The Korn/Ferry Market Cap 100 - The Wall Street Journal

[Pages:44]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.

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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 Est?e 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 companies, 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.

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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 Est?e 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 Vice Chairman

Stephen P. Mader Vice Chairman

Board leadership in an era of change

Rotating the role

Companies that rotate non-executive leadership may switch it up each meeting, every six months, or once a year. The most common practice is to have the executive session led by the chair of the committee whose subject matter is the principal topic of discussion.

Examples of how boards rotate the role, from several proxy statements of KFMC100 companies:

"The role of presiding director alternates each six months between the chair of the compensation committee...and the chair of the governance committee."

"Directors serve as the chairperson, or presiding director, for these executive sessions on a rotating basis (meeting-bymeeting) in accordance with years of service on the board."

"The independent directors will serve as lead director in turn, rotating in alphabetical order."

"The discussion leader position rotates annually among the chairs of each of the independent board committees."

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 risk mitigation, CEO pay, and succession--has fueled major regulatory changes intended to foster greater independence and board oversight. In particular, the Dodd-Frank Act, signed into law on July 21, 2010, requires further disclosure on company proxies, including on whether the CEO and chairman of the board roles are split and why companies chose a given approach.

Such rules and public pressure will continue to compel boards to demonstrate independent board leadership. What is unknown is precisely how boards will do that, or what specific responsibilities will fall to the non-executive board leader. Each company has a unique culture, so best practices will be adapted more than transplanted. The exact shape non-executive leadership takes should remain the board's decision.

Today's non-executive board leader--sometimes referred to by the shorthand "lead director"--plays a key role in determining not only what the board will focus on but also how it will fulfill its responsibilities. One might think of the board leader as the conscience of the board.

Central to success is the relationship between this individual and the CEO. Communications between the two should be entirely candid. The non-executive board leader operates as the CEO's thought partner, providing insights into the board's thinking, and conveying good news as well as bad. 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.

Contrary to frequent media reports suggesting there is a surge to implement non-executive chairmanship, we found that only nine companies among the KFMC100 have adopted that model.

Figure 1

Titles for non-executive board leaders in the KFMC100

Titles were taken from companies' 2009 proxy statements. If no title was specifically indicated, the title of the individual who chairs executive sessions was used.

Title Lead director Co-lead director Rotating lead director Non-executive chairman Presiding director Rotating presiding director Rotating discussion leader

Count 49 1 2 9 28 10 1

KFMC100 companies with non-executive chairmen

> Bank of America Corp. > Intel Corp. > Citigroup, Inc. > McDonald's Corp. > Walt Disney Co. > Walgreen Co. > Unitedhealth Group, Inc. > Mastercard Inc. > Newmont Mining Corp.

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.

The CEO was not chairman at an additional twelve companies in the KFMC100; in most of those cases,

Only 9 percent of the KFMC100 have non-executive chairmen. By comparison, 19 percent of 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. But so far, the largest, most valuable companies--represented by the

KFMC100--appear more prone to leave the CEO/chairman roles combined.

Portrait of a lead director

In our daily work with boards, we're seeing the role of non-executive board leaders evolve. When the designation of a non-executive board leader was just starting to be implemented, the main objective was to find someone capable of filling the role. In many cases that person was the senior-most director; some boards had a revolving board leader, with directors on the board taking turns for defined periods.

Boards that are learning to reap the benefits of independent board leadership are ahead of the curve. They recognize how beneficial the right leader is to board effectiveness and approach the selection process in much the same way a CEO would approach selecting a key member of his or her management team. They take into account background, experience, and personal characteristics. They ask themselves if this person would be a good partner and advisor to the CEO, which they are defining as a key ingredient.

But before they leverage the role fully, they have to define what it is. While admittedly few boards have yet done so, the process starts with building a position specification comprising key responsibilities and characteristics. The spec of an ideal board leader (see "The position specification" sidebar) can then serve as a yardstick for prospective non-executive board leaders. Boards may define the role slightly differently, but they must define it; there should be no ambiguity.

The position specification: non-executive board leader

Most boards have yet to formalize the job responsibilities of the non-executive board leader, and they will naturally vary by the situation. As a starting point, here are the requirements and characteristics cited most frequently during our engagements.

Key responsibilities

Chairs all executive sessions, and--in the absence of the CEO/chairman--meetings of the board. Calls meetings of independent directors when necessary.

Consults with chairman and directors on meeting schedule, agenda and materials. Provides information on topics to be discussed and ensures directors will be prepared.

Acts as liaison between chairman, members of the board (collectively and individually).

In cooperation with the CEO, responds to shareholder inquiries and approves company responses to outside communication.

Works with the chair of the compensation committee on CEO performance evaluation and compensation.

Determines who should attend board meetings, including members of management and outside advisors.

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