The Korn/Ferry Market Cap 100

2012

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Introduction...... 4 The inside lane: AmerisourceBergen...... 7 The dark horse: Newell Rubbermaid ...... 11 The head start: MasterCard...... 16 The standout final lap: Marriott...... 23 Conclusion: Winning a race with no finish line ...... 27 Appendix A: The KFMC100 companies ...... 31 Appendix B: The KFMC100 directors...... 37 Appendix C: The KFMC100 boards...... 47

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They were asked about their specific succession experience, in particu- lar who on the board drove the process, how it varied depending on the scenario, and how they viewed the quality of the outcome—whether the Introduction company stayed inside, ultimately went outside, or, in one case, selected a director as the successor.

Ten guiding principles for boards emerged from the interviews:

• Discuss and plan for CEO succession on an ongoing basis so that the Two facts about CEO succession are unassailable. The first is that every board is prepared not only for orderly transitions but also for the chief executive now in office will, sooner or later, be replaced. The sec- unexpected. ond is that many companies have either done little to prepare for a • Decide how involved the full board should be in the succession pro- smooth transition or are using a process that is flawed. cess and how the process should be led. Depending on the board’s Yet some companies get it right. They recognize that CEO succession car- composition, transition situation, and dynamics, some benefit from ries risks even as it offers new opportunities. Reducing those risks, by the involvement of all of the members and others from an effort using best practices, is among a board’s most important tasks. primarily led by a committee.

To identify best practices, three vice chairmen at Korn/Ferry Interna- • Be clear about the sitting CEO’s role in CEO succession. If a transi- tional with expertise in CEO succession—Dennis Carey, Stephen Mader, tion is underway, should the CEO lead a specific segment of the pro- and Jane Stevenson—interviewed current and former top executives and cess, be cast as a key advisor, or have no part? directors at four companies that had changed chief executives in recent years: AmerisourceBergen Corporation, Marriott International Inc., MasterCard Worldwide, and Newell Rubbermaid Inc. Those interviewed were: Figure 1 Succession plan disclosure

• Ajay Banga, president and CEO, MasterCard Twenty five of the Korn/Ferry Market Cap 100 companies did not specify in their proxy statement or principles of governance that they had any succession plan in place. The other • Michael Cowhig, non-executive chairman and chair of the search 75 percent explicitly state that they maintain or review a succession plan. committee, Newell Rubbermaid

• Richard Haythornthwaite, non-executive chairman and chair of the nominating and governance/search committee, MasterCard 75% Company maintains or 25% Company does not disclose reviews a succession plan if it has a succession plan • Michael B. Polk, president and CEO, Newell Rubbermaid

• David A. Rodriguez, executive vice president and chief human re- sources officer, Marriott International

• R. David Yost, former CEO, AmerisourceBergen

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• Commit to continual, open communication. Keep the entire board in the loop on problems and progress at all critical points.

• Look for certain qualities in those directors leading the succession work. Are they strategically minded and highly disciplined? Do they The inside lane: possess a balance of judgment and intuition? Do they have CEO ex- perience themselves? AmerisourceBergen

• Make sure that corporate strategy is the ultimate driver. Agreement is needed on where the company is going before someone can be chosen to take it there. It was CEO R. David Yost who set the timetable for the search that re- • Recognize that internal candidates typically need three or more placed him at AmerisourceBergen. “I was sixty-two when I stepped for- years of targeted development to step into the CEO role. ward and said to the board, ‘Hey, guys, I just want you to know that I • When the situation permits, lower the risks of choosing an outside don’t see myself doing this for the rest of my life. I mean, sixty-four or candidate by bringing that person in early enough to be integrated sixty-five is probably going to be it for me.’ ” into the company before being appointed as CEO, so that both the It was 2009 and Yost had been chief executive for a dozen years, first at candidate and the board become comfortable with the fit. AmeriSource Health Corporation and then, after its merger with Bergen • Don’t rule out sitting directors as CEO candidates, but do tread care- Brunswig Corporation in 2001, at AmerisourceBergen. As a result, he fully concerning the process and consequences of engagement. Make had been the new company’s only CEO—making the choice of a succes- sure that a director isn’t an active candidate and a sitting director sor that much more significant. Based in Valley Forge, Pennsylvania, with accountability for the CEO decision process at the same time. AmerisourceBergen is a health care supply chain services company serv- ing the United States, Canada, and selected international markets. It has • Use a mix of incentives to robustly fill the succession pipeline. In 10,000 employees and annual revenues of $79 billion. addition to making talent development a factor in annual bonuses for a sitting CEO, consider providing future financial upside through In Yost’s view, the key to being ready for a CEO succession is for the equity or incentive payments, based on the successful transition of whole board to see the process as a continual effort. His board spent the new CEO. time on succession planning at every meeting.

Ultimately, each of the four companies wound up with a CEO transition “When you have [succession responsibility] only in the governance com- that was tailored to its own needs and realities. A smooth and sure succes- mittee or the compensation committee, you run the risk of having too sion shouldn’t be difficult to pull off. Companies that understand the right limited a focus,” Yost said. “You also want to be careful not to alienate process, and apply it effectively, generally come out with a good choice. the board—the succession process is best served by having the full board involved.”

The leader of the succession effort, Yost said, must be able to keep every- one focused on answering one central question: what do we need the next Dennis Carey Stephen P . Mader Jane Stevenson CEO to do? That task involves looking at strategic plans and asking where Vice Chairman Vice Chairman Vice Chairman

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the company is going to be three to five years down the road and beyond. At the same time, Yost kept an eye on external talent. AmerisourceBer- What are the skill sets that are needed to take the company there—skills gen had made a number of key hires from the outside over the years, that may be substantially different from those of the incumbent? including its head of human resources and chief information officer. “I kept very wired to who was out there and who was looking around,” Yost At the same time, the board should be considering internal candidates said. who might be ready in two or three years—and what is required to de- velop their skills to meet those anticipated needs. It’s also prudent to After about a year, Yost said, “it became apparent who the successor was bring in independent consultants, Yost said, both to keep the board fo- going to be”—Steven H. Collis, who was then executive vice president cused and to offer objective insights. and also president of AmerisourceBergen Drug Corporation, the com- pany’s largest subsidiary, with more At AmerisourceBergen, any abstract thinking became very concrete than $60 billion in annual revenues. “The CEO needs to be once Yost announced his retirement plans in 2009. As for the division of That halted any external search be- ready to go, and to labor, the board worked primarily on defining the strategic needs. “I fore it really started. “Now that’s a understand that he will probably had the most influence in assessing the leadership skills,” Yost little bit of a risky run by not testing be judged by how well said, “because as CEO I was working with the internal candidates on a the marketplace, because you don’t his successor does.” day-to-day basis.” know who is going to stand up,” Yost —R. David Yost He and the board decided not to look at external candidates until the confided. “But we decided that it was pool of internal ones could be thoroughly assessed. With the help of not too big of a risk—it was highly remote that we would find someone their outside consultant, they identified three or four areas for develop- better.” ment in the leading contenders. Some board members participated di- That vote of confidence in Collis was well earned. He had made a name rectly in that effort, meeting with the candidates to offer their views on for himself by founding and running one of the company’s four main how each was doing. operating units, the specialty group. When Collis first emerged as a CEO candidate, he was moved from that unit to run the drug subsidiary so that he would get more operational experience. The move was contro- Figure 2 versial, Yost recalled, because Collis had been doing such a great job at 100 Succession oversight in the KFMC the specialty unit. He was then promoted to chief operating officer in CEO succession planning responsibilities are often divided among individuals, committees, November 2010 to run all of the company’s businesses—a shift that was and the full board. Nearly half of the companies on this year’s Korn/Ferry Market Cap 100 understood by the board, but not outsiders, as a sign that he had been list indicated in their proxy statements and principles of governance that the full board was tapped as the heir apparent. involved with succession planning.

Charged with oversight of succession The grooming process touched other areas as well. Collis got more expo- Full board 49% sure to Wall Street—for instance, by attending investor conferences with Governance committee 39% the chief financial officer. And he got some mentoring from experienced CEO 30% CEOs about the complex relationship that he would have to forge with Compensation committee 22% the board. Development/human resources committee 22% Chairman 3% Yost felt confident about passing the baton on July 1, 2011, his sixty- fourth birthday just days away. Yost had thought the succession might

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not come until he turned sixty-five, but he could see that Collis was ready and should step in at that point, fully engaged and fresh for the task—and that any delay could well be counterproductive.

