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KORN/FERRY INTERNATIONAL
29th Annual Board of Directors Study 2002 Consumer Products
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Executive Summary It has been an extraordinarily turbulent year for American companies and their
boards, marked by near-unprecedented volatility in investment markets, sharp erosion of investor confidence, heightened focus on the validity and credibility of financial reporting practices, and high-profile corporate failures such as Enron and Worldcom. In this environment, the board's critical role in overseeing fundamental corporate practices — how effectively that role is being executed and how it can be strengthened — has come under scrutiny as never before.
29th Annual Board of Directors Study 2002 Consumer Products
This publication, a supplement to Korn/Ferry International's 29th Annual Board of Directors Study, presents responses and findings from survey participants on the boards of Consumer Products companies. The study indicates that these organizations are making long-term progress in efforts to implement board practices for stronger corporate governance — but that some significant gaps still remain. The findings are based on responses from directors of over 40 Consumer Products companies. This year: ■
65 percent of boards have written guidelines on corporate governance;
■
33 percent of boards formally evaluate the entire board's performance on a regular basis; and
■
55 percent of boards have a formal committee that reviews corporate governance processes and board operations.
While progress is being made regarding corporate governance processes and board evaluation, boards will have to do more — especially in light of new regulatory mandates designed to formalize these processes in the wake of the past year's notable failures of board oversight. For example, corporate governance rule proposals adopted by the New York Stock Exchange Board of Directors in August state that listed companies must adopt and disclose corporate governance guidelines on management succession and other key processes. Yet our survey of directors reveals that: ■
only 49 percent of boards have a management succession committee or process, and
■
59 percent of companies have undergone a management succession process in the last three years.
Mandates such as those of the NYSE, with prescriptions for formal governance guidelines, could create issues for the significant percentage of companies that, according to our survey, do not have such guidelines or processes at this time. The Korn/Ferry Consumer Products survey also shows that evaluation of individual directors clearly has not yet taken hold as a board practice. ■
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80 percent of respondents say that individual directors should be evaluated regularly regarding performance. However: ●
only 17 percent of boards currently conduct such evaluations, and
●
only 25 percent of directors on those boards think that the evaluations are effective.
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Boards going forward can anticipate closer examination of how they measure the performance and, ultimately, the effectiveness of directors on behalf of shareholders, as part of the heightened concern over how well boards execute their oversight role. Other key survey findings include: ■
Independence is an essential concern of directors: ●
81 percent of directors say the former CEO shouldn't sit on the board.
●
76 percent of directors say the board should hold regular executive sessions without the CEO during board meetings, yet ▲
only 43 percent of boards hold such sessions.
■
Directors are spending an increasing amount of time on board matters — an average of 16 hours per month, or approximately 192 hours annually.
■
Most directors (58 percent) say their company's CEO compensation program is effective.
■
55 percent of directors think the majority of a director's compensation should be in stock.
■
40 percent of boards have a requirement that directors own shares of company stock.
■
61 percent of directors would like to see their board become more diverse by increasing its minority representation.
29th Annual Board of Directors Study 2002 Consumer Products
Korn/Ferry's 29th Annual Board of Directors Study — Consumer Products highlights provides a comprehensive and illuminating look into the state of board practices at the nation's leading companies — charting progress made, as well as progress still to be achieved. The publication represents Korn/Ferry's ongoing commitment to generating and sharing timely, practical information from the nation's corporate leaders regarding their efforts to maintain and extend "best practices" for corporate governance. We hope that you find the study informative and useful, and that it provides you with insight into the key steps that governance programs must take to address today's pressing concerns about the credibility and responsibility of corporate America.
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Survey Responses T
he following responses are a supplement to Korn/Ferry International’s 29th Annual Board of Director’s Study. The findings are based on responses from over 40 Consumer Products companies.
Board Composition The average board in our survey consists of two inside directors and seven outside directors. According to respondents, the optimal board size is two inside directors and eight outside. 29th Annual Board of Directors Study
Current Board Size
Optimal Board Size
2002 Inside
2
Inside
2
Consumer Products 7
Outside
0
1
2
3
4
5
6
Does the former CEO sit on the board?
7
8
Outside
8
0
1
2
3
4
5
Should the former CEO sit on the board?
