The Weight of America's Boards
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THE WEIGHT OF AMERICA’S BOARDS Ranking America’s Largest Corporations by the Governance Capacity of Their Boards 2016 Edition Chicago, Illinois Illustrations: SeanKellyStudio.com An In the Boardroom Publication A Research Report by THE LEADERSHIP QUOTIENT Research Affiliate of Boardroom Consultants blank TABLE OF CONTENTS Overview ............................................................................................................... 1 Introduction ........................................................................................................... 1 Background & Foundation ......................................................................................... 3 Our “Business Acumen Weight” Valuation Methodology .................................................. 4 Quick-Take Analysis ................................................................................................ 5 Current Status of Board Diversity ................................................................................ 8 Appropriate Governance Capacity Guidelines & Ideal Board Weight .................................. 10 Preview of Governance Scores & Companies That Distinguished Themselves ...................... 11 2016 Board Weight & Governance Capacity Observations & Findings ...... 13 Improving Your Governance Capacity Ratings ............................................. 25 Closing Reflections & Official 2016 Board Weight Rankings ....................... 29 America’s Largest Corporations Ranked by Revenue & Market Cap ................................... 31 Alphabetical Index ................................................................................................. 41 Director Distribution by Business Acumen Category ...................................................... 46 * * * We wish to thank the many board directors who have provided us with their insight and encouragement. THE WEIGHT OF AMERICA’S BOARDS Ranking America’s Largest Corporations by the Governance Capacity of Their Boards by James J. Drury III and James J. Drury IV OVERVIEW Introduction “weight” of combined business acumen present in the boardroom. The assessment of a board’s “quality”, As we present our 5th The Weight of America’s without objective criteria, is little more than a Boards report, a bit of reflection. Its introduction in subjective exercise. However, we believe if a board 2011 was an attempt on our part to propose a possesses both a high “capacity to govern well”, thoughtful, analytical process by which the and highly capable “boardroom leadership”, that “governance capability” of America’s corporate is as close as one can get to having confidence that boards could be assessed. With a 30-year history it is a good board, a strong board, and a quality providing board counsel and recruiting board board. directors, we found ourselves on more than a few occasions being asked whether a particular board was With each publication of our report, our confidence either “good or bad” or “strong or weak”, whenever a in the value of our assessment model has been well-known company found itself in significant reinforced. Many of the boards assessed by our difficulty. model have expressed their appreciation for the recognition they have received, acknowledging their In our professional role as a trusted board advisor, we good standing in the media and their annual reports. always declined to comment. However, in many of A good number of boards have also requested these situations, we did have an opinion, primarily multiple copies of our report to share with their based on our professional experience and judgment, directors in order to discuss a strategy for not fact-based knowledge. An informed opinion strengthening their governance capacity. We would would have required first-hand observation of the like to recognize, in particular, Blackrock, PPG, and process by which directors made critical decisions in Parker Hannifin for making our top 10 list in each the boardroom, over a sustained period of time – of the five years that our repot has been published. which is implausible given that board proceedings are highly confidential by necessity. Perhaps the strongest support for the rationale of our assessment model emerged recently in a research There are many significant factors that must be project conducted by our firm. In order to strengthen considered when evaluating the quality of a board our professional insight regarding what makes a great director, and most of them are subjective: integrity, board and a great director, we were privileged to intelligence, judgement, commitment, collegiality, to conduct in-depth personal interviews with 30 of name a few. There is one factor, however, that can America’s most accomplished and respected be assessed objectively that all directors should board directors. Together, their collective director possess in equal measure: a high level of experience has been gained in the boardrooms of 60 demonstrated accomplishment and acumen in Fortune 500 companies, ranging in scale from the their chosen field of endeavor. As the role of a largest to the smallest. One of the questions we public board is to govern the performance of a asked was, “When you think of the most respected business enterprise, we firmly believe that “business and effective directors that you have observed in the acumen” is the most essential quality of an effective boardroom over the years, what are the most board director. That fundamental belief provides the important characteristics that they have in objective framework for our board assessment model. common?” With few exceptions, the most frequently mentioned characteristic was “high Our methodology involves a calibration of a board’s business acumen and achievement”, confirming “capacity to govern well”, which is based upon the our instincts. 1 We are pleased to share our 2016 board report. Its step up to the plate? When it comes to business findings will provide a uniquely objective perspective acumen, are they heavyweights or lightweights? regarding the governance capacity of the largest 500 A fundamental premise of our report is that we value companies by revenue, and the 500 largest companies business experience more highly than non- by market cap (more than 600 leading public business experience in measuring governance companies), and their 6,000+ board directors. Our capacity. Our research shows that the more report will also serve as an alternative point of view accomplished a director is in business achievement, when considering the opinions voiced by shareholder the more likely that director is to engage the CEO, activists and institutional investment advisors. management team, and other directors in rigorous discussion regarding critical business issues. If there is any question about the value of business acumen, observe which directors lead in a crisis, and which Background & Foundation directors follow. THE ROLE OF TODAY’S CORPORATE BOARD TRENDS THAT CONCERN US Historically, a board’s fiduciary oversight role has Based on our experience advising boards, there are a been defined as both powerful and limited, firmly number of factors and trends that we believe will be grounded in the principles of corporate law and detrimental to board governance capacity, unless they governance mandate. However, some prefer a are reversed: simpler definition. In the words of one of America’s most respected retired CEOs, and a director of A marked erosion of overall boardroom business Fortune 50 corporations, the role of a board is acumen, as fewer of America’s most twofold: “To determine who runs the place, and who accomplished business executives occupy owns the place.” boardroom seats. Growing public mistrust of corporate boards The clear separation between the board’s without deeper understanding of the board’s role, governance-oversight responsibility and manage- leading to ever-increasing rules, regulations, and ment’s decision-making responsibility is widely guidelines that weaken a board’s decision-making understood. Yet that distinction does not seem to ability. satisfy those who hold boards accountable for almost A long-observed propensity for shareholder every corporate failure, misstep, and transgression. activists, and some business journalists, to The board seems to be viewed as the conscience of presume that boards are at fault whenever a the public corporation. It is almost assumed that a corporation experiences difficulty. board should have anticipated and prevented anything that goes awry. Decline in Board Business Acumen Much of the erosion in board service by business A board’s responsibility is complex and multifaceted. executives is the result of increased demands on A board oversees management performance, directors’ time, as well as board pressure on safeguards the long-term health of the business, and America’s best business leaders (CEOs and top represents the interests of shareholders. In addition, executives) to reduce their outside board it must consider the interests of other company commitments. The era of the over-boarded CEO is stakeholders: employees, pensioners, customers, long behind us. In 1990, 70% of active Fortune 500 suppliers, and the communities in which the company CEOs served on outside boards, filling 772 seats. In operates. As the governance role of boards continues 2016, only 45% served on outside boards, filling only to be under scrutiny and criticism by shareholder 266 seats – a 66% decline. We can assume that if activists, the “capacity to govern