an impartial and objective perspective to the board, and our experience finds that founders, family members of founders, and former executives tend not to possess that objectivity. Being independent in title is not necessarily a reflection of reality. An analysis of the types of chairpersons found in the S&P 500 in 2016 is described in Figure 2.

Figure 2. Types of chairpersons, S&P 500, 2016

Chairperson role Who is included Number Percent All independent chairpersons, which Non-executive includes those who have had no former 132 26% chairperson executive role at the company

Founder or family member of founder (not in management role) 3 1%

Former non-CEO executive Chairperson 12 2% or executive (e.g., CFO, EVP, senior executive) chairperson Current non-CEO executive (e.g., EVP, VP, senior executive) 5 1% Former CEO 98 20%

CEO Current CEO, or CEO and president 247 49%

Company does not have a Lead director or chairperson of the board, with 3 1% no chairperson or without a lead director

TOTAL 500 100%

Source: Korn Ferry Institute and HawkPartners analysis as of year-end 2016. Base: Companies of the S&P 500.

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While it is reasonable to expect the gradual trend toward separation to continue, particularly given that many major pension funds and fund managers have a preference for separated roles, some large companies continue to maintain combined roles while enlisting a lead director as a counterbalance to consolidation of power. When we look at the companies that appointed their CEO as chairperson in 2016, all but one (CBS Corporation) appointed a lead director if they didn’t have one already.2 Most of these appointees are members of the board, though less often they are former independent chairpersons. These types of elections are typically part of a comprehensive succession-planning process and/or a requirement of the company’s governance guidelines (i.e., when the roles of CEO and chairperson are combined or when the chairperson is not considered otherwise independent).

The reasoning behind the decision to combine roles often remains private. It is therefore notable when a company does, in fact, offer to delineate its rationale. Among those exceptions were United Parcel Service Inc. (UPS), General Motors Co. (GM), and Duke Energy Corporation, which, when they respectively combined roles this past year, cited goals of “strategic alignment” (UPS), “clear accountability” (Duke Energy), and “efficiency” (all three).

Korn Ferry’s continued perspective is that there must be independent leadership of the board—but how each company achieves this critical independent leadership should be customized to the unique characteristics and culture of each company. This does suggest that each company dedicate careful thought and analysis to the process and be able to articulate the rationale for its structure.

2 11 out of 28 companies that combined the roles of CEO and chairperson in 2016 had lead directors serving prior to combining.

13 When choosing a new CEO or chairperson, about half of the S&P 500 changed their structure.

Figure 3. Nature of most recent succession events, S&P 500, 2016

50%

40%

30% 49% 20% 46% 10% 5% 0 Maintained Changed New company/ structure structure in transition

Source: Korn Ferry Institute and HawkPartners analysis as of year-end 2016. Base: Companies of the S&P 500 with a change in leadership during the period observed.

About half of S&P 500 companies that experienced a change in chairperson or CEO leadership (or both) reevaluated and ultimately changed their structure in 2016. These figures comport with the oft-repeated declarations in proxy statements that the leadership structure of the company “is subject to discretion and review.” Leadership models are dynamic and anything but fixed, given the significant proportion that have changed structures during the most recent leadership transition.

Among companies that had a leadership change in the past year, the trend toward separation of the chairperson and CEO roles continues among the S&P 500. Overall incidences of separation were up six points in 2016, to 50% in the S&P 500.

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Figure 4. Rate of separation, S&P 500, 2009–2016

50%

40%

30% 50% 20% 42% 44% 37% 39% 10%

0 2009 2010 2011 2012 2016

Source: Korn Ferry Institute and HawkPartners analysis as of year-end 2016. Base: Companies of the S&P 500.

Additional analysis of the outcome of these leadership changes reveals that companies with independent non-executive chairpersons were more likely to maintain the status quo (i.e., sustained separation), whereas those with non-CEO executive chairpersons were more likely to have made a change in their board leadership structure this past year (i.e., be newly separated). Among those companies with a non- executive chairperson who had a leadership change this past year, three- quarters were sustained separations—that is, they continued to maintain an independent board leader. The reverse is true for companies with executive chairpersons: nearly three-quarters were newly separated, while only about a quarter were sustained.

15 Figure 5. Type of separation by chairperson type, S&P 500, 2016

100%

80% 28%

60% 77% Sustained separation Roles separated 40% 72% 20% 23% 0 Non-executive Non-CEO executive chairperson chairperson

Source: Korn Ferry Institute and HawkPartners analysis as of year-end 2016. Base: Separated companies of the S&P 500 with a change in leadership during the period observed.

Among those companies with independent chairpersons who separated in 2016 (23%), Wells Fargo & Company stands out as being one of the largest companies to make the leap from CEO-chairperson to completely independent chairperson, a change that demonstrates activist preference for independence. Following the resignation of Wells Fargo CEO-chairman John Stumpf in the wake of a company scandal regarding fake accounts, the board elected to split the role of CEO and chairperson and appoint its lead director as independent chairperson.

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More companies are separating and maintaining separation.

Further breaking down succession events for 2016 among S&P 500 companies, we find two-thirds of those companies that made a leadership change in 2016 chose to separate the CEO and chairperson roles, either by continuing to opt for a separated structure (36%) or moving to a separated structure (30%).