Yes 19% No 63%
4
Yes 37%
6
No 81%
7
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Should a board that has an inside director as chairman elect or appoint an outside director as the lead director?
If your chairman is also the CEO, do you have an elected or appointed lead director?
No 39%
Yes 39%
No 61%
Yes 61%
29th Annual Board of Directors Study 2002 Consumer Products
Should the board typically hold regular executive sessions without the CEO during board meetings?
Does the board typically hold regular executive sessions without the CEO during board meetings?
No 56%
No 24%
Yes 44%
Yes 76% Diversity in the Boardroom
Do you have any of the following minorities currently represented on your board?
Is there a limit to the number of other boards on which the CEO and board members may serve as outside directors?
Should there be a limit to the number of other boards on which the CEO and board members may serve as outside directors?
Yes
Yes
CEO
35%
Outside Directors 5
10
15
20
25
30
35
85%
African American
62%
Hispanic
3%
Asian
6%
Other
3%
89%
Outside Directors
15% 0
CEO
Women
56% 0
20
40
60
80
100
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Management Succession In spite of the frequency of change at the top, more than half (51 percent) of these companies do not have a management succession committee or process, despite strong public and regulatory support for creation and disclosure of such.
Does the board have a management succession committee or process?
29th Annual Board of Directors Study 2002
No 51%
Yes 49%
Consumer Products
In the last three years, has your company undergone a management succession process?
No 41%
16 average hours per month spent on board matters. 51% more hours than in 2001.
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Yes 59%
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Managing Corporate Governance The percentage of directors reporting a formal committee that reviews corporate governance processes and board operations is 55 percent. Similarly, 65 percent report their boards have written guidelines on corporate governance and 87 percent report these guidelines are helpful to the board. Does your board have a formal committee that reviews corporate governance processes and board operations?
29th Annual Board of Directors Study
No 45%
Yes 55%
2002 Consumer Products
Does the board have written guidelines on corporate governance?
No 35%
Yes 65%
Do you believe written governance guidelines are helpful to a board?
No 13%
Yes 87%
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Evaluating Performance Only 33 percent reported the practice of evaluating the entire board’s performance. The percentage of boards regularly evaluating individual director performance is 18 percent. Is the entire board’s performance formally evaluated on a regular basis?
If YES: How effective is the evaluation?
Yes 33%
29th Annual Board of Directors Study 2002
No 67%
Very Ineffective 8% Ineffective 4%
Somewhat Effective 41%
Consumer Products
Effective 41% Very Effective 6%
Does your board evaluate individuals on a regular basis?
If YES: How effective is this evaluation of individual directors?
Is there a director on your board you feel should be replaced?
Yes
30%
No
70%
Very Effective 7%
Yes 18%
No 82%
Somewhat Effective 54%
Effective 25%
Ineffective 7%
Very Ineffective 7%
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Risk & Crisis Though the past year was characterized by devastating crises, these events were not a catalyst for greater board involvement in risk and crisis management. Almost three-quarters (73 percent) of the directors indicated that their board and management team had not developed or discussed a crisis management plan prior to September 11th. Similarly, 72 percent reported no action had been taken post-September 11th.
Had your board and management team developed or discussed a crisis management plan prior to September 11th?
29th Annual Board of Directors Study 2002 Consumer Products
Yes 27% No 73%
Has your board taken any action to address crisis management since the tragedy of September 11th?
Yes 28%
80% of respondents felt that individual directors should be evaluated regularly as to their performance.
No 72%
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Board Experience How difficult has it been for your board to add directors with the following skill sets? Somewhat Difficult
Very Difficult
100
Not At All Difficult
80%
80
76%
62%
60
54% 48% 43%
29th Annual Board of Directors Study
40
2002
20
Consumer Products
0
37%
34% 23%
20% 9%
9% 4%
0%
International
Technical
Financial
1%
Marketing
Legal
Compensation Uncertainty about stock as executive compensation seems to have affected trends in stock as director compensation. Sixty percent of Consumer Products boards do not require directors to own shares of company stock, while the percentage of directors believing the majority of a director's compensation should be in stock is 55 percent this year. Directors are divided as to the form of stock, with stock grants preferred by 49 percent and stock options cited by 42 percent. Do you think the majority of a director’s compensation should be in stock?