Problems arise when the CEO “wants to be remembered as the greatest The dark horse: deal that ever was,” Yost said. “That’s not the proper role—which is to make sure that your company goes on in perpetuity without you.” To Newell Rubbermaid that end, Yost suggested that part of a CEO’s bonus—and that of other senior managers—should be tied to executive development. But to fur- ther incentivize the CEO, a post-succession bonus, say two years down the road, would also be a good idea, he added. “The CEO needs to be ready to go, and to understand that he will be judged by how well his The decision by Newell Rubbermaid Inc. to pick Michael B. Polk—one of successor does,” Yost said. the company’s directors—last year as its new CEO is rich in ironies.

In other words, the CEO is just one in a never-ending line of company If Polk, then a No. 2 at consumer products giant Unilever, had expressed stewards, each responsible for putting the firm’s interests ahead of his interest in joining the board with the CEO’s chair in mind, Newell Rub- or her own. That includes not only identifying the best successor, but bermaid would have been unlikely to nominate him to the board in the also recognizing the time is right for the company. “You need to keep first place. And if the company had tried to recruit him as a director your ego in check and realize that you are not hiring your clone, but with the CEO succession in mind, Polk would have said no. He was ex- rather someone with leadership skills for the future,” Yost said last year, cited by the challenges where he was and didn’t know enough about shortly before stepping down. Newell Rubbermaid to see why such a move would make sense. “I was not looking for anything other than a board role and I told the search At AmerisourceBergen, the stars aligned perfectly. “My successor was committee that,” Polk recalled. ready,” Yost said, “the board was ready, I was ready.” But eighteen months later, with CEO succession work fully underway for a transition the following year, Polk and Newell Rubbermaid began to fall for each other—even though neither party was acknowledging it. Newell’s directors saw the breadth of his global experience and were impressed by his impact as a strategist and operational manager. They became convinced Polk had what it would take to run Newell, a global marketer of diversified consumer and commercial products. With $6 billion a year in revenues, the company was full of complex challenges, selling multiple brands and products in multiple markets through mul- tiple B-to-B and B-to-C channels.

At the same time, Polk’s seat on the board afforded him a firsthand view of the steady progress the company had been making and the opportuni- ties that existed in its future. He also felt a strong connection to not only his fellow directors but also Newell’s senior management team.

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There were several major obstacles, however. The first: both Polk and discussions. For another, a small group enabled expeditious decision the board valued his directorship, and neither party wanted to sacrifice making. (Accordingly, the committee alone interviewed outside candi- that relationship in order to put him into the potential CEO pool. Sec- dates. Internal candidates were interviewed by Cowhig and the chair- ond, there were a number of personal and professional hurdles to clear. man of the nominating/governance committee.) A third reason was the Polk wasn’t able to relocate to Newell’s headquarters in Atlanta, and he heavy demands of the search; not all directors would be able to dedicate had an attractive long-term financial package that he would forfeit upon so much extra time and effort. his departure from Unilever. Finally, Cowhig also wanted true consensus around the next CEO. If the Even if those could be surmounted, choosing a director to be a CEO is full board, or even a larger group, was involved in the nitty-gritty of the simply not the preferred course of action at most companies. And sud- search, directors who argued for a selection other than the winning denly focusing on a director in the middle of a search brings its own is- candidate would feel compromised. Cowhig preferred the promise of sues. AmerisourceBergen’s Yost is one crisp alignment. skeptic. “If you are hiring a guy to be Several months into the CEO, he needs to learn about the searching for their next Indeed, before embarking on the actual search, the board agreed to re- business,” he said. “Let him be the CEO ... it became view the company’s key strategic assumptions about its future course since those assumptions would determine the criteria for choosing the COO or something else. Having some- increasingly clear that the body go from the board to being the new CEO. Cowhig wanted a dialogue liberated of “ownership” issues or ideal candidate sat right sacred cows. The board utilized a search firm to facilitate private inter- CEO would make me feel uncomfort- beside them. able.” views with each director followed by a full-board discussion that includ- ed input from Ketchum. Finally, an executive session was held, without And yet, several months into searching for their next CEO—reviewing Ketchum, during which the consensus on strategic assumptions was both internal contenders and a slate of highly qualified external candi- baked into the profile specification for the next CEO. In this way, the dates—it became increasingly clear that the ideal candidate sat right be- directors shook hands on the shape of the selection in a manner that side them. Polk had caught their eye, and the search committee mem- would prevent a dispute later on. bers decided to seize the opportunity and deal with the dangers. Although Ketchum, as outgoing CEO, did not drive the process, neither was Newell’s search had begun normally enough in 2010, when President he isolated from it. He was not involved in the external interviews, for in- and CEO Mark D. Ketchum told the board that he wanted to retire some- stance, but was consulted about assessing the internal candidates, whom he time in 2011. knew more deeply than the other directors did. The committee also sought his guidance on how its decisions might affect the company and key execu- The company decided to use its executive committee as the search com- tives. Ketchum was treated as a director with special knowledge, and he was mittee. Besides Non-Executive Chairman Michael Cowhig, the small updated more frequently by the committee than were other directors. group included the chairs of the audit, compensation, and nominating/ governance committees—and notably not Polk. The final selection, Again with the help of an outside search firm, Newell’s internal candi- though, would be a full board decision. dates were interviewed and external candidates were identified and also interviewed. It was near the finish line of that extensive process, how- Cowhig had a number of reasons for placing the search responsibility in ever, that the search committee began to suspect that Polk might make the hands of a smaller group. For one thing, outside candidates tend to a superior candidate. worry about confidentiality if too many people are aware of their job

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As it happened, in another unlikely twist, Ketchum had himself been as a strong outside candidate. By virtue of their time with him, they plucked from the board, albeit in the middle of an urgency. He was were confident enough in his abilities to take not just the next step, but named the interim CEO in 2005 when Joseph Galli resigned. But even also to go the extra mile. They would see whether they could meet the with that transition as precedent, the search committee realized that it requirements of his candidacy for CEO that they otherwise may have was on new ground here. It was one thing to temporarily elevate a direc- viewed as far too risky for a smooth and cost-effective transition. tor as interim CEO and then determine to make that appointment per- manent; it was an entirely different matter to pick someone from the When the committee was ready, it briefed the organizational develop- board during an orderly succession process. ment and compensation committee and Cowhig met individually with the remaining board members, covering the pre-negotiated conditions So when Polk came into focus, Cow- It was one thing to to gauge whether the board would approve them. When that was clear, hig and the other committee mem- temporarily elevate a the search committee pursued Polk as a finalist, but with the freedom bers came up with novel ways to han- director as interim CEO to turn to any of the other candidates if it or Polk reconsidered. dle the situation. and then determine to He didn’t. Polk became president and CEO on July 18, 2011. The key to managing Polk’s candida- make that appointment cy without disrupting his ongoing di- permanent; it was an The board also took full advantage of Ketchum’s availability to overlap with Polk’s initiation for continuity’s sake. He remained as a director for rectorship was to treat him outside of entirely different matter to three additional board meetings. the rest of the succession process. By pick someone from the the time he was engaged, Polk was board during an orderly The successful outcome of Newell’s novel succession underscores the not competing with alternative candi- succession process. value of trusting in the search. For all the best-laid plans, in the end the dates nor did the committee mem- search committee and the board were open to finding the right person bers feel that Newell Rubbermaid was no matter where that person happened to be: inside, outside … or even competing with Polk’s role at Unilever. They had rightly calculated that in the next chair. their discussion would be about whether a responsible set of terms could be established that set Polk up to succeed. If not, both parties could step away on that premise alone, and Polk could continue as an effective di- rector.

Because of the decision to use a small search committee, Polk also hadn’t been involved in any of the succession interviews. That enabled the com- mittee to keep him insulated and separate from the final CEO candi- dates. The members also kept preliminary negotiations with him to themselves; if the contours of a viable deal could be reached, only then would the committee bring Polk forward to the board as its first choice.

After eighteen months as a director, Polk had a grasp of Newell’s future possibilities and a sense of how well he could shape them. For their part, the members of the search committee had come to know and value Polk to an extent that would not have been possible had he simply popped up

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What’s more, the succession effort needed clear leadership because of the highly diverse nature of MasterCard’s board. Its directors had richly varied governance experiences and, although very aligned on the long- The head start: term objectives of the company, held a robust range of views on shorter- term priorities.