Figure 6. Outcome of most recent succession event, S&P 500, 2016

Type of change Roles separated 30% Roles combined 19% Sustained separation 36% Sustained combination 2% Combined after temporary separation 7% Separated after temporary combination 1% Temporarily separated 4% Temporarily combined 1% New company 1%

Source: Korn Ferry Institute and HawkPartners analysis as of year-end 2016. Base: Separated companies of the S&P 500 with a change in leadership during the period observed.

Despite the scrutiny on companies that continue to have a CEO- chairperson (and the high-profile proxy battles over that structure that often play out in the news), 19% of companies still opted to move to combined the CEO and chairperson roles in the most recent leadership change event. What may appear to be contrarianism, however, is perhaps evidence of the opposite: Their example indicates that the optimal structure for any given company is a unique decision and not simply a matter of conforming to the popular sentiment of the time. GM, for example, stated that in “a time of unprecedented industry change,” its board had concluded that combining the roles of the chairperson and CEO would best serve its strategic vision. Or consider Duke Energy, which stated that a recombined governance structure “best serves the company and our shareholders as we navigate an era of remarkable change.”

17 The more recent the change, the more likely to separate.

Looking at leadership structure over the long term can provide a useful perspective on the pace of change in the trend to separate the CEO and chairperson roles. Companies that had any change in leadership (to the chairperson, or CEO, or both) in the most recent three-year period between 2013 and 2016 were almost twice as likely to have separated roles than companies where the most recent change was between 2008 and 2012. Almost all companies (95%) that have had no change over the last 13 years maintain a combined structure; only two (Regeneron Pharmaceuticals Inc. and Omnicom Group Inc.) have a separated structure.

It is not entirely clear what distinguishes companies that have not changed from those that have. Size does not appear to be a major factor, though companies that have changed in the last three years are slightly more likely to be smaller in size than any of those with less recent changes. Nor are they necessarily any more likely to be disproportionately made up of “traditional” industries (those whose rate of separation is less than 50%).

Figure 7. Structure by date of last leadership change, S&P 500, 2016

5% 100%

80% 29% 37%

60% 68% Separated 95% 40% Combined 71% 63% 20% 32% 0 No change Change Change Change since 2003 2003-2007 2008-2012 2013-2016 (n=41) (n=58) (n=120) (n=278)

Source: Korn Ferry Institute and HawkPartners analysis as of year-end 2016. Base: Companies of the S&P 500.

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100

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Retirement is the most common reason for a succession event.

Figure 8. Reason behind most recent succession event, S&P 500, 2016

7% 1% 1%

Retired—planned succession Resigned—shareholder pressure/ 22% crisis or interim position replaced M&A, spin-o, IPO, or new company 70% Founder steps aside Death or medical emergency

Source: Korn Ferry Institute and HawkPartners analysis as of year-end 2016. Base: Companies of the S&P 500 with a change in leadership during the period observed. Note: Figures do not add up to 100% due to rounding error.

Just as the structural implication of a succession event can be examined, so too can the reason behind it. An analysis of the S&P 500 companies that experienced a leadership transition in 2016 shows succession events occurred according to a predetermined plan 70% of the time, making retirement the leading cause for a change. The case of a founder (or a member of the founder’s family) stepping aside can be deemed a subset of planned successions.3 Such instances make up a minority of all events, but are treated separately, given the individuals involved and the differing forces that may lead to such an event. All other reasons for a change account for a significantly smaller proportion of turnover, though the second-leading cause, at 22%, is an unplanned resignation or company crisis. In such instances, time pressures and the need for an operational management and oversight team may preclude a lengthy search, and companies often appoint an interim chairperson or CEO.

3 According to the methodology, instances that would have otherwise qualified as “Retired—planned succession” but involved a founder or family member of the founder were classified as “Founder steps aside.”

19 Planned succession events are more likely to result in separated leadership.

Figure 9. Probability of combined or split leadership by reason for change, S&P 500, 2016

80%

60%

Separated 40% 78% 67% Combined 20% 33% 22% 0 Retired—planned succession Resigned—shareholder pressure/ crisis or interim position replaced

Source: Korn Ferry Institute and HawkPartners analysis as of year-end 2016. Base: Companies of the S&P 500 with a change in leadership during the period observed.

For each possible reason for a change in leadership structure, there is an associated probability of ending up with either a combined or separated structure. Given the trend toward splitting roles, it is not surprising that the most common reasons for change result in separation—particularly when that reason is resignation. However, since we last reported, we have seen an increase in the percentage of companies that became or remained separated following planned succession (67% in 2016 vs. 39% between 2003 and 2012, on average).

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The critical role of board succession planning.

Appendix A outlines Korn Ferry’s approach to board succession planning. One of the key principles is to always be thinking two to three years in advance, reflecting on which skills and unique competencies are needed to align with the company’s greatest future challenges and opportunities.

For the purposes of this report, board succession planning must be integrated with CEO succession and board leadership. The right leadership in these two roles is the number one driver of shareholder value, and companies that thoughtfully manage these smooth transitions ought to be commended. This process is not easy but should be one of the board‘s top priorities. Just as there are unique competencies for your CEO, there are unique competencies for a board leader. Just as you want to develop options in your CEO succession, you should be building a pipeline of board talent—individuals who have the unique qualities, time, and interest to take on board leadership roles.

Building trust with shareholders is important, and those companies that manage all types of leadership transitions seamlessly will establish enormous credibility with all constituents. Lastly, not all directors will make great board leaders, and this must be factored into your long-term board succession framework.

