KORN/FERRY INTERNATIONAL
Annual Board of Directors Study 31st Supplement on Technology
2004 KORN/FERRY INTERNATIONAL
Table of Contents Board Practices Among Technology Companies – Survey Responses ...... 2 31st Director Compensation/Perceived Risks ...... 2 Annual Board of Stock Ownership and Pension Plans ...... 2 Directors Study Supplement on Technology Optimal Board Size ...... 4 Presence of Former CEOs on Board ...... 5 Perceived Director Risk ...... 6 Sessions Without the CEO ...... 6 Mandatory Retirement ...... 8 Board Meetings and Preparation ...... 9 Board Independence ...... 9 Global Perspective ...... 10 Sarbanes-Oxley – U.S. Only ...... 10 About Korn/Ferry InternationalGlobal Technology Market ...... 11 About Korn/Ferry International ...... 11
Methodology
Statistical information collected for this analysis of governance trends was reported by the FORTUNE 1000 in their proxies during the period from July 1, 2002 through June 30, 2003. Where appropriate, comparisons are made with data gathered in previous Korn/Ferry International Annual Board of Directors Studies. Technology directors responding to the survey were from the U.S., Europe and Asia/Pacific.
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Board Practices Among Technology Companies – 31st Survey Responses Annual Board of Technology companies, like companies in many other industries, are endeavoring Directors Study Supplement to navigate the complex and ever-changing landscape of corporate governance. on Technology These companies face some unique challenges, however, due to the evolving and entrepreneurial nature of the technology industry. For example, founders typically maintain a prominent role in – if not control of - the boardroom even after they give up the corner office. To provide anecdotal evidence of ways in which board practices in this industry are evolving, we have examined the responses of technology company directors to our Korn/Ferry International’s 31st Annual Board of Directors Study.
Director Compensation/Perceived Risk
Compensation and incentive practices in technology company boards no longer significantly differ from the practices found in other industries. Like board members in nearly every industry, these directors want to be compensated more in cash and less in stock, a sea change from the go-go Internet era. Now that remuneration is more modest and predictable, we believe that more directors are turning down board opportunities due to the perceived risk/reward equation.
Do you think the majority of a director’s compensation should be in stock?
Yes 31%
No 69%
Stock Ownership and Pension Plans
In an effort to more closely align boardroom interests with those of shareholders, some companies require board members to hold equity positions. The percentage of technology company directors reporting that they must be shareholders was 44 percent – significantly lower than the U.S. average of 65. Additionally, only 33 percent of technology directors believe that a majority of their compensation should be in
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stock. Boardrooms may be favoring cash compensation over stock at least partly in recognition of the increased responsibilities, external oversight and time commitment required of directors with the introduction of Sarbanes-Oxley. In addition, recent volatility of technology stocks may make it a less attractive currency for 31st Annual Board of director compensation. Directors Study Supplement Is there a requirement that directors own shares of company stock? on Technology
Technology 44%
U.S. Average 65%
0% 20% 40% 60% 80% 100%
% of Companies that Require Stock Ownwership
American and European boards differ in many respects, but perhaps no more so than on director pension and retirement plans. While the global average is 20 percent, only six percent of all U.S. respondents indicate they have such plans. This is in sharp contrast to the 60 percent of European directors who indicate their compensation package includes such benefits. In the technology sector 32 percent of companies report retirement or pension plans - almost exactly between U.S. and European sentiment. When comparing industries, a larger percentage of technology companies have director pension and retirement plans than do consumer products companies (17 percent).
Does your company have a director’s pension or retirement plan?
U.S. 6%
Consumer Products 17%
Global Average 20%
Technology 32%
Europe 60%
0% 20% 40% 60% 80% 100%
% of Companies With a Director's Pension or Retirement Plan
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Optimal Board Size
Size and composition affect a board’s ability to function efficiently and with sufficient 31st independence from management. The average number of inside directors at technology Annual Board of Directors Study Supplement companies in 2004 was eight. Interestingly, directors in this industry felt that a board on Technology three quarters this size (six directors) was optimal. Board sizes in this industry tend to be smaller than in other industries. Our study revealed that the average size of FORTUNE 1000 boards is 11.
What is your current board size? (Inside and Outside)
Outside 4
Inside 4
0123456
Current Board Size
What board size do you think is optimal? (Inside and Outside)
Outside 3
Inside 3
0123456
Optimal Board Size
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Presence of Former CEOs on Board Most likely due to the degree of high involvement maintained by their founders, 31st technology companies tend not to observe mandatory retirement requirements as Annual Board of often as companies in other industries. Directors Study Supplement on Technology Thirty-eight percent of the technology board members polled said that the company’s former CEO should sit on their board. By contrast, only 33 percent of technology board members surveyed reported that their company’s former CEO actually sits on the board. While these figures suggest that technology board members feel that the former CEOs are less prevalent in the boardroom than they ideally should be, their involvement is still greater than in other industries. The global, cross-industry average of board members reporting that their former CEOs remain on the board was just 28 percent.
Does your former CEO sit on the board?
Yes 33%
No 67%
Should the former CEO sit on the board?
Yes 38% No 62%
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Perceived Director Risk
Technology directors are much more likely than other respondents to turn down 31st board positions due to the perceived risk/reward equation offered today by technology Annual Board of Directors Study Supplement companies. In fact, 35 percent of board members in this industry report declining on Technology positions in the past 12 months. This is in sharp contrast to the overall turndown rate of 22 percent, and just 20 percent in the insurance industry – a fairly stable industry. The rapid formation of businesses within the technology industry and the greater historical volatility associated with the technology industry are two key reasons.