MasterCard Logically, the person at the helm of a CEO succession would be the non- executive chair/lead director or the chairman of the nominations com- mittee, according to Haythornthwaite. But he hastened to add that the board title doesn’t matter so long as the individual has the right quali- ties. The leader needs to be strategically minded and disciplined to run There are many times, of course, when there is no “right” internal candi- the process tightly. A good balance of judgment and intuition is also date—or director—and the search for a new CEO leads to someone from necessary. And CEO experience helps. The chief executive’s role is “enor- outside. This is a riskier proposition, in theory, if only because of the un- mous in terms of accountability, and people who have not been in that knowns: What is this candidate really like? How well does he or she un- position can never quite understand that,” he said. derstand our needs? Can the new person mesh well with our culture? A close relationship with the incumbent CEO is also essential. “Things One way to reduce those risks is to recruit a prospective successor before come out of the woodwork—for example, the CEO’s view of the role that the baton is expected to pass. That way the individual can become a he or she should be playing in the succession process,” Haythornthwaite known quantity. said. Some CEOs, for instance, subconsciously enter the process thinking it’s their job to find the successor. “That’s quite difficult—sometimes In the late summer of 2009, MasterCard brought in Ajay Banga, a senior some pretty tough conversations have to be held saying, ‘No, that’s not executive at Citigroup, to be its president and chief operating officer. the way it is. It’s actually the board that makes the decision—and you’re Less than a year later, he was named to succeed Robert W. Selander, just one member. And it’s the board that must live with the decision, not MasterCard’s CEO since 1997. you.’ ” “This was a succession that could be planned a long way in advance be- In MasterCard’s board structure, a human resources/compensation com- cause we knew Bob’s retirement date,” recalled Richard Haythornth- mittee had been working on a continuing basis with Selander on leader- waite, MasterCard’s non-executive chairman, who led the search. ship development and succession planning. In theory, it was the nomi- That retirement date was the end of 2010. The succession process started nating and corporate governance committee, which Haythornthwaite in mid-2008. Plenty of time, indeed. headed, that was responsible for the actual selection of the next CEO. In practice, the chairman of the HR/compensation committee, David Car- There were only three problems. First, MasterCard had become a public lucci, was co-opted in and a de facto search committee formed. company through a public stock offering in 2006 and the full board had been in place for only a couple of years; the directors felt as if they were When the search committee members reviewed Selander’s list of top parachuting into the succession situation. Second, the board was uncer- internal candidates, “we came at it with an open mind” but recommend- tain about the prospects for an internal finalist. And, third, the finan- ed to the full board that it pursue an external search, Haythornthwaite cial crisis that was roaring in full force in 2008 put a cloud over the field said. That recommendation was accepted, and then the task became get- of outside possibilities.

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ting Selander to agree that the next CEO would come from outside the Banga not only had the nuts and bolts of the business down cold, he had company. “That’s why it is important to have a good working relation- big ideas. Indian-born and educated, he had worked at Nestlé and Pepsi ship with the outgoing CEO,” the chairman said. “That’s not an easy before joining Citi and put in tours of duty in the United States, Europe, conversation to have.” the Middle East, Africa, and, of course, India. He was almost as interna- tional as MasterCard itself. (Based in Purchase, New York, MasterCard Not only was Selander gracious and understanding of the board’s view, operates in more than 210 countries and territories and has annual rev- he remained fully involved in the process of finding that outsider. “We enues of $6.7 billion.) cannot imagine a world where we would move forward with someone that you didn’t think was an appropriate candidate,” Haythornthwaite Meetings with the search committee were hastily arranged and all came recalled telling Selander, “not least because there is going to be a transi- to the same conclusion. As did the board. “It was unanimous,” the chair- tion here.” Although the final recommendation would come from the man said. “We closed the deal pretty rapidly.” search committee, he added, “it had to be a consensual decision.” Looking back, it was clear that the board, new as it was to the post-IPO So, even though Selander wasn’t an “You have to come in MasterCard, was pulling its strategic vision into focus in real time, even official member of the board’s search with a strategy before as it was searching for a successor. Had the company chosen one of the committee, as chairman, Haythorn- you come in with people. earlier contenders, it might have misstepped. Though capable, those can- thwaite made sure that he was invit- The people need to be a didates likely would have been the wrong fit for the strategy that finally ed to every key discussion and spent fell into place. “You have to come in with a strategy before you come in fit to the strategy.” time with short-listed candidates be- with people. The people need to be a fit to the strategy,” Haythornth- fore they completed the interview — Richard Haythornthwaite waite said. Circumstances were such for MasterCard that these issues process. were being necessarily addressed concurrently rather than sequentially.

When the search got underway with the support of an external consul- Banga joined MasterCard on Aug. 31, 2009, as president and COO. The tant, the search committee found that candidates fell into two catego- following April he was named CEO, formally replacing Selander on July ries. One group had the strategic vision, ideas, and wherewithal to make 1, 2010. Selander, who had been CEO for thirteen years, stayed on as ex- big changes—and could ensure that the company could respond to the ecutive vice chairman and a director until he retired at the end of 2010. significant systemic challenges that it faced. The other group, the chair- man said, was less creative and more buttoned-down, but would have “Coming from the outside to become the CEO is not an easy thing to do,” been better suited to lead the company through a short-term period of Banga said. “Having this little transition period gave me a chance to market weakness. Different directors favored different candidates de- learn the company, get to know the people, and have someone to sound pending on their expectations of the external world. out ideas with. It was very helpful.” It also gave him time to get to know the analyst community, the media, regulators, and, of course, clients— A number of candidates were considered, some seriously, but no one all before facing the daily pressure of producing results as the CEO. completely clicked—until a board member suggested Banga, then chair- man and CEO of Citibank’s international global consumer group. When determining the length of this sort of transition, the board has to be extremely careful, Haythornthwaite added. “It’s always better to “I looked into Ajay and met him at my home,” the chairman said. “And he make it quite short, with the option to lengthen it. It’s a lot tougher to was the first person who really straddled the two groups. From the mo- have it long and try to shorten it.” ment I met him, I just felt this is the individual we’d been looking for.”

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In office now a little more than two years, Banga spends much of his appreciate the capabilities that the new CEO must possess to meet those time developing talent within the company and introducing up-and- challenges. The leader also needs to have had experience managing an coming leaders to the board in an ongoing effort to prepare for his own organization to understand the politics and logistics of settling into a succession, whether the need arrives suddenly or far down the road. new company.

“Developing a good pipeline—not just potential CEO candidates for the By contrast, those committee members with ongoing oversight of the near term, but also for the second and third levels of leadership further talent pipeline are in it for the long haul. Though they don’t need to have out—is 50 percent of what a CEO should be doing,” he said. had CEO experience themselves, they do need senior management expe- rience and longevity—and they must be very process-driven. How do you “Developing a good When it comes to succession, Banga build a pipeline two or three levels down from the CEO? How do you and others we interviewed made an pipeline—not just identify and develop missing skills in those people? How do you pick jobs important distinction between the potential CEO candidates that they should move into? “The results may take years to play out and development of a talent pipeline of fu- for the near term, but there is a lot of ambiguity involved,” Banga said. “But some people are ture leaders and the actual search for also for the second and only interested in the end conclusion—they want to see the last page and selection of a new CEO. The non- first—and they shouldn’t be involved.” executive chairman or independent third levels of leadership lead director should head the latter further out—is 50 percent Banga takes a hands-on approach to developing his executive team. He effort, including any external search. of what a CEO should be uses each board meeting to introduce to the directors some of the eighty But the identification and develop- doing.” or so rising talents in the company. And each year he leads a “people ment of future leaders should be driv- — Ajay Banga conversation” with the board, explaining how he’s developing layers of en by the chief executive and over- leaders who in future years will move up to the thirty-five-person oper- seen by a board committee. ating committee, and later the eight-person executive committee. When he saw gaps in key skill areas early this year, he took action. The solu- Likewise, Banga sees different skills at work. The individual managing tion: “Let’s go hire four or five people, some relatively senior. We briefed the event of a CEO change needs to be inclusive and draw in a wide a search company and by May 1 had them all in.” group of board members. That leader needs some longevity to under- stand the company (the thought of a new chairman looking for a new Ideally, someone should be ready to take over tomorrow morning, at CEO is “scary,” he says), have a grasp of the challenges it is facing, and

Figure 4 Figure 3 Emergency succession Leading succession on the board Only 17 percent of the Korn/Ferry Market Cap 100 companies specified in their proxy and Only 37 percent of the companies in the Korn/Ferry Market Cap 100 indicated in their proxy governance statements that they had a plan or person at the ready in the event of a sudden statement or principles of governance that the existing chairman of the committee CEO departure. overseeing succession planning either was or is a CEO of a public company. Stated plan for interim CEO 4% Currently a CEO 14% Written procedures in place 6% Former CEO 23% List of potential successors 7%

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least on an interim basis, with a permanent replacement ready in a year or two and other internal candidates being groomed for the five-year horizon. “You just hope that by the time we get to the point of succes- sion, we’ve got three or four good internal candidates,” Haythornthwaite The standout final lap: said. “It’s always a challenging process because the end time is generally not as precise as it was with Bob. And so there’s a hedging process that Marriott goes on with the development.”