21 Lead directors are a fixture in combined or non- independent structures. Consider some exceptions.

Companies that opt to combine the CEO and chairperson roles nearly always appoint a lead director, though a select few companies do not. As of the end of 2016, only four (2%) of the 247 S&P 500 companies with combined CEO and chairperson roles were without a lead director (Berkshire Hathaway Inc., CBS Corporation, Mohawk Industries Inc., and Microchip Technology Inc.).

Consistent with our finding that companies with combined roles almost always have lead directors, 26 out of the 27 companies that recently combined after a leadership change in 2016 had a lead director. The exception is CBS: after Sumner Redstone resigned from his role as executive chairman amid questions about his competency, president and CEO Leslie Moonves stepped in as chairman, and no lead director was named. LEAD DIRECTORS Another interesting area is the role of lead directors among companies with executive chairpersons who, by our definition, are not independent. In 2016, 8% of these companies had an executive chairperson with no lead director. Among them are Exelon Corporation, which made the move in 2013 to change the title of its executive chairman to chairman, and describe him as independent in their proxy statement. By contrast, among companies with a non-executive chairperson, two also have a lead director (The AES Corporation and CF Industries Holdings Inc.). In both cases, the lead director is also the chairperson. Both companies’ corporate guidelines stipulate that if the chairperson is independent, that individual will also serve as lead independent director.

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Among the Korn Ferry Market Cap 100 (KFMC100), the group that is most likely to have combined roles, just one company, Berkshire Hathaway,lacks a lead director. Warren Buffett, who has expressed his belief that, depending on the situation, either combined or separated CEO and chairperson roles can be appropriate, has announced that Berkshire Hathaway will have a separated structure upon his retirement, with his son Howard Buffett (currently a director) taking over as chairperson but not CEO. Warren Buffett aside, companies with a combined structure and no independent lead director face criticism from shareholders, and most are adding or expanding the role of the lead director. Urban Outfitters Inc. (also combined), whose leaders at one time said that they would not appoint a lead director because they believed it “could inhibit the free flow of ideas among the independent directors,” appointed a lead director in 2015.

Figure 10. Lead director presence by leadership structure, S&P 500, 2012 vs. 2016

4% 2% 100%

80% 62% 61% 60% 96% 98% No lead director 40% Lead director

20% 38% 39% 0 2012 2016 2012 2016 Combined Separated

Source: Korn Ferry Institute and HawkPartners analysis as of year-end 2016. Base: Companies of the S&P 500.

100

0 It is still more likely for companies with a separated structure not to have a lead director (61% in 2016). For those that do, it is important to clearly articulate the role of the lead director so there is no confusion over leadership. Two reasons to potentially have a lead director is to facilitate the evaluation of the non-executive chairman and to sit in the role during the non-executive chairman’s absence.

Figure 11. Typical leadership roles

Lead director at Lead director Non- company with a at company Role executive combined CEO- with non-exec chairperson chairperson chairperson Serves as mentor and sounding board to CEO on issues facing the enterprise ✓ Chairs board meetings ✓ Chair meetings when chairperson is absent ✓ ✓ Chairs board meetings ✓ ✓ Calls meetings of independent directors when necessary ✓ ✓ Consults with CEO and directors and defines meeting schedule, agenda, ✓ ✓ and materials Acts as liaison between the CEO and members of the board ✓ ✓ Acts as liaison between executive and independent board directors ✓ ✓ In cooperation with the CEO, responds to shareholder inquiries and approves company responses to ✓ ✓ outside communications Works with the chair of the compensation committee on CEO performance evaluation and compensation ✓ ✓

Manages intraboard relationships ✓ ✓ 24 24 | Annual Survey of Board Leadership |

Figure 11. (cont'd.)

Non- Lead director at Lead director company with a at company Role executive chairperson combined CEO- with non-exec chairperson chairperson Advises the nominating/ governance committee on selection of committee chairs and board members ✓ ✓ Advises committee chairs and helps to manage the overall workload of the board ✓ ✓ Ensures that the board has the appropriate performance- monitoring tools in place ✓ ✓

Facilitate evaluation of non-executive chairperson ✓

Lead directors continue to be more common at large companies.

Figure 12. Presence of lead directors by company size, S&P 500, 2012 vs. 2016

100% 16% 28% 19% 27% 80% 36% 39%

60% No lead director 40% 84% 81% Lead director 72% 64% 73% 61% 20%

0 Market cap Market cap Market cap Market cap Market cap Market cap 1–100 101–250 251–500 1–100 101–250 251–500 2012 2016 Source: Korn Ferry Institute and HawkPartners analysis as of year-end 2016. Base: Companies of the S&P 500.

Since larger companies are more likely to have combined chairperson and CEO roles, they are also more likely to have lead directors. Consistent with our findings in 2012, KFMC100 companies in 2016 showed a 20-point difference from companies at the lower end of the market cap spectrum.

100

0 Board leadership compensation

When it is time for a board leadership transition, a company that seeks a non-executive chairperson often looks to its non- employee board members as a source of highly qualified and informed candidates. Obviously, the increased responsibility and time commitment required of a chairperson generally comes with increased compensation. The 2016 annual cash retainer of the non-executive chairperson** ranged from a low of $0 to a high of $575,000, with a median of $190,000. The chairperson’s 2016 annual cash retainer was 0 to 6.4 times that of the typical board member, with a median of 2.1 times. The 2016 annual equity retainer for the non-executive chairperson ranged from $67,500 up to $550,000, with a median of $200,000, though the number of companies offering equity compensation was lower than the number offering cash compensation. The chair’s 2016 annual equity compensation was 0.5 to 3.9 times that of the typical board member, with a median of 1.4 times.

