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Annual Survey of Board Leadership 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— 4 | Annual Survey of Board Leadership | 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 6 | Annual Survey of Board Leadership | 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 8 | Annual Survey of Board Leadership | 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
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