But when it comes time to make a change at the top of MasterCard, Banga said he will be ready to hand the final decision over to the board.

A sitting CEO “should not have an equal say in succession decisions,” At first blush, the most striking thing about the new CEO of Marriott Banga added. “Once the board and its committee are comfortable and International, Inc. is that his last name is not Marriott. they’ve got it down to the one or two people they really like, they can ask me for my opinion, but finally they should be making every call. My In late March, Arne Sorenson became the first person from outside the opinion as CEO should, at best, just be interesting to have.” family to run the global hotel company. He succeeded Bill Marriott Jr., who had served as CEO for forty years after taking over from his father, the company’s founder, who had led it for the previous forty-five years.

Sorenson had been with the Bethesda, Maryland-headquartered compa- ny for twenty years before being named CEO, starting out as a promising outsider who over time turned into a highly trusted insider. But Soren- son was still rigorously tested before being handed the CEO’s mantle.

To be sure, Sorenson’s route to the top was shaped in part by the com- pany’s family history and dynamics. A public company, Marriott is still more than 20 percent owned by Marriott family members. But those circumstances aside, the succession was guided by the same broad prin- ciples that were employed by AmerisourceBergen, MasterCard, and New- ell Rubbermaid.

“Succession should be a process, not an event,” said David A. Rodriguez, Marriott’s executive vice president and chief human resources officer. “It has to be continuous, comprehensive, and rooted in both today’s and tomorrow’s business.”

Succession planning is not a job for “casual board members,” he noted. Those involved in a CEO search need to have a firm grasp on the strate- gy. They have to “immerse themselves in today’s pressures and issues while also gaining insight into how the industry is changing. You don’t

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want to choose a CEO for a model that is tied to yesterday’s business— candidates for their ability to deal with the subtleties and special ele- you need to choose someone with the right attributes and characteris- ments of the situation.” tics to push the company to where it needs to be five and ten years down the road,” he noted. Sorenson wasn’t the only candidate in the running to succeed Marriott. But the two had developed a special rapport over the years. And Soren- In Marriott’s case, Rodriguez said, one of the key drivers of change is a son had been tested and tested again as a senior manager. looming generational shift in customers from baby boomers to their children, the millennials. Marriott has 3,700 lodging properties in sev- He caught the attention of Marriott while representing the company as enty-four countries and territories and annual revenues of more than its lead outside lawyer in what was arguably the most important trans- $12 billion, and baby boomers are still the company’s bread and butter. action in Marriott’s history, the separation of its real estate assets from But soon profitability will be tied much more to the younger generation. the hotel management business. Impressed with Sorenson’s work, Mar- That inevitable shift—what Rodriguez called a “liminal” moment—was riott brought him inside, starting him out in mergers and acquisitions. A few years later, when the CFO left, just one of the themes that was shaping the future of the business and “You can’t have a lot of therefore succession. Sorenson was tapped for that job, even though his background wasn’t horses running neck and Another was the recognition that a successful transition isn’t about in finance. neck close to the finish choosing just a CEO, but rather making sure that the right leadership line, and the best way to team is in place or being developed. “You need to be looking at all the “Mr. Marriott saw his talent,” Rodri- guez said, adding that Sorenson also narrow the field is to put roles surrounding the CEO,” Rodriguez said. “Is this the right person to their feet to the fire.” help that team keep growing with the business?” won the CEO’s trust. “A very impor- tant piece to the succession puzzle — David A. Rodriguez And then there was the family theme. Given the central role that Bill was Bill’s level of trust with the candi- Marriott had played over six decades at the company—he turned what dates. I don’t think any family leadership thinks that it can’t wait to had been a restaurant business in his father’s day into a hotel giant—any hand over the reins to a non-family member. But very early on, we had change at the top was bound to be a “bit of a shock to the system,” Rodri- a sense Arne would be a good candidate.” guez said. It was essential that the search, which was conducted by the compensation committee, “be extremely thoughtful in assessing the As the succession process picked up speed, a winnowing of the candi- dates began. “You can’t have a lot of horses running neck and neck close to the finish line,” Rodriguez said, “and the best way to narrow the field is to put their feet to the fire.” Figure 5 Depth of succession plans In Sorenson’s case, that meant becoming president of the company’s Eu- ropean operations in addition to being CFO. “It was important to see him Only 57 percent of the companies in the Korn/Ferry Market Cap 100 reported that their boards oversaw succession plans that extended below the CEO level. accountable for a full business, with all the different roles that are im- plied,” Rodriguez said. “We had a long look at him in that venue.” Succession plan encompasses All key corporate officers 11% Others were put through the same rigorous paces. “They were stars too, All senior managers 46% and no one failed,” Rodriguez said. “It was just that every time Arne got Not specified 43% a new assignment, he got better. By the last couple of years, the choice

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wasn’t cloudy at all—it was very clear that he was the top candidate and he had the tools to be CEO.”

On March 31, just days after he turned eighty, Marriott passed the reins to Sorenson and took up a new role as the company’s very active execu- Conclusion: Winning a tive chairman. race with no finish line For Rodriguez, who was “charged with thinking about succession from Day 1” when he joined the company fifteen years ago, it was the end of a long process. But he didn’t get much downtime before starting up again. CEO succession may not be rocket science, but it is not a cookie-cutter “Three days before the transfer, Arne and I shared a great laugh,” Rodri- process, either. The guiding principles for getting it right not only have guez recalled. “He looked at me and said, ‘Oh, by the way, we need to to be understood, but also adapted to a company’s particular situation. figure out what we are going to say to the board at the next meeting about picking my successor.’ ” “It never ceases to amaze me how simultaneously simple and complex succession stories are,” said Korn/Ferry’s Stevenson. “There are under- pinning guidelines that point the way to the right process, yet the ap- plication of that process is so widely diverse, depending as it does on the board, the CEO, the business strategy, and the type of challenges that are unique to each company.”

Indeed, the successions described above differed in many ways. Yost played a central role in picking his successor at AmerisourceBergen, for instance, while Ketchum, his counterpart at Newell, was a crucial advi- sor without driving the project. Nor did every company get everything right—as with MasterCard having to play catch-up in aligning its strate- gy with its CEO profile.

The common denominator, though, was a commitment to continuing the succession process until the company hit pay dirt. In one telling similarity, those in charge of the succession process at each company knew with real conviction when the winner had been found.

“In the end, you’ve got to wait for the right candidate to come along,” MasterCard’s Haythornthwaite said. “You have to make expedient deci- sions as you go—and you have to have a bit of luck thrown in.”

As the four case studies in this report reflect, details always vary. But ten guiding principles stood out as a bold outline of an effective succes-

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sion. We hope these are helpful as boards continue to exercise their suc- committee. This is essential both to keep the directors informed and to cession responsibilities with more efficiency, effectiveness, and confi- detect and address issues as they surface. Also, directors often give ac- dence. cess to useful information out in the market.

Never stop planning. CEO succession is an ongoing process that begins Agree on the strategy first.The board must reach consensus on the anew the day after a CEO is chosen. “It is important that you not only future business environment and the strategy to address it. Then, and have a long-term plan in place but also a ‘train wreck’ scenario, should only then, is it ready to define the attributes that the new CEO must the CEO become incapacitated,” said Yost. Yet the majority of companies have to pursue that strategy. The process used to win alignment on strat- may not be prepared to name a new CEO should the need suddenly arise, egy can vary. The one employed by Newell Rubbermaid stands out for its according to proxy and governance statements filed by firms that are on thoroughness: use an outside party to interview each director and the this year’s list of the Korn/Ferry Market Cap 100. Only 17 percent indi- outgoing CEO, then have a full group discussion, and reach final align- cated that they had identified an interim replacement, annually re- ment at the executive committee level. viewed a list of candidates, or had written procedures in place. What’s Develop and test internal candidates. more, 25 percent did not indicate that they had any succession plan, Preparing viable internal candi- short or long term. dates for future succession is a long-term process that typically requires at least three years of focused effort with high board participation. The Pick your succession leader with care. Whether it’s the lead director, identification and development of fu- board chairman, or a committee chair, whoever leads a CEO selection ture leaders encompass filling seats “The idea is to go outside process must have a solid sense of the company’s strategy and future in the second and third tiers of man- in advance with a runway outlook. He or she needs to be: highly disciplined, able to devote signifi- agement as well as at the top of the to make sure that the cant extra time to the task, intuitive about people, and trustworthy in house. Banga, MasterCard’s CEO, is a flight path to the CEO’s the eyes of the board. CEO experience is also highly recommended so great example. He showcases seventy- office is going to work.” that the search leader knows firsthand what the role will demand of a five to eighty rising stars to his board —Stephen P. Mader candidate. on an ongoing basis.