Among the companies in the S&P 500, 60% reported paying their lead directors an additional fee above and beyond standard board member compensation. Among those firms that pay the lead director an additional fee, median additional compensation in 2016 was $30,000.

For additional information about trends in board compensation, contact Irv Becker at [email protected].

* Korn Ferry Hay Group studied the 500 largest companies in the United States, 485 of which filed a final definitive proxy statement between May 1, 2016, and April 30, 2017 (the S&P 500). ** The non-executive chairperson definition used here is consistent with that used in the report on page 8.

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27 Size continues to be a factor in rate of separation.

The rate of separation correlates with company size. By the end of 2016, a little more than a third of the largest 100 companies in the S&P 500 had separated structures, compared with slightly fewer than half of those in the middle range of market cap and only about two-thirds of the companies at the low end of the market cap range.

Figure 13. Rate of separation by company size, S&P 500 2016

60%

50%

40% 1–100 30% 59% 101–250 20% 46% 251–500 35% 10%

Source: Korn Ferry Institute and HawkPartners analysis as of year-end 2016. Base: Companies of the S&P 500. THE EFFECT OF COMPANY SIZE THE EFFECT OF COMPANY

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Larger companies have been less likely to separate CEO and chairperson roles.

Figure 14. Chairperson independence by market cap S&P 500, 2012 vs. 2016

100% 12% 15% 21% 24% 30% 33% 80% 19% 19% 19% Outside/ 21% independent 60% 21% 27% Previous/ current executive 40% 69% CEO 66% 59% 54% 49% 20% 41%

0 2012 2016 2012 2016 2012 2016 Market cap Market cap Market cap 1–100 101–250 251–500

Source: Korn Ferry Institute and HawkPartners analysis as of year-end 2016. Base: Companies of the S&P 500.

We continue to observe higher rates of separation among smaller companies this past year. While only 41% of the smallest companies in the S&P 500 had a combined CEO-chairperson, 54% of companies in the middle range and 66% of the largest companies did.

Notably, there is an interesting shift among the largest companies, moving toward having a truly independent chairperson. When we look at the rate of increase between 2012 and 2016, we see a 25% increase in the move toward outside/independent chairpersons and none toward non-independent chairpersons.

It appears that while companies are motivated to shift away from a combined CEO-chairperson model, the largest companies are increasingly less likely than in previous years to retain current or former executives as chairpersons—and may increasingly favor an independent chairperson if they do make the decision to split roles.

120 29 100 80 60 40 20 0 Not all industries take the same approach to board leadership structure.

Figure 15. Separation rate by industry, S&P 500, 2012 vs. 2016

80% 78% 2012 2016 70% 68% 63% 60% 55% 54% 52% 50% 49% 49% 50% 46% 47% 46% 42% 40% 40% 37% 39% 39% 35% 36% 34% 32% 33% 30%

20%

10%

0 IT Services REITs Insurance Telecom Consumer Healthcare/ Utility Basic Industrial Financial pharma Source: Korn Ferry Institute and HawkPartners analysis as of year-end 2016. Base: Companies of the S&P 500. Notes: Excludes Diversified sector, which contains only four companies.

Certain industries have historically tended to favor the more “traditional” approach of combining the chairperson and CEO roles. These companies occupy the far right-hand side of Figure 15 and this year do show evidence of some movement toward separation, though rates are, on average, slightly lower than those occupying80 the other end of the graph. 70 60 50

INDUSTRY 40 30 20 10 0

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Those companies that had changes in leadership in the past year show a relatively consistent inclination toward separation across industry sectors (65% or higher, with the exception of industrial and consumer goods), regardless of how conservative their industry is overall. These days, change, no matter what the industry sector, is a good barometer for separation.

Within the larger industry categories, certain subsectors stand out for their particularly high or low rates of separation (detailed in Figure 16).

Figure 16. Subsectors by separation rate

Subsectors with >60% separation rate: ■ Data Processing and Outsourced Services ■ Internet Software and Services ■ Semiconductors ■ Packaged Foods and Meats

Subsectors with <30% separation rate: ■ Aerospace and Defense ■ Asset Management and Custody Banks ■ Life and Health Insurance ■ Regional Banks

Source: Korn Ferry Institute and HawkPartners analysis as of year-end 2016. Base: Subsectors with fewer than seven companies excluded. See Appendix E for a chart that depicts how subsectors map into sectors.

31 Aerospace and Defense: Sticking with combined structure.

The Aerospace and Defense subsector, which is comprised entirely of combined leadership structures, saw two changes in 2016 that preserved the status quo (combination)—though under very different circumstances.

The most recent change, at The Boeing Company, was the completion of an orderly transition. Transitions that occur to ease in change typically represent a move toward combination, or resumed combination primarily due to a former CEO and chairperson staying on as chairperson before handing the reins over to the new CEO. In this case, current CEO Dennis Muilenburg took the chairman mantel from chairman James McNerney, who, after retiring as CEO in 2015, remained on as chairman during the transition.

For United Technologies Corporation, the change marked an end to leadership turmoil that preserved combination—with the last step in a succession battle being the replacement of the interim chairman with the current CEO, Gregory Hayes. Both Hayes and Edward Kangas stepped in in 2014 to replace CEO-chairman Louis Chênevert (Hayes as CEO and Kangas as non-executive chairperson) when Kangas (the lead independent director at that time) exerted pressure.