If YES: What form of stock? Primary Stock Grants
No 45%
Yes 55%
49%
Primary Stock Options
42%
Combination
3% 9%
Other 0
10
10
20
30
40
50
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How do you feel about your company’s CEO compensation program? Very Effective 25%
Effective 58%
Fairly effectiveneeds changes 14% Ineffective 3%
29th Annual Board of Directors Study 2002 Consumer Products
Is there a requirement that directors own shares of company stock ?
Yes 40%
No 60%
If YES: What is the requirement? Average 1250 shares
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Survey Demographics Are you responding as an inside or outside director?
Inside
25.3%
74.7%
Outside
0
10
20
30
40
50
60
70
80
29th Annual Board of Directors Study 2002 Consumer Products
What is your title or status with your primary company?
Board Chairman
22.8%
President
26.9% 29%
CEO General Counsel Vice Chairman Chief Financial Officer Chief Technical Officer Corporate Secretary
2.1% .7% 2.8% 0% .7% 9%
Retired CEO Retired
18.6%
Other
18.6%
0
12
5
10
15
20
25
30
35
40
45
50
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How long have you served on this board?
2.1%
Less Than One Year 1-2 Years
12.8%
28.4%
3-5 Years 6-10
23.6%
29th Annual Board of Directors Study
33.1%
Over 10 Years
2002 0
10
20
30
40
50
Consumer Products
Your age:
0%
34 Years or Younger
3.4%
35-44 Years 45-54
19.5%
55-64
43.6%
65-74
28.8%
$400 million
4.7%
75 Years or Older 0
10
20
30
40
50
is the average revenue of companies of respondents.
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Which of the following best describes your company:
29th Annual Board of Directors Study 2002 Consumer Products
16.2%
Bank Other Financial Professional Services Other Services Insurance Entertainment E-Commerce Advance Technology Aerospace Apparel Automotive Building Materials Chemicals Consumer Electronics Energy Healthcare Products Forestry Healthcare Services Industrial and Farm Equipment Metals Publishibg Rubber Scientific Transportation Other
5.2% 13.7% 4.2% 3.7% 3.7% 1.6% 8.4% 1.6% 4.2% 1% 1.6% .5% 6.3% 2.6% 4.7% 4.7% 1.6% 3.1% .5% 2.1% 1% .5% .5% 2.6% 0%
0
14
3
6
9
12
15
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About Korn/Ferry International’s Consumer Practice Whether your organization specializes in Consumer Products; Retail and Apparel; Media and Entertainment; Travel, Hospitality and Leisure; or Advertising and Marketing services, Korn/Ferry's Global Consumer Market has the experience and judgment to deliver the right candidates through superior service. Korn/Ferry consultants help our clients gain insight into the complex issues facing consumer companies. Our consultants possess deep consumer industry expertise, having held key executive positions with consumer companies in addition to their years of executive search and consulting experience. Whether your organization's needs are global or local, Korn/Ferry's Global Consumer Market offers an unmatched network of offices, with comprehensive worldwide coverage and a critical local presence with strong regional teams based in Europe, North America, Latin America and the Asia/Pacific region.
29th Annual Board of Directors Study 2002 Consumer Products
When your company is ready to find the best senior executives, Korn/Ferry's Global Consumer Market will organize the right team to serve your needs in order to build a successful long-term partnership. Korn/Ferry is proud of the depth and breadth of its relationships, in terms of both the many young, entrepreneurial companies the firm serves, as well as the partnerships with multinational firms worldwide. Regardless of the size or corporate culture of the business, Korn/Ferry's Global Consumer Market has the team in place to provide outstanding candidates to fill your executive search needs.
About Korn/Ferry International Korn/Ferry International (NYSE:KFY), with over 70 offices in 36 countries, is the world's leading provider of executive human capital solutions. Based in Los Angeles, the firm works closely with clients worldwide to deliver customized executive search, management assessment and mid-level search services, including the identification of CEOs, COOs, CFOs, board members and other senior-level executives; the formal evaluation of senior management teams; and the recruitment of middle managers through its Futurestep subsidiary. For more information, visit the Korn/Ferry International web site at www.kornferry.com or the Futurestep web site at www.futurestep.com.
For additional copies of this study, please call the Global Marketing Department at (310) 552-1834.
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