Define the board’s role.The search for a new CEO can be run board- Give a prospective CEO a head start. When possible, lower the risks wide or delegated to a committee. Pick the structure that plays to your of choosing an outsider by strategically bringing the person into the board’s strengths and dynamics, recognizing that there are tradeoffs in company with enough time to learn its culture and how its current lead- each approach. Involving every director may require more time to make ership operates. This way, by the time the succession is finalized, the decisions and pose confidentiality issues. A narrow approach may limit new CEO and the board should be deeply familiar with each other and the process’ focus and make final consensus harder. comfortable with the fit. “The idea is to go outside in advance with a runway to make sure that the flight path to the CEO’s office is going to Define the sitting CEO’s role. The CEOs in some circumstances lead work,” said Korn/Ferry’s Mader. and manage the succession process. In others, the CEO is cast as an im- portant advisor. The key is to make a conscious decision and reach a Don’t rule out directors ... but never appoint one with the anticipation clear agreement with the CEO on his or her participation. of CEO succession. If a strong candidate happens to be on the board when a successor is needed, the director’s title needn’t be an insur- Keep talking. Recognize the central importance of communication to mountable barrier. There are two choices when considering a sitting di- the full board, particularly if the search process has been delegated to a rector: bring the candidate into the process with the understanding that

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his or her director status will terminate regardless of the outcome, or keep the candidate out of the main search process and proceed along a separate discreet path so that the candidacy is “reversible” and the direc- torship viable should either party not want to go further. About the 2012 Use a mix of incentives to prime the pipeline. Part of a CEO’s annual bonus should be tied to executive development. Some companies go one Korn/Ferry step further: providing for a bonus after the CEO has left if the successor Market Cap 100 he or she helped to select was, in fact, a winner.

The Korn/Ferry Market Cap 100 (KFMC100) are the U.S. companies that had the largest market capitalization as of the close of markets on May 1, 2012, after the end of most firms’ 2011 fiscal year. Companies were removed from the list if they were not traded primarily on the NYSE or Nasdaq, or were public investment firms.

Appendix A: The KFMC100 companies

There were eight companies that joined the ranks of the KFMC100 in FY 2011: Biogen Idec Inc. priceline.com Inc. Celgene Corp. Starbucks Corp. Exelon Corp. The TJX Companies, Inc. Kimberly-Clark Corp. Yum! Brands, Inc.

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Figure 6 Figure 8 KFMC100 by market capitalization The Korn/Ferry Market Cap 100

The KFMC100 companies had a median market capitalization of $57.2 billion on May 1, 2012, The KFMC100 ranked in order of market capitalization as of the close of markets on after the close of most companies’ fiscal year. Exactly 24 percent of companies were valued May 1, 2012. at $100 billion or more. Market cap in Market Cap Number billions on $30 billion – $39.99 billion 31 Rank Co. May 1, 2012 Industry $40 billion – $59.99 billion 25 1 Apple Inc. (NasdaqGS: AAPL) $546.1 Computer hardware $60 billion – $79.99 billion 12 2 Exxon Mobil Corp. (NYSE: XOM) $406.0 Integrated oil and gas $80 billion – $99.99 billion 8 3 Microsoft Corp. (NasdaqGS: MSFT) $267.0 Systems software $100 billion – $149.99 billion 8 4 International Business Machines Corp. (NYSE: IBM) $238.9 IT consulting and other services $150 billion – $199.99 billion 9 5 Chevron Corp. (NYSE: CVX) $210.2 Integrated oil and gas $200 billion and over 7 6 General Electric Co. (NYSE: GE) $207.1 Industrial conglomerates 7 Wal-Mart Stores Inc. (NYSE: WMT) $200.3 Hypermarkets and super centers 8 Google Inc. (NasdaqGS: GOOG) $197.2 Internet software and services 9 AT&T, Inc. (NYSE: T) $193.3 Integrated telecommunication Figure 7 services Industry sectors represented 10 Johnson & Johnson (NYSE: JNJ) $178.7 Pharmaceuticals 100 Services was the most represented sector among the KFMC with twenty-two companies. 11 Wells Fargo & Co. (NYSE: WFC) $177.1 Diversified banks The KFMC100 included fifteen basic materials companies, but that was a significant drop 12 Procter & Gamble Co. (NYSE: PG) $174.4 Household products from 2011, when that sector comprised twenty companies. Consumer goods, on the other hand, added three companies to the list, for thirteen. 13 Pfizer Inc.(NYSE: PFE) $172.6 Pharmaceuticals 14 The Coca-Cola Co. (NYSE: KO) $172.3 Soft drinks Sector Count 15 JPMorgan Chase & Co. (NYSE: JPM) $162.1 Other diversified financial services Basic materials 15 Conglomerates 3 16 Philip Morris International, Inc. (NYSE: PM) $153.5 Tobacco Consumer goods 13 17 Oracle Corp. (NasdaqGS: ORCL) $146.3 Systems software Financial 11 18 Intel Corp. (NasdaqGS: INTC) $142.2 Semiconductors Health care 14 19 Merck & Co. Inc. (NYSE: MRK) $119.4 Pharmaceuticals Industrial goods 6 20 Verizon Communications Inc. (NYSE: VZ) $114.7 Integrated telecommunication Services 22 services Technology 14 21 QUALCOMM Inc. (NasdaqGS: QCOM) $109.4 Communications equipment Utilities 2 22 Cisco Systems, Inc. (NasdaqGS: CSCO) $108.6 Communications equipment 23 Amazon.com Inc. (NasdaqGS: AMZN) $104.5 Insternet retail 24 Pepsico, Inc. (NYSE: PEP) $103.2 Soft drinks 25 McDonald’s Corp. (NYSE: MCD) $99.0 Restaurants 26 Schlumberger Limited (NYSE: SLB) $98.9 Oil and gas equipment and services 27 Abbott Laboratories (NYSE: ABT) $97.6 Pharmaceuticals 28 Citigroup, Inc. (NYSE: C) $96.8 Other diversified financial services

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Market cap in Market cap in billions on billions on Rank Co. May 1, 2012 Industry Rank Co. May 1, 2012 Industry

29 ConocoPhillips (NYSE: COP) $91.7 Integrated oil and gas 62 Eli Lilly & Co. (NYSE: LLY) $46.2 Pharmaceuticals 30 Bank of America Corp. (NYSE: BAC) $87.4 Other diversified financial services 63 Enterprise Products Partners LP (NYSE: EPD) $45.4 Oil and gas storage and transportation 31 Visa, Inc. (NYSE: V) $82.7 Data processing and outsourced services 64 Express Scripts Inc. (NasdaqGS: ESRX) $44.9 Health care services