Figure 17. Rate of separation within Aerospace and Defense subsector as of December 30, 2016

Company (in order of Leadership Leadership Leadership Most recent market cap in 2016) status, 2008 status, 2012 status, 2016 change Boeing Company, The Combined Combined Combined 3/1/2016 United Technologies Corp. Separated Combined Combined 9/14/2016 Honeywell International Inc. Combined Combined Combined 7/1/2002 Lockheed Martin Corp. Combined Combined Combined 1/1/2014 General Dynamics Corp. Combined Combined Combined 1/1/2013 Raytheon Co. Combined Combined Combined 10/1/2014 Northrop Grumman Corp. Combined Combined Combined 7/19/2011 TransDigm Group Inc. Not part of S&P Not part of S&P Combined 7/23/2003 Rockwell Collins Inc. Combined Combined Combined 11/11/2015 L3 Technologies Inc. Not part of S&P Not part of S&P Combined 10/7/2008

Source: Korn Ferry Institute and HawkPartners analysis as of year-end 2016. Base: Companies of the S&P 500.

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Airlines and Movies and Entertainment: Activism in the services industry.

Although not captured in Figures 18 and 19 because of the subsectors’ relative size, the Airlines and Movies and Entertainment industries have had their share of noteworthy events that resulted in separation.

United Continental Holdings, Inc.’s troubles began when, in response to lagging performance, two activist shareholders pushed for new board positions and the replacement of its non-executive chairman, Henry Meyer, with former Air Canada CEO Robert Milton. According to reports, activists believed that the board was unable to steer the company toward better performance following years of trouble after its 2010 merger. The outcome was that the resulting structure did not change, and separation was maintained.

In the case of Viacom Inc., however, activism did lead to a separation when the struggling entertainment conglomerate ousted its CEO- chairman, Philippe Dauman, along with four other board members, resulting in a separation of the chairperson and CEO roles. The move to install Robert Bakish as CEO was made by majority owner Sumner Redstone at a time when Viacom was considering recombining with CBS, which is also controlled by Redstone. The new executive chairman, Thomas May, was an independent, outside pick for the role, joining the board on August 18, 2016, only to become chairman less than a month later, on September 14, 2016.

Although separated as recently as 2008, The Walt Disney Company and Time Warner Inc. remained the only two combined companies from 2012 to 2016 among those in Movies and Entertainment.

The Airlines sector contains a whole new crop of companies that have recently joined the S&P 500, three out of five of which are combined.

33 Figure 18. Rate of separation within the Airlines subsector as of December 30, 2016

Company (in order of Leadership Leadership Leadership Most recent market cap in 2016) status, 2008 status, 2012 status, 2016 change Delta Air Lines Inc. Not part of S&P Not part of S&P Separated 10/11/2016 Southwest Airlines Co. Combined Combined Combined 5/21/2008 American Airlines Group Inc. Not part of S&P Not part of S&P Combined 6/4/2014 United Continental Holdings Inc. Not part of S&P Not part of S&P Separated 6/8/2016 Alaska Air Group Inc. Not part of S&P Not part of S&P Combined 1/1/2014

Source: Korn Ferry Institute and HawkPartners analysis as of year-end 2016. Base: Companies of the S&P 500.

Figure 19. Rate of separation within the Movies and Entertainment subsector as of December 30, 2016

Company (in order of Leadership Leadership Leadership Most recent market cap in 2016) status, 2008 status, 2012 status, 2016 change Walt Disney Company, The Separated Combined Combined 3/13/2012 Time Warner Inc. Separated Combined Combined 1/1/2009 Twenty-First Century Fox Inc. Not part of S&P Not part of S&P Separated 7/1/2015 Activision Blizzard Inc. Not part of S&P Not part of S&P Separated 10/11/2013 Viacom Inc. Separated Separated Separated 12/12/2016 Discovery Communications Inc. Separated Separated Separated 5/16/2014

Source: Korn Ferry Institute and HawkPartners analysis as of year-end 2016. Base: Companies of the S&P 500.

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Appendix A: Companies with new chairpersons in the S&P 500 in 2016

Company Chairperson CEO EC NEC Advance Auto Parts Inc. Jeffrey C. Smith Albemarle Corp. Luther C. Kissam IV X Allergan plc Brenton L. Saunders X AmerisourceBergen Corporation Steven H. Collis X Archer Daniels Midland Co. Juan R. Luciano X Baxter International Inc. José E. Almeida X Boeing Company, The Dennis A. Muilenburg X Boston Scientific Corp. Michael F. Mahoney X CarMax Inc. Thomas J. Folliard X CBS Corp. Leslie Moonves X Charter Communications Inc Thomas M. Rutledge X Cintas Corp. Scott D. Farmer X Clorox Company, The Benno Dorer X CMS Energy Corp. John G. Russell X CSRA Inc. Nancy Killefer X Darden Restaurants, Inc. Charles M. Sonsteby X Delta Air Lines Inc. Francis S. Blake X Devon Energy Corp. John Richels Dollar General Corp. Michael M. Calbert X Dover Corp. Michael F. Johnston X Duke Energy Corp. Lynn J. Good X Dun & Bradstreet Inc. Robert P. Carrigan X Eaton Corporation plc Craig Arnold X Edison International William P. Sullivan X Fifth Third Bancorp Marsha C. Williams X Foot Locker Inc. Richard A. Johnson X Frontier Communications Corp. Pamela D.A. Reeve X General Motors Co. Mary T. Barra X Harley-Davidson Inc. Michael J. Cave X

