The Korn/Ferry Market Cap 100 Board leadership at America’s most valuable public companies About the 2010 Korn/Ferry Market Cap 100 The Korn/Ferry Market Cap 100 (KFMC100) comprises the U.S. companies traded on the NYSE or NASDAQ , excluding public investment firms, with the largest market capitalization as of the close of market on May 3, 2010, after reporting for the 2009 fiscal year. Data about the companies’ boards, compiled from proxies related to fiscal year 2009, provide the baseline for this report. B Contents Introduction . 2 Board leadership in an era of change . 4 What’s in a name? . 4 Portrait of a lead director . 6 Interview with Mark Ketchum . 8 Lead director, Kraft Foods Adding value to the board . 12 Interview with Irv Hockaday . 14 Presiding director, Ford Motor Co. and Estée Lauder Companies Inc. Committee membership and leadership . 16 Leadership succession on the board . 18 Assessing the need for terms . 19 Interview with Bonnie G. Hill . 20 Lead director, The Home Depot, Inc. Compensating for time and value . 22 Final thoughts and best practices . 24 Appendix A . 25 Board data Appendix B . 32 List of the KFMC100 companies Appendix C . 35 List of the KFMC100 non-executive board leaders Introducing the Korn/Ferry Market Cap 100 The Korn/Ferry Market Cap 100 (KFMC100) marks a new approach to the governance research our firm has undertaken for thirty-five years. We’ve chosen to examine the United States’ one hundred most valuable compa- nies, working from the assumption that leadership models represented on these boards are worth observing and emulating. In this first KFMC100 report, we focus on non-executive board leadership in this elite subset of boards. Among our top-line findings: There is no rush to split the role of chairman and CEO. Non-executive chairmen remain rare, leading only 9 percent of boards in the KFMC100. By comparison, 19 percent of S&P 500 boards have non-executive chairmen. Current or former CEOs are the most sought-after group for the role of non-executive board leader. About three-quarters of non-executive board leaders have held one or more top corporate title (chairman, president, or CEO) and 8 percent are active CEOs at public companies. Thirteen percent of companies rotate the role of non-executive board leader. This model clearly works well for some companies, but poses additional challenges, including maintaining available talent and ensuring continuity in the board’s important work. Outside of these boardrooms, the bigger corporate governance picture continues to develop. The dramatic economic hemorrhaging of 2008 led to additional scrutiny of boards, with shareholder groups and the news media criticizing boards for any perceived lack of independence. While the causes of our economic woes have proven far more complex and widespread than the actions of some boards, the result has been a raft of new regulations from Washington addressing “say on pay,” proxy access, and CEO succession plans. At the same time, the role of the of non-executive board leader is growing. The non-executive board leader position began as a means of meeting an independence requirement, but today the role increasingly is being leveraged to create efficiency and additional value in the boardroom. The role must be tailored to the culture of individual boards, of course, but some best practices are beginning to crystallize. 2 To determine what top boards are doing in the area of non-executive board leadership, we engaged in a two-step process. First, we examined the KFMC100 to get a clear picture of non-executive board leaders, including their backgrounds and experience, their responsibilities on the board, and their compensation. We also looked at similar data for all directors in this group. Second, we interviewed three non-executive board leaders to get a closer look at how this evolving role is changing the face of governance. Specifically, we probed for the board’s role in shaping strategy, managing risk, and leadership succession. The following report provides both statistical and anecdotal insights. In addition, we have folded in our own views, developed over the course of hundreds of board-level search and consulting engagements for the largest companies in the United States. We hope the practices we’ve highlighted will help boards determine how to select, evaluate, compensate, and establish a succession planning process for the non-executive board leader. Finally, we would like to thank Bonnie Hill, lead director of The Home Depot, Irv Hockaday, presiding director of Ford Motor Company and Estée Lauder, and Mark Ketchum, lead director of Kraft Foods for generously sharing their time and valuable perspectives. We welcome your comments and queries, whether regarding this report or any of the challenges your board may be facing. Dennis Carey Stephen P. Mader Vice Chairman Vice Chairman Board leadership in an era of change At Korn/Ferry International, we have heard more