32 Comcast Corp. (NasdaqGS: CMCSA) $81.5 Cable and satellite 65 Starbucks Corp. (NasdaqGS: SBUX) $43.2 Restaurants 33 The Home Depot, Inc. (NYSE: HD) $79.0 Home improvement retail 66 Ford Motor Co. (NYSE: F) $42.9 Automobile manufacturers 34 Walt Disney Co. (NYSE: DIS) $77.3 Movies and entertainment 67 Las Vegas Sands Corp. (NYSE: LVS) $42.2 Casinos and gaming 35 United Parcel Service, Inc. (NYSE: UPS) $74.9 Air freight and logistics 68 Monsanto Co. (NYSE: MON) $40.6 Fertilizers and agricultural chemicals 36 United Technologies Corp. (NYSE: UTX) $74.3 Aerospace and defense 69 The Dow Chemical Co. (NYSE: DOW) $40.4 Diversified chemicals 37 Occidental Petroleum Corp. (NYSE: OXY) $74.0 Integrated oil and gas 70 Southern Co. (NYSE: SO) $39.9 Electric utilities 38 Kraft Foods Inc. (NYSE: KFT) $70.7 Packaged foods and meats 71 Medtronic, Inc. (NYSE: MDT) $39.8 Health care equipment 39 American Express Co. (NYSE: AXP) $70.3 Consumer finance 72 Gilead Sciences Inc. (NasdaqGS: GILD) $39.4 Biotechnology 40 Caterpillar Inc. (NYSE: CAT) $67.1 Construction and farm machinery 73 Target Corp. (NYSE: TGT) $38.7 General merchandise stores and heavy trucks 74 Emerson Electric Co. (NYSE: EMR) $38.6 Electrical components and equipment 41 Altria Group Inc. (NYSE: MO) $65.6 Tobacco 75 Costco Wholesale Corp. (NasdaqGS: COST) $38.3 Hypermarkets and super centers 42 3M Co. (NYSE: MMM) $62.0 Industrial conglomerates 76 MetLife, Inc. (NYSE: MET) $38.2 Life and health insurance 43 U.S. Bancorp (NYSE: USB) $61.5 Diversified banks 77 priceline.com Inc. (NasdaqGS: PCLN) $37.9 Internet retail 44 American International Group, Inc. (NYSE: AIG) $61.0 Multi-line insurance 78 Lowe’s Companies Inc. (NYSE: LOW) $37.7 Home improvement retail 45 EMC Corp. (NYSE: EMC) $59.2 Computer storage and peripherals 79 Danaher Corp. (NYSE: DHR) $37.7 Industrial machinery 46 The Goldman Sachs Group, Inc. (NYSE: GS) $58.7 Investment banking and brokerage 80 Apache Corp. (NYSE: APA) $36.9 Oil and gas exploration and 47 UnitedHealth Group, Inc. (NYSE: UNH) $58.5 Managed health care production 48 CVS Caremark Corp. (NYSE: CVS) $58.1 Drug retail 81 Anadarko Petroleum Corp. (NYSE: APC) $36.6 Oil and gas exploration and production 49 The Boeing Co. (NYSE: BA) $57.5 Aerospace and defense 82 Texas Instruments Inc. (NYSE: TXN) $36.5 Semiconductors 50 MasterCard Incorporated (NYSE: MA) $57.2 Data processing and outsourced services 83 Freeport-McMoRan Copper & Gold Inc. (NYSE: FCX) $36.4 Diversified metals and mining

51 Bristol-Myers Squibb Co. (NYSE: BMY) $56.4 Pharmaceuticals 84 Time Warner Inc. (NYSE: TWX) $36.2 Movies and entertainment 52 Amgen Inc. (NasdaqGS: AMGN) $55.5 Biotechnology 85 General Motors Co. (NYSE: GM) $36.0 Automobile manufacturers 53 Union Pacific Corp.(NYSE: UNP) $53.5 Railroads 86 PNC Financial Services Group Inc. (NYSE: PNC) $35.0 Regional banks 54 eBay Inc. (NasdaqGS: EBAY) $53.0 Internet software and services 87 Praxair Inc. (NYSE: PX) $34.6 Industrial gases 55 Nike Inc. (NYSE: NKE) $51.3 Footwear 88 Morgan Stanley (NYSE: MS) $34.2 Investment banking and brokerage 56 E.I. du Pont de Nemours & Co. (NYSE: DD) $50.1 Diversified chemicals 89 Yum! Brands, Inc. (NYSE: YUM) $33.5 Restaurants 57 Hewlett-Packard Co. (NYSE: HPQ) $49.0 Computer hardware 90 DIRECTV (NasdaqGS: DTV) $33.3 Cable and satellite 58 News Corp. (NasdaqGS: NWSA) $47.8 Movies and entertainment 91 Exelon Corp. (NYSE: EXC) $33.2 Electric utilities 59 VMware, Inc. (NYSE: VMW) $47.7 Systems software 92 Deere & Co. (NYSE: DE) $33.1 Construction and farm machinery and heavy trucks 60 Honeywell International Inc. (NYSE: HON) $47.3 Aerospace and defense 93 National Oilwell Varco, Inc. (NYSE: NOV) $32.3 Oil and gas equipment and services 61 Colgate-Palmolive Co. (NYSE: CL) $47.2 Household products

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Market cap in 100 billions on Appendix B: The KFMC directors Rank Co. May 1, 2012 Industry 100 94 Biogen Idec Inc. (NasdaqGS: BIIB) $32.1 Biotechnology Turnover on KFMC boards remained remarkably low in fiscal year 95 Celgene Corp. (NasdaqGS: CELG) $32.0 Biotechnology 2011. There were only ninety total appointments—including seven new 96 Halliburton Co. (NYSE: HAL) $31.6 Oil and gas equipment and services CEOs—to this group of 1,190 directors, a turnover rate of only 7.6 per- 97 The TJX Companies, Inc. (NYSE: TJX) $30.9 Apparel retail cent. 98 Baxter International Inc. (NYSE: BAX) $30.8 Health care equipment The following list includes all directors who joined a KFMC100 board in 99 Kimberly-Clark Corp. (NYSE: KMB) $30.7 Household products fiscal year 2011. Those new directors who are also CEO of that company 100 Walgreen Co. (NYSE: WAG) $30.2 Drug retail are marked with an asterisk (*).

Mukesh D. Ambani James W. Breyer New board New board Bank of America Corp. News Corp. Profile Profile Chairman and Managing Director, Reliance Managing Partner, Accel Partners Industries Limited Other boards Other board Wal-Mart Stores Inc.; Dell Inc. Reliance Industries Limited J. Frank Brown Kate Baicker New board New board The Home Depot, Inc. Eli Lilly & Co. Profile Profile Former Dean, INSEAD Professor of Health Economics at the Harvard University School of Public Health M. Michele Burns New board Shumeet Banerji The Goldman Sachs Group, Inc. New board Profile Hewlett-Packard Co. Executive Director and CEO, Retirement Profile Policy Center sponsored by Marsh & Chief Executive Officer, Booz & Co. McLennan Companies Inc. Other boards James Bell Cisco Systems, Inc.; Wal-Mart Stores Inc. New board JPMorgan Chase & Co. David L. Calhoun Profile New board Retired Executive Vice President, The Caterpillar Inc. Boeing Co. Profile Other board CEO, Nielsen; Former Vice Chairman, The Dow Chemical Co. General Electric Co. Other boards Sally E. Blount Nielsen Holdings NV; The Boeing Co.; New board Medtronic, Inc. Abbott Laboratories Profile Larry Casey Dean of the J.L. Kellogg Graduate School of New board Management at Northwestern University Enterprise Products Partners LP Profile Robert Bradway Private Investor; Senior Director, Duncan New board Energy Partners LP Amgen Inc. Profile President and COO, Amgen Inc. Other board Norfolk Southern Corp.