35 Appendix A (cont'd.)

Company Chairperson CEO EC NEC HCP Inc. Michael D. McKee X Hess Corp. James H. Quigley X Illumina Inc. Jay T. Flatley X Intuit Inc. Brad D. Smith X J. M. Smucker Company, The Richard K. Smucker X Jacobs Engineering Group Inc. Steven J. Demetriou X Leggett & Platt Inc. R. Ted Enloe III X Marathon Petroleum Corp. Gary R. Heminger X Marsh & McLennan Companies Inc. H. Edward Hanway X McDonald's Corp. Enrique Hernandez Jr. X Newmont Mining Corp. Noreen Doyle X Nielsen Holdings plc James A. Attwood Jr X Nike Inc. Mark G. Parker X Nordstrom Inc. Philip G. Satre X Parker-Hannifin Corp. Thomas L. Williams X Perrigo Company plc Laurie Brlas X PPG Industries Inc. Michael H. McGarry X Principal Financial Group Inc. Daniel J. Houston X Procter & Gamble Company, The David S. Taylor X Skyworks Solutions Inc. David J. Aldrich X Southwestern Energy Co. Catherine A. Kehr X Travelers Companies Inc., The John H. Dasburg X United Continental Holdings Inc. Robert A. Milton X United Parcel Service Inc. David P. Abney X United Technologies Corp. Gregory J. Hayes X Verisk Analytics Inc. Scott G. Stephenson X Viacom Inc. Thomas J. May X Vulcan Materials Co. J. Thomas Hill X Wells Fargo & Co. Stephen W. Sanger X Weyerhaeuser Co. Rick R. Holley X Williams Companies Inc. Kathleen B. Cooper X Yum China Holdings Inc. Robert D. Walter X

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Appendix B: Companies with non-standard leadership structure (as of year-end 2016)

Co-chairperson No chairperson Co-CEO No CEO NEC Torchmark Adobe Systems Inc. Oracle Corp. Nordstrom Inc. Corp. Whole Foods Whole Foods Bed Bath & Beyond Inc. Market Inc. Market Inc. Loews Corp. Torchmark Corp. Torchmark Corp. Torchmark Corp.

Appendix C: Companies with no chairperson (as of year-end 2016)

Company Lead director CEO Notes

Has not elected a chairperson since co-founder stepped down in 2016: “Since the 2016 annual meeting of stockholders, at which time Mortimer B. Zuckerman Boston Properties Inc. Joel I. Klein Owen D. Thomas ceased serving as a director and our Board conferred upon him the honorary title of Chairman Emeritus, our Board of Directors has operated without a Chairman of the Board.”

Company has a history of leaving the role unfilled. Chairman Leonard Miller died in 2002, and the role was unfilled for two years until Robert Strudler assumed Lennar Corp. Sidney Lapidus Stuart A. Miller the position in 2004. Strudler died in 2006, leaving the role empty again, and it was again left unfilled. Lead director manages board meetings. The CEO is the son of Leonard Miller.

There has never been a chairperson since the company’s founding in 1993. Corporate governance allows for but Jen-Hsun Huang NVIDIA Corp. William J. Miller does not require a chairperson: (co-founder) “The board may select a chairman of the board in the manner and upon the criteria that the board deems appropriate at the time of selection.”

37 Appendix D: Companies with CEO-chairperson and no lead director (as of year-end 2016)

Company CEO–chairperson Notes

Berkshire Hathaway Inc. Warren E. Buffett “The board of directors has not named a lead independent director.” “The Board has not appointed a lead independent director. In support of the independent oversight of CBS Corp. Leslie Moonves management, the non-management directors and, separately, the independent directors routinely meet and hold discussions without management present.” “Microchip does not have a Microchip Technology Inc. Steve Sanghi lead independent director.” “The Board of Directors does not have one independent Lead Director; rather, the Board has determined that each of the three independent Mohawk Industries Inc. Jeffrey S. Lorberbaum chairs of the Audit, Compensation and Governance Committees will also provide Board leadership by presiding at the Board’s executive sessions on a rotating basis.”

Appendix E: Subsector mapping to sectors Basic Materials Consumer Goods Industrial Goods Apparel, Accessories, Aluminum* Aerospace and Defense and Luxury Goods Coal and Consumable Fuels*/** Agricultural Products* Auto Parts and Equipment* Diversified Chemicals* Automobile Manufacturers* Building Products* Beverages—Wineries Construction and Farm Diversified Metals and Mining* and Distillers* Machinery and Heavy Trucks* Fertilizers and Brewers* Construction Materials* Agricultural Chemicals* Gold* Consumer Electronics* Diversified Machinery* Electrical Components Independent Oil and Gas* Distillers and Vintners* and Equipment*/**** Farm and Construction Industrial Gases* Electronic Manufacturing Services* Machinery*/** Integrated Oil and Gas* Footwear* Industrial Machinery Oil and Gas Drilling* Forest Products* Marine***

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Basic Materials Consumer Goods Industrial Goods

Oil and Gas Equipment Home Furnishings Metal and Glass Containers*/** and Services* and Fixtures* Oil and Gas Exploration Packaging and Containers* and Production Household Appliances* Oil and Gas Refining Household Products* Paper Packaging*/** and Marketing* Oil and Gas Storage Housewares and Specialties* and Transportation* Specialty Chemicals* Leisure Products* Steel* Motorcycle Manufacturers* Office Electronics* Packaged Foods and Meats Paper Products* Personal Products* Soft Drinks* Tires and Rubber* Tobacco*

