KORN/FERRY INTERNATIONAL
29th Annual Board of Directors Study 2002 Healthcare Services
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 Healthcare Services
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 Healthcare Services 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. This year: ■
60 percent of Healthcare Services boards have written guidelines on corporate governance.
■
50 percent of boards formally evaluate the entire board’s performance on a regular basis; and
■
60 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: ■
60 percent of boards have a management succession committee or process.
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 Healthcare Services company survey also shows that evaluation of individual directors clearly has not yet taken hold as a board practice. ■
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86 percent of respondents say that individual directors should be evaluated regularly regarding performance. However: ●
only 20 percent of boards currently conduct such evaluations, and
●
only 14 percent of directors on those boards think that the evaluations are effective.
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: ●
71 percent of directors say the former CEO shouldn't sit on the board.
●
61 percent of directors say the board should hold regular executive sessions without the CEO during board meetings, yet ▲
■
only 50 percent of boards hold such sessions.
Directors are spending an average of 14 hours per month on board matters, or approximately 168 hours annually.
■
Most directors (56 percent) say their company’s CEO compensation program is effective.
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53 percent of directors think the majority of a director’s compensation should be in stock.
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only 22 percent of boards have a requirement that directors own shares of company stock.
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74 percent of directors would like to see their board become more diverse by increasing its minority representation.
29th Annual Board of Directors Study 2002 Healthcare Services
Korn/Ferry’s 29th Annual Board of Directors Study — Healthcare Services company highlights provides a comprehensive and illuminating look into the state of board practices at the nation’s leading healthcare services 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 The following responses are a supplement to Korn/Ferry International’s 29th Annual Board of Director’s Study. The findings are based on responses from Directors of over 40 Healthcare Services boards.
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 2002
Current Board Size
Optimal Board Size
Healthcare Services 2
Inside
7
Outside 0
2
2
Inside
4
6
Does the former CEO sit on the board?
Outside
8
10
8 0
2
4
6
Should the former CEO sit on the board?
74% of respondents said they would like to see their board become more diverse by increasing its minority representation.
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No 67%
8
Yes 29%
Yes 33% No 71%
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If your chairman is also the CEO, do you have an elected or appointed lead director?
Should a board that has an inside director as chairman elect or appoint an outside director as the lead director?
Yes 25%
No 24%
No 75%
Yes 76% 29th Annual Board of Directors Study 2002 Healthcare Services
Does the board typically hold regular executive sessions without the CEO during board meetings?
Should the board typically hold regular executive sessions without the CEO during board meetings?
No 39%
Yes 50%
No 50%
Yes 61% 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
0
20
40
60
80
100
African American
33%
Hispanic
11%
Asian
22%
Other
22%
50%
Outside Directors
10%
Outside Directors
78%
80%
CEO
30%
Women
0
20
40
60
80
100
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Managing Corporate Governance In keeping with the established trend of a formal committee that reviews corporate governance processes and board operations, 60% of Healthcare Services companies have such committees. 60% of these companies have written guidelines on corporate governance and 97% believe these guidelines are helpful to a board.
Does your board have a formal committee that reviews corporate governance processes and board operations?
29th Annual Board of Directors Study 2002
No 40%
Yes 60%
Healthcare Services
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Does the board have written guidelines on corporate governance?
average hours per month spent on board matters.
No 40%
Compared to last year how many hours are you spending per month on board matters? More
46%
Fewer
5%
About the Same
Yes 60%
Do you believe written governance guidelines are helpful to a board? No 3%
49%
Yes 97%
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Management Succession Data reveals that in the last three years only 40% of Healthcare Services companies have undergone a management succession process. 60% of these companies have a management succession committee or process, and would be prepared for such change at the top.
Does the board have a management succession committee or process?
No 40%
29th Annual Board of Directors Study
Yes 60%
2002 Healthcare Services
In the last three years, has your company undergone a management succession process?
No 60%
Yes 40%
25% of respondents feel there is a director on their board that should be replaced.
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Evaluating Performance There is an even split on the practice of evaluating the full boards performance on a regular basis and only a one quarter of respondents feel this is effective. Only 20% of boards evaluated individual directors but 86% feel this practice should be done regularly.
Is the entire board’s performance formally evaluated on a regular basis?
If YES: What form of stock? 29th Annual Board of Directors Study 2002
Very Effective 6%
No 50%
Very Ineffective 13%
Yes 50%
Healthcare Services Effective 25%
Does your board evaluate individual directors on a regular basis?
Yes 20%
86% of respondents felt that individual directors should be evaluated regularly as to their performance.
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No 80%
Board Experience How difficult has it been for your board to add directors with the following skill sets?
100
Somewhat Difficult
Very Difficult
80
Not At All Difficult 74.2%
73.6% 65.6% 58.6%
60
50%
40 20
29th Annual Board of Directors Study
36.4% 31% 22.6%
21.9%
2002
17.6%
13.6%
10.4%
8.8%
12.5% 3.2%
0
International
Technical
Financial
Marketing
Healthcare Services
Legal
Compensation More than half of the respondents feel their CEO’s compensation program is effective. How do you feel about your company’s CEO compensation program?
Should audit committee chairs be paid more than chairs of other committees?
Yes
42%
No
58%
Very Effective 34% Effective 56%
Fairly Effective 10%
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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. More than half (50 percent) of the directors indicated that their board and management team had not developed or discussed a crisis management plan prior to September 11th. The same percentage reported 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 Healthcare Services
No 60%
Yes 40%
Has your board taken any action to address crisis management since the tragedy of September 11th?
No 40%
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Yes 60%
Survey Demographics What is your title or status with your primary company? 25.8%
Board Chairman 19.4%
President CEO
35.5% 0%
General Counsel Vice Chairman
6.5% 3.2%
Chief Financial Officer Chief Technical Officer
0%
Corporate Secretary
0%
Retired CEO
9.7%
Retired
29th Annual Board of Directors Study
12.9%
Other
29%
0
5
10
15
20
25
30
35
40
45
2002
50
Healthcare Services
How long have you served on this board?
2.6%
Less Than One Year 1-2 Years
15.4%
3-5 Years
You are:
30.8%
92% Male 8% Female
17.9%
6-10
33.3%
Over 10 Years 0
10
20
30
40
Your age: 0%
34 Years or Younger 35-44 Years
7.7%
45-54
Are you responding as an Inside or outside director?
17.9%
41.1%
55-64 65-74
Inside
15%
Outside
85%
28.2%
5.1%
75 Years or Older 0
10
20
30
40
50
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Korn/Ferry International Healthcare Services Practice With close to 40 seasoned and dedicated client partners, Korn/Ferry’s Healthcare Services Practice understands the critical issues facing healthcare companies today. In 2001, our Healthcare Services team handled more than 250 assignments, representing 11-percent growth from the previous fiscal year. Korn/Ferry’s global network of Healthcare Services consultants possess expertise in a range of related fields, including: ■
Hospitals, academic medical centers and hospital systems
29th Annual Board of Directors Study
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Managed care and payer/insurer organizations
2002
■
Integrated delivery systems
■
Physician groups and independent practice associations
■
Practice and network management companies
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Ancillary services companies
■
Venture-backed healthcare service companies
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Sub-acute care, including home care, rehabilitation and long-term care.
Healthcare Services
Korn/Ferry’s Healthcare Services Practice offers clients the highest levels of service and exclusivity, working for only a few clients in each sector at the same time. More important, our team has a proven track record of finding the right healthcare executives on a timely basis - nationwide.
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 seniorlevel 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.
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