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Elaine Chao David B. Dillon Jesse J. Greene Jr. Scott D. Josey New board New board New board New board Wells Fargo & Co. DIRECTV Caterpillar Inc. Apache Corp. Profile Profile Profile Profile Former U.S. Secretary of Labor Chairman and CEO, The Kroger Co. Former Vice President of Financial Former CEO and Chairman, Mariner Energy, Other boards Other board Management, Chief Financial Risk Officer, Inc.; CEO, Sequitur Energy Management Protective Life Corporation; Dole Food Co. The Kroger Co. Vice President, and Treasurer, International LLC Inc. Business Machines Corp. Dixon Doll Chansoo Joung Kevin P. Chilton New board Judd Gregg New board New board DIRECTV New board Apache Corp. Anadarko Petroleum Corp. Profile Honeywell International Inc. Profile Profile Co-Founder and General Partner, DCM Profile Senior Advisor, Warburg Pincus LLC Retired Commander, United States Strategic Other board Former U.S. Senator from New Hampshire; Command, Offutt Air Force Base Network Equipment Technologies, Inc. Former Governor of New Hampshire Steven A. Kandarian* Other boards Other board New board Orbital Sciences Corporation; Level 3 Anne M. Finucane IntercontinentalExchange Inc. MetLife, Inc. Communications Inc. New board Profile CVS Caremark Corp. William W. Helman IV CEO, MetLife, Inc. Elizabeth J. Comstock Profile New board New board Global Strategy and Marketing Officer, Bank Ford Motor Co. Lawrence W. Kellner Nike Inc. of America Corp. Profile New board Profile General Partner, Greylock Partners The Boeing Co. Senior Vice President and Chief Marketing John H. Fitzpatrick Other board Profile Officer, General Electric Co. New board Zipcar, Inc. President, Emerald Creek Group; Former American International Group, Inc. Chairman and CEO, Continental Airlines Timothy Cook* Profile Peter B. Henry Other boards New board Chairman, Oak Street Management Co. New board Chubb Corp.; Marriott International, Inc. Apple Inc. Kraft Foods Inc. Profile Kenneth C. Frazier* Profile Candace Kendle Chief Executive Officer, Apple Inc. New board Dean, Leonard N. Stern School of Business, New board Other board Merck & Co. Inc. New York University United Parcel Service, Inc. Nike Inc. Profile Profile President and CEO, Merck & Co. Inc. Helen Hobbs Co-Founder and Former Chairman and W. Don Cornwell Other board New board CEO, Kendle International Inc. New board Exxon Mobil Corp. Pfizer Inc. Other board American International Group, Inc. Profile HJ Heinz Co. Michael A. Friedman Profile Investigator, Howard Hughes Medical Former CEO and Chairman, Granite New board Institute; Professor of Internal Medicine and Paal Kibsgaard* Broadcasting Corporation Celgene Corp. Molecular Genetics and Director of the New board Other boards Profile Schlumberger Limited President and CEO, City of Hope McDermott Center for Human Growth and Pfizer Inc.; Avon Products Inc. Development, University of Texas Profile Other board CEO, Schlumberger Limited Richard Daley MannKind Corp. Southwestern Medical Center New board Robert Iger Joel Klein The Coca-Cola Co. Fabian Tito Garcia New board New board New board Profile Apple Inc. News Corp. Former Mayor of Chicago; Managing Kimberly-Clark Corp. Profile Profile Profile Principal, Tur Partners LLC President and CEO, Walt Disney Co. Executive Vice President, Education Chief Operating Officer of Global Innovation Division, News Corp.; Former Chancellor of and Growth, Colgate-Palmolive Co. Other board Bill DeLaney Walt Disney Co. the New York City Department of Education New board Evan G. Greenberg Express Scripts Inc. Omar Ishrak* Charles A. Koppelman Profile New board New board The Coca-Cola Co. New board President, CEO, and Principal Executive Medtronic, Inc. Las Vegas Sands Corp. Officer, Sysco Corp. Profile Profile Chairman, President, and CEO, ACE Limited Profile Other board Chairman and CEO, Medtronic, Inc. Chairman and CEO, CAK Entertainment, Sysco Corp. Other board Inc. ACE Limited Other board Six Flags Entertainment Corp.

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Blake G. Krikorian Nancy McKinstry Lorrie Norrington Gary M. Reiner New board New board New board New board Amazon.com Inc. Abbott Laboratories DIRECTV Hewlett-Packard Co. Profile Profile Profile Profile Founder, id8 Group Productions Inc. Chairman and CEO, Wolters Kluwer N.V. Former President, eBay Marketplaces at Special Advisor, General Atlantic Other boards eBay Other board Ellen J. Kullman Sanoma Oyj; Ericsson; Wolters Kluwer N.V. Other board Genpact Limited New board Autodesk Inc. United Technologies Corp. Kathryn McQuade Johnathan A. Rodgers Profile New board Lubna S. Olayan New board Chairwoman and CEO, E.l. DuPont de Altria Group Inc. New board Comcast Corp. Nemours & Co. Profile Schlumberger Limited Profile Other board Executive Vice President and Chief Financial Profile President and CEO, TV One, LLC E.l. DuPont de Nemours & Co. Officer, Canadian Pacific Railway Limited Deputy Chairwoman and CEO, Olayan Other boards Financing Co. Nike Inc.; Procter & Gamble Co. Rodger A. Lawson Eduardo G. Mestre Other boards New board New board WPP PLC; Chelsfield Partners LLP; Saudi Patricia F. Russo UnitedHealth Group, Inc. Comcast Corp. Hollandi Bank New board Profile Profile Hewlett-Packard Co. Retired President and CEO, Fidelity Vice Chairman, Evercore Partners Inc. James W. Owens Profile Investments Financial Services Other board New board Former CEO and Director, Alcatel-Lucent; Avis Budget Group Inc. Morgan Stanley Former Vice Chair of the National Security Mike O. Leavitt Profile Telecommunications Advisory Committee New board Katie Mitic Retired Chairman and CEO, Caterpillar Inc. Other boards Medtronic, Inc. New board Other boards Merck & Co. Inc; KKR & Co. L.P.; General Profile eBay Inc. International Business Machines Corp.; Motors Co.; Alcoa Inc. Former Governor of Utah; Former U.S. Profile Alcoa Inc. Secretary of Health and Human Services; Former Director of Marketing, Facebook Inc. Robert E. Sanchez Chairman, Leavitt Partners Inc. Federico Pena New board Jon Moeller New board Texas Instruments Inc. Teri List-Stoll New board Wells Fargo & Co. Profile New board Monsanto Co. Profile President of Global Fleet Management Danaher Corp. Profile Senior Advisor, Vestar Capital Partners; Solutions, Ryder System, Inc. Profile Chief Financial Officer, Procter & Gamble Former U.S. Secretary of Energy; Former Former Vice President of Finance, Procter & Co. U.S. Secretary of Transportation Ronald L. Sargent Gamble Co. New board William C. Montgomery Other board Sonic Corp. The Home Depot, Inc. Ann M. Livermore New board Profile New board Apache Corp. Robert B. Polet Chief Executive Officer, Staples, Inc. Hewlett-Packard Co. Profile New board Other boards Profile Managing Director, Quantum Energy Philip Morris International, Inc. The Kroger Co.; Staples, Inc. Executive Vice President, Technology Partners Profile Solutions Group, Hewlett-Packard Co. Chairman, Safilo Group S.p.A.; Former CEO Tom Schoewe Kalpana Morparia Other board and President, Gucci Group NV New board New board United Parcel Service, Inc. Other boards General Motors Co. Philip Morris International, Inc. Safilo Group S.p.A.; Reed Elsevier NV Profile Mohd H. Marican Profile Former Executive Vice President and Chief New board CEO, J.P. Morgan India Private Limited Rima Qureshi Financial Officer, Wal-Mart Stores Inc. ConocoPhillips Other board New board Other boards Profile Dr. Reddy’s Laboratories Limited MasterCard, Inc. Northrop Grumman Corp.; KKR & Co. L.P.; Former President and CEO, PETRONAS Profile PulteGroup, Inc.; Centex Corp. Dennis A. Muilenburg Other boards Senior Vice President and Business Unit Sembcorp Marine LTD; SembCorp New board Head, CDMA Mobile Systems, Ericsson Dominique Senequier Industries Caterpillar Inc. New board Profile Joshua Ramo Hewlett-Packard Co. Lowell C. McAdam* Executive Vice President, The Boeing Co.; New board Profile New board President and CEO, Boeing Defense Starbucks Corp. Chairman and CEO, AXA Private Equity Verizon Communications Inc. Profile Other boards Profile Vice Chairman, Kissinger Associates Cir-Compagnie Industriali Riunite S.p.A.; Chairman, President, and CEO, Verizon Other board Schneider Electric SA Communications Inc. FedEx Corp.

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Clara Shih Lee Thomas Ralph Whitworth New board New board New board Starbucks Corp. E.I. DuPont de Nemours & Co. Hewlett-Packard Co. Profile Profile Profile CEO and Director, Hearsay Labs Inc. Former Chairman and CEO, Rayonier Inc. Principal, Relational Investors LLC Other boards Elliott Sigal Rayonier Inc.; Georgia-Pacific Group; Ronald A. Williams New board Hercules Inc. New board Bristol-Myers Squibb Co. Johnson & Johnson Profile Donald Thompson Profile Executive Vice President, Chief Scientific New board Former Chairman and CEO, Aetna Inc. Officer, and President, R&D, Bristol-Myers McDonald’s Corp. Other boards Squibb Co. Profile The Boeing Co.; American Express Co. Other board President and Chief Operating Officer, Mead Johnson Nutrition Co. McDonald’s Corp. Eric Wiseman Other board New board Sherry Smith Exelon Corp. Lowe’s Companies Inc. New board Profile Deere & Co. Robert D. Walter Chairman, President, and CEO, VF Corp. Profile New board Other boards Executive Vice President and Chief Financial American Express Co. VF Corp.; Cigna Corp. Officer, Supervalu Inc. Profile Founder and Former Chairman and CEO, Richard Snell Cardinal Health, Inc. New board Other boards Enterprise Products Partners LP Nordstrom Inc.; Yum! Brands, Inc. Profile Senior Counsel, Thompson & Knight LLP Alberto Weisser New board Deborah L. Spar Pepsico, Inc. New board Profile The Goldman Sachs Group, Inc. Chairman and CEO, Bunge Limited Profile Other board President, Barnard College Bunge Limited Roy Tamakoshi Miles D. White New board New board Morgan Stanley Caterpillar Inc. Profile Profile Senior Advisor, The Bank of Tokyo- Chairman and CEO, Abbott Laboratories Mitsubishi UFJ, Limited Other boards Other board Abbott Laboratories; McDonald’s Corp. The Kansai Electric Power Co. Inc. Tony L. White Masaaki Tanaka New board New board CVS Caremark Corp. Morgan Stanley Profile Profile Former Chairman, President, and CEO, Resident Managing Officer for the United Applied Biosystems, Inc. States, Mitsubishi UFJ Financial Group Inc. Other boards Ingersoll-Rand plc; Bard Inc. Marc Tessier-Lavigne New board Margaret C. Whitman* Pfizer Inc. New boards Profile Procter & Gamble Co., Hewlett-Packard Co. President, The Rockefeller University Profile Other board President and CEO, Hewlett-Packard Co.; Regeneron Pharmaceuticals Inc. Former President and CEO, eBay Inc. Other board Zipcar, Inc.