*Fewer than seven companies within this subsector **No companies were in this category in 2016 ***No companies fell into this category in 2016 or previous years ****No companies fell into this category in previous years, only 2016

Diversified Financial Services Insurance Industrial Conglomerates* Asset Management* Insurance Brokers* Asset Management Diversified*** and Custody Banks Life and Health Insurance Conglomerates* Consumer Finance* Multi-Line Insurance* Property and Casualty Diversified Banks* Insurance Investment Banking Reinsurance*** and Brokerage* Other Diversified Financial Services* Regional Banks Specialized Finance* Thrifts and Mortgage Finance*

39 Healthcare and Pharma IT Telecom Biotechnology* Alternative Carriers*** Cable and Satellite* Healthcare Distributors* Application Software* Communications Equipment* Integrated Healthcare Equipment Computer Hardware* Telecommunication Services* Computer Storage Wireless Healthcare Facilities* and Peripherals* Telecommunication Services* Healthcare Services* Electronic Components* Electronic Equipment Healthcare Supplies* and Instruments*

Healthcare Technology* Home Entertainment Software*

Life Sciences Tools Internet Software and Services and Services* Managed Healthcare* Semiconductor Equipment* Medical Appliances Semiconductors and Equipment* Medical Instruments Systems Software* and Supplies* Pharmaceuticals Technology Distributors***

Services Utility REITs/Real Estate Services Diversified Real Estate Advertising* Utility*** Activities*** Air Freight and Logistics* Electric Utilities Diversified REITs* Airlines* Gas Utilities* Home Building*

Apparel Retail* Independent Power Producers Industrial REITs* and Energy Traders* Automotive Retail* Multi-Utilities Office REITs* Broadcasting* Water Utilities*/**** Real Estate Services* Casinos and Gaming Residential Construction* Catalog Retail*** Residential REITs* Commercial Printing*** Retail REITs* Computer and Specialized REITs* Electronics Retail*

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Services Utility REITs/Real Estate Services

Construction and Engineering* Data Processing and Outsourced Services Department Stores* Distributors* Diversified Support Services* Drug Retail* Education Services*/** Environmental and Facilities Services* Food Distributors* Food Retail* General Merchandise Stores* Home Furnishing Retail* Home Improvement Retail* Hotels, Resorts, and Cruise Lines* Human Resource and Employment Services* Hypermarkets and Super Centers* Internet Retail* IT Consulting and Other Services* Leisure Facilities*** Movies and Entertainment* Music and Video Stores* Office Services and Supplies* Publishing*/** Railroads* Research and Consulting Services* Restaurants* Security and Alarm Services*/** Specialized Consumer Services* Specialty Stores* Trading Companies and Distributors* Trucking*

Fewer than seven companies within this subsector **No companies were in this category in 2016 ***No companies fell into this category in 2016 or previous years ****No companies fell into this category in previous years, only 2016

41 Appendix F: long-term board succession planning “best practices for high performing boards”.

The world is moving at lightning pace—globalization, innovation, disruptive technologies—and the pressure on boards to reinvent themselves has accelerated from the investor community. It has always been an honor to be elected a director, but with heightened expectations and responsibilities, directorship is a serious profession.

Elite boards have raised the bar and established a vision and objective to be a strategic asset and a source of long-term competitive advantage. It is a high bar, which requires an engaged and relentless culture of continuous improvement and a clear view of the characteristics of high-performing boards, that is, those established in the NACD Center for Board Leadership’s Report of the Blue Ribbon Commission on Board Evaluations.

One essential element of the framework is “the right people at the right time.” The key principle is that there should be a constant and continuous alignment of the skills and competencies to the board’s most challenging future strategic issues, toughest decisions, and major risks. The challenge— top talent and potentially top diverse talent aligned to these challenges is scarce. Korn Ferry’s best practice allows a board to be opportunistic and patient (see Exhibit 1).

When we were able to push the “re-set” button and rebuild boards for Lehman Bros. and Delphi as they emerged from bankruptcies, a major upfront eff ort was undertaken to identify all these major issues and detail the successful leadership backgrounds that would be “strategic assets to the company.” All candidates had a “history of making good decisions” but also had an area of expertise where their related skills and networks would be of specific value.

Except in cases such as carve-outs, IPOs, or companies emerging from bankruptcies, it would not be good practice to be constantly re-setting the board every time there was a major change in the industry. Longer- term board succession planning, however, is a best practice Korn Ferry is managing for many of its clients and is much like CEO succession planning.

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In the CEO Succession Practice, our best advice is to start early to ensure a seamless transition of high-performance CEO leadership. The exact same advice applies to boards if we want the right talent around the table on a continuous basis. In the past, we would respond to clients on a one- off transactional basis, but potentially disappoint them when the “ideal” candidates—including diversity candidates—were not available at that exact time. With the bar set at the highest level, we cannot compromise on the qualifi cations of new board members because of timing issues. Longterm board succession planning is a clear best practice.

Board Succession Process Framework

The process to develop a board succession framework starts with a detailed analysis of the company’s long-term strategic plan and what the company must do to drive long-term shareholder value. In that analysis, we try to simulate board interaction and board agendas to identify what precise competencies and successful experiences would add the greatest value around the table. The first column in the case study summarizes the drivers of shareholder value and the second, the alignment of required skills.