than one observer compare change on corporate boards to watching a glacier move. No more. Amid an atmosphere of panic and recriminations stemming from the 2008 financial crisis, political and media attention directed at corporate boards surged. Warranted or not, the focus on board performance—especially on Rotating the role risk mitigation, CEO pay, and succession—has fueled major regulatory Companies that rotate non-executive changes intended to foster greater independence and board oversight. In leadership may switch it up each meeting, every six months, or once a year. The most particular, the Dodd-Frank Act, signed into law on July 21, 2010, requires common practice is to have the executive further disclosure on company proxies, including on whether the CEO session led by the chair of the committee and chairman of the board roles are split and why companies chose a whose subject matter is the principal topic of discussion. given approach. Examples of how boards rotate the role, Such rules and public pressure will continue to compel boards to 100 from several proxy statements of KFMC demonstrate independent board leadership. What is unknown is precisely companies: how boards will do that, or what specific responsibilities will fall to “The role of presiding director alternates the non-executive board leader. Each company has a unique culture, so each six months between the chair of the best practices will be adapted more than transplanted. The exact shape compensation committee…and the chair non-executive leadership takes should remain the board’s decision. of the governance committee.” “Directors serve as the chairperson, or Today’s non-executive board leader—sometimes referred to by the presiding director, for these executive shorthand “lead director”—plays a key role in determining not only what sessions on a rotating basis (meeting-by- meeting) in accordance with years of service the board will focus on but also how it will fulfill its responsibilities. One on the board.” might think of the board leader as the conscience of the board. “The independent directors will serve as lead Central to success is the relationship between this individual and the director in turn, rotating in alphabetical order.” CEO. Communications between the two should be entirely candid. The “The discussion leader position rotates non-executive board leader operates as the CEO’s thought partner, providing annually among the chairs of each of the insights into the board’s thinking, and conveying good news as well as bad. independent board committees.” The board, too, must view the non-executive board leader as an honest broker. With those building blocks in place, the non-executive board leader represents a potentially powerful vehicle for enhanced board performance. What’s in a name? From our perspective, independent board leadership is a rising value proposition, but the specific title given to a non-executive board leader does not appear to have significance. Whether that person is called a lead director, presiding director, or non-executive chairman, there is little difference in responsibilities. The only actual pattern we have observed is related to the title of non-executive chairman. While a few companies have a tradition of non-executive chairmen, that title also surfaces temporarily during a period of transition, such as during a CEO succession or after a crisis. 100 Contrary to frequent media reports suggesting there is a surge to KFMC companies with non-executive chairmen implement non-executive chairmanship, we found that only nine companies among the KFMC100 have adopted that model. > Bank of America Corp. > Intel Corp. > Citigroup, Inc. > McDonald’s Corp. Figure 1 Titles for non-executive board leaders in the KFMC100 > Walt Disney Co. > Walgreen Co. Titles were taken from companies’ 2009 proxy statements. If no title was specifically indicated, > Unitedhealth Group, Inc. the title of the individual who chairs executive sessions was used. > Mastercard Inc. > Newmont Mining Corp. Title Count Lead director 49 Co-lead director 1 Rotating lead director 2 Non-executive chairman 9 Presiding director 28 Rotating presiding director 10 Rotating discussion leader 1 The practice of having a non-executive chairman is notably more prevalent among the Standard & Poor’s 500; 19 percent of the S&P 500 had non-executive chairman during fiscal 2009, compared with the 9 percent we found in the KFMC100 . This may be because the S&P 500, which encompasses a wide range of performance levels and track records, has responded more to pressure to implement what are perceived to be improvements and best practices. Only 9 percent of the KFMC100 have non-executive The CEO was not chairman at an additional twelve companies in the chairmen. By comparison, 19 percent of KFMC100; in most of those cases, the S&P 500 did. another insider was chairman of the board, such as the former CEO, a founder, or a member of the founding family.