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Figure 9 Figure 12 Number of boards served among new KFMC100 directors Age of directors

Among the KFMC100 class of 2011, a large majority of the directors (in this case including Excluding CEOs, there are 1,130 individual directors in the KFMC100, the bulk of whom are in CEOs) were on only one or two boards. In FY 2010, about 13 percent of directors served on their fifties and sixties. Only 5 percent are under age fifty or over seventy-five. The average four or more boards; in FY 2011, that rate dropped to less than 5 percent. age of directors, again excluding CEOs, is 62.9. 5% 75 and over 5% 49 or younger Number of 1 37 boards served 14% 70 to 74 10% 50 to 54 2 30

3 19

4 2 16% 55 to 59 28% 65 to 69 5 2

22% 60 to 64 0 50 Number of directors

Figure 10 Figure 13 CEOs on KFMC100 boards Gender balance of KFMC100 directors

CEOs past and present remain highly desirable as directors, but that experience appears to Although nearly all—96 percent—of boards have at least one female director, women make be harder to come by as companies limit CEO availability for outside board service. up only 20 percent of all KFMC100 directors. However, of the eighty-three directors added to these boards in FY 2011, 28 percent were women. The average number of women on a Past or present CEO experience with a public company board, excluding CEOs, is 2.25. Seats newly filled in FY 2011 35% Incumbents’ seats 43%

19% Female Figure 11 Governance experience

KFMC100 boards primarily, but not exclusively, added directors with previous board 81% Male experience with a public company.

New directorships by governance experience (n= 83) First time directors 35

Experienced directors 48

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Appendix C: The KFMC100 boards Figure 14 Demographics of new KFMC100 directors

Boards in the KFMC100 made incremental progress on diversity among directors: American Figure 17 minorities were appointed to 16 percent of new directorships vs. 11 percent of the Board size incumbent directorships. Note that ethnicity information was unavailable for 114 of the The median size for a board was 11.9 directors and 85 percent of boards had between ten incumbent directors. and fifteen directors. Seats newly filled in FY 2011 Incumbents’ seats 11% 7 to 9 directors (n=83) (n=1,100) 4% 16 to 17 directors African-American 6.0% 10.0% Asian-American 4.8% 1.8% Hispanic-American 2.4% 2.6% 32% 13 to 15 directors

53% 10 to 12 directors

Figure 15 Nationality of KFMC100 directors

After a jump to 21.4 percent in FY 2010, the percentage of foreign director appointments to KFMC100 boards fell back to 13 percent in FY 2011. Nationality data was unavailable for sixty-six of the 1,190 incumbents. Figure 18 American Non-American Board independence Seats newly filled in FY 2011 87% 13% In the KFMC100, 81 percent of boards had one or two executive directors. The rest were Incumbents’ seats 86% 14% independent directors. 12% 3 executive directors 7% 4 to 7 executive directors

Figure 16 100 Global experience of KFMC directors 26% 2 executive directors In addition to nationality, other indicators of global experience stayed steady in FY 2011, with little variation between the incoming class of ninety directors (including CEOs) and the 1,100 55% 1 executive director incumbents.

International work experience Seats newly filled in FY 2011 29% Incumbents’ seats 27%

Born and or educated abroad Seats newly filled in FY 2011 16% Incumbents’ seats 17%

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Figure 19 Figure 21 Who is the chairman? Board meetings

At two-thirds of companies, the CEO is also the chairman of the board. Thirty-four Just over half of the KFMC100 boards met seven or fewer times in FY 2011. The average companies have a non-CEO chairman. number of board meetings was 8.4, down slightly from an average of 8.7 in FY 2010. 11% Non-executive chairmen 17% 4 to 5 meetings

23% Chairman or executive chairmen 13% 13 to 22 meetings 66% CEO is also chairman of the board 34% 6 to 7 meetings

21% 10 to 12 meetings

15% 8 to 9 meetings

Figure 20 Figure 22 100 Cash retainers for directors BRIC experience on KFMC boards

100 The median cash retainer for directors in the KFMC100, excluding meeting attendance Although 88 percent of KFMC boards include directors who held a significant work bonuses, is $100,000, an increase of $20,000 from 2011. At 81 percent of boards, the cash assignment outside the United States, only a third of those had members with experience in retainer is between $50,001 and $125,000. Only two companies, Amazon.com Inc. and the fast growing BRIC nations—Brazil, Russia, India, or China. Yum! Brands, Inc., offer no cash retainers. One or more directors with work experience anywhere outside the U.S. 88% >$150,001 3% One or more directors with work experience specifically in BRIC countries 28%

$125,001 – $150,000 1%

$100,001 – $125,000 10% Figure 23 $75,001 – $100,000 40% KFMC100 retirement age policies

$50,001 – $75,000 31% Seventy-nine of the KFMC100 companies have an established retirement age for directors, though twenty of those have granted exceptions. Additionally, companies with no retirement $25,001 – $50,000 11% age actually have a lower average age among directors, suggesting that such policies are having little if any effect. $0 – $25,000 4% Exceptions Average 0% 50% Retirement policies Number granted director age

Have a mandatory retirement age policy 52 12 62.8 Have retirement policy that explicitly allows exceptions 27 8 62.8 No retirement policy 21 -- 62.6

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About Korn/Ferry’s Board & CEO Services Practice Figure 24 Duration of directorships in the KFMC100 Korn/Ferry International has recruited CEOs and board directors for Directors in the KFMC100 tend to serve a long time on boards. Though the average tenure more than 40 years. Our dedicated Board & CEO Services practice is com- overall is 7.8 years, among the eighty-seven directors who left in FY 2011, the average tenure mitted to improving governance practices worldwide. Our approach in- was 11.1 years. The average age of a departing director was 67. cludes Board Director and CEO Search and Selection, CEO Succession Planning and Assessment, Board Effectiveness, and Director/Executive Compensation Consulting. 69% Directorships held for 9 or fewer years Visit www.kornferry.com/BoardCEOServices for more information. 31% Directorships held for 10 years or more Key contacts

Figure 25 Individual director review policy in the KFMC100 Board renewal and improvement are sometimes approached by a vigorous annual review of Dennis Carey Stephen P. Mader Jane Stevenson each individual director. In the KFMC100, fewer than half of boards currently have that as a Vice Chairman Vice Chairman Vice Chairman stated policy in their annual proxy statement. Korn/Ferry International Korn/Ferry International Korn/Ferry International +1 215 656 5348 +1 617 790 5700 +1 404 222 4022

53 Boards with no stated individual review policy 47 Boards that perform individual reviews of directors

© 2012 Korn/Ferry International

321095_KF_MC100_Text.indd 50 9/21/12 7:41 PM 321095_KF_MC100_Text.indd 51 9/21/12 7:41 PM About Korn/Ferry International

Korn/Ferry International (NYSE:KFY), with a presence throughout the Americas, Asia Pa- cifi c, Europe, the Middle East and Africa, is a premier global provider of talent manage- ment solutions. Based in Los Angeles, the fi rm delivers an array of solutions that help clients to attract, deploy, develop and reward their talent.

Visit www.kornferry.com for more information on the Korn/Ferry International family of companies, and www.kornferryinstitute.com for thought leadership, intellectual property and research.

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