The third and fourth columns are more difficult and sensitive as they detail the current skills on the board, and where they fit the future alignment, and then their projected tenure. The final column provides a roadmap for prioritization of future board needs based on skills, gaps, and future retirements. It should also be noted that ideal future candidates may satisfy multiple priorities. One of the sensitivities is documenting the record of success in priority areas for current board members; this may highlight current backgrounds of board members that do not fit the framework. For example, can an individual who has never had a history of success or making good decisions add value?

43 Exhibit 1. Case Study: $5B Industrial Company Board Succession Framework

Current Projected Future Challenges/Key Drivers Aligned Board Skills Board Tenure Priority of Shareholder Value Status (Years) Executives (CEOs/Group X 10+ Not a priority. Heads) that have driven X 10+ Operational excellence operational excellence on Have a global platform X 5+ skills Be industry leader driving X 1+ covered. operation efficiency and Technology executives maintain relentless culture that have leveraged technology of continuous improvement in driving efficiencies in 4 manufacturing robotics, supply chain and data mining.

World class CFO—global, X 3 Growth through razor-sharp capital intensive, longcycle, management of capital respected company X 1 2 allocation, global risk, portfolio management & M&A Top retired global/capital markets investment banker X 2

Sustainability, health & safety Global thought leaders X 10 Not a on topic priority. Continue drive to be Have recognized globally Executives recognized skills for leadership for same leadership covered.

World-class talent Executives (CEO’s, group X 10+ management to ensure: heads) with history of X 10+ Top talent in industry attracting and mentoring top talent X 1 High employee engagement Top global HR leader Recognized for leadership from company known for 3 and driving competitive exceptional global talent advantage through management diversity and inclusion

Strategy/global risk Global strategic thinker X 2 management Executive skilled at X 3 1 Develop clear vision of what’s strategic thinking next beyond current strategy Global leaders that to drive shareholder value understand geopolitical risk and regulation

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Board Leadership

Factored into the framework is the objective to have a seamless transition of board leadership, whether it takes the form of non-executive chairman or lead director, as well as committee leadership.

Not all directors have the unique qualities required to assume these leadership positions. In fact, the individual who aggressively lobbies for these positions in many cases is the wrong person, and in other cases the person identified as the right choice may not have the time or interest. The current board leader along with chair of the governance committee must plan the process carefully.

Once the framework is developed and agreed on by the board, it must be kept fresh and current on a yearly basis to be sure new and emerging transformational issues are discussed, and if any create a new competency requirement for the board.

Benefits of Framework Although the initial process of developing the framework creates sensitivities, it does stimulate the right conversation around the table and, frankly, one that major shareholders expect boards to have on a continuous basis. Election by the shareholders is a privilege and honor and all directors should periodically be asking themselves questions about their continued value on the board. The framework helps generate self-assessment and reflection, which should include the following questions:

n Given the future direction and challenges of the company, are my skills still relevant and adding high value?

n If the board were to search for a new director, could they find someone with skills more relevant than mine for future challenges?

In addition to stimulating the right discussions around the board table, this framework allows the company to project its needs over multiple years. This extended time horizon allows for extensive research in all high-priority areas and in-depth discussions far in advance to determine interest, conflicts, and future timing amid a relaxed timeframe to get to know the candidate and assess cultural fit.

45 The extensive research and outreach builds a pipeline of candidates to both socialize—get to know them—and be opportunistic if suddenly their calendar opens up to a board opportunity. This could happen if the candidate is on the board of a company that is acquired, if their company changes its policy regarding outside board limits, and for other reasons. If you have already built a rapport with a candidate you can make a preemptive move, be opportunistic even if it is a little ahead of schedule.

Ineffective Board Framework Many companies say they have skills matrices but some we have seen are not helpful (see Exhibit 2). You have a long list of functions on the left, each board member checks a box re: their skill set but it does not necessarily align to “successful experiences aligned to future changes or a helpful gap analysis.”

Exhibit 2. Illustrative Example of Ineffective Board Matrix

Board Members Skills Member 1 Member 2 Member 3 Member 4 Member 5 Member 6 Member 7 General Management X X Marketing X Govt. Relations X X Finance X X Legal X X TT X Political X Academic X Investor Relations X Human Relations X X

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Diversity

We all know the multiple benefits of “diversity of thought” on the board, as well as the heightened pressure to have diverse boards. The multi-year horizon allows targeted research of best-in-class companies to identify diversity executives who are up and coming and several years away from being exposed to board opportunities. Once these executives reach the ideal level it may be too late to recruit them, as the competition for their service heats up. And once they have one outside board, they are no longer available. Attracting them early and providing thoughtful board mentoring will help to ensure that the board attracts these future directors.

Boards should begin to embrace a board succession process—geared to long- term board needs—as a best practice, much as they have embraced CEO succession planning. By doing so, they will be working to align their boards more closely with company strategy and building a board team that will help to ensure its success.

47 About Korn Ferry Korn Ferry is the preeminent global people and organizational advisory firm. We help leaders, organizations, and societies succeed by releasing the full power and potential of people. Our nearly 7,000 colleagues deliver services through our Executive Search, Hay Group, and Futurestep divisions. Visit kornferry.com for more information.

About The Korn Ferry Institute The Korn Ferry Institute, our research and analytics arm, was established to share intelligence and expert points of view on talent and leadership. Through studies, books, and a quarterly magazine, Briefings, we aim to increase understanding of how strategic talent decisions contribute to competitive advantage, growth, and success. Visit kornferryinstitute.com for more information.