Have you ever turned down a board position because you felt your risk was too great?
Insurance 20%
Overall 22%
Technology 35%
0% 20% 40% 60% 80% 100%
% That Have Turned Down Board Positions in the Past 12 Months
Sessions Without the CEO
Common best board practices recommend that the CEO not be present during a board’s regular executive session. Given the tendency of technology company CEOs to be founders and holders of significant equity positions, one would expect them to have greater involvement in board meetings. Surprisingly, 70 percent of technology boards hold regular executive sessions without a CEO. This is well below the current Americas average of 93 percent, but significantly above the rate of such sessions in Europe and Asia/Pacific.
The tendency of technology companies to meet without the CEO present is greater than for companies in industries such as banking and consumer products
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Does the board typically hold regular executive sessions without the CEO present
Banking 57% 31st Annual Board of Directors Study Supplement Consumer Products 60% on Technology
Healthcare 68%
Technology 70%
Insurance 75%
0% 20% 40% 60% 80% 100%
% of Boards that Meet Without the CEO
Europe 23%
Asia/Pacific 27%
U.S. 93%
0% 20% 40% 60% 80% 100%
% of Boards that Meet Without the CEO
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Mandatory Retirement
Given their entrepreneurial culture, technology companies tend to lag other 31st industries in terms of observing mandatory retirement provisions. Our survey Annual Board of Directors Study Supplement revealed that only 51 percent of technology companies require retirement at a on Technology standard age - typically at 70 years of age. By contrast, 69 percent of boards in the U.S. and 61 percent of U.K. boards uphold mandatory retirement provisions. Figures within the banking and the healthcare industries stand at 74 percent and at 66 percent, respectively.
Does your board have a mandatory retirement age?
No 31% No 49% Yes 51% Yes 69%
U.S. Overall Technology
No 26% No 34%
Yes Yes 74% 66%
Banking Healthcare
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Board Meetings and Preparation Increased regulation such as Sarbanes-Oxley places a heavier time burden on board 31st members already tasked with navigating the complex landscape of global business. Annual Board of Technology company respondents to our study reported a monthly investment in Directors Study Supplement board matters of 18 hours. This is in line with numbers reported around the globe on Technology in other industries.
How many hours per month do you estimate that you spend on board matters for this company, including review and preparation time, meeting attendance and travel?
Insurance 16
Healthcare 17
Technology 18
Global Average 18
15.0 15.5 16.0 16.5 17.0 17.5 18.0 18.5 19.0
Average Numberof Hours Per Month
Board Independence
Recent regulatory policy has resulted in a call for increased independence in the boardroom. Seventy-five percent of technology company directors feel that their board is working more independently than in years past. This percentage held true for respondents in the U.S., and in Asia/Pacific (excluding Japan). Far fewer respondents in Germany and France reported a greater sense of independence in the boardroom (58 percent and 56 percent, respectively).
Do you feel your board is working more independently this year, as compared with past years?
No% 25
Yes 75%
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Global Perspective
Relative to companies in other industries, technology companies are more likely to 31st have strong board representation from members with extensive global experience Annual Board of Directors Study Supplement (average of five members.) on Technology Please indicate the number of board members that fall into the following categories:
U.S. Nationals with Extensive 4 Global Experence (Global Average)
U.S. Nationals with Extensive 5 Global Experence (Technology Average)
0246810
Number of Board members in Each Category
Sarbanes-Oxley – U.S. Only
The costs associated with meeting regulatory requirements are considerable. Almost all (99 percent) of technology directors surveyed in the U.S. report having complied with Sarbanes-Oxley, and they estimate the cost of ongoing compliance to be $4.8 million. The estimated average cost of ongoing compliance reported across all industries in the U.S. is $3.7 million.
What is the cost to your company of ongoing compliance with the requirements mandated by Sarbanes-Oxley?
U.S. Average $3.7
Technology $4.8
$0.0 $2.0 $4.0 $6.0 $8.0 $10.0
Cost ($ Million)
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About Korn/Ferry International Global Technology Market 31st The consultants in our Global Technology Market offer executive search expertise Annual Board of with in-depth knowledge of the technology market and the leaders therein who have Directors Study Supplement demonstrated success through execution, excellence and unparalleled strategic and on Technology competitive passion. Our team, sector and function are focused and located in every major technology center throughout the world.
About Korn/Ferry International
Korn/Ferry International (NYSE:KFY), with more than 70 offices in 36 countries, is the premier provider of executive search, outsourced recruiting and leadership development solutions. The firm works closely with clients to provide solutions tailored to their recruitment and assessment needs, through the company’s executive search business, identifying CEOs, COOs, CFOs and other senior-level executives; through the Global Board Services Practice, recruiting for boards of directors and consulting on matters of corporate governance; through the firm’s Management Assessment and Coaching business, which provides evaluation and development of senior management teams; and through Futurestep, Korn/Ferry’s middle management recruiting provider.
For more information, visit the Korn/Ferry International Web site at www.kornferry.com or the Futurestep Web site at www.futurestep.com.
11 Korn/Ferry International Global Technology Market Regional Market Leaders
Richard Spitz Global Managing Director, 310-226-2655 [email protected]
Lisa Behlmann Regional Managing Leader, Europe +44-20-7312-3199 [email protected]
Carlos Gonzales Regional Managing Leader, Latin America +5255-52015437 [email protected]
Kaori Iwamoto Regional Managing Leader, Asia Pacific +813-3560-1411 [email protected]
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