KORN/FERRY INTERNATIONAL
29th Annual Board of Directors Study 2002 Life Sciences
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 Life Sciences
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 Life Sciences 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: ■
62 percent of Life Sciences boards have written guidelines on corporate governance.
■
48 percent of boards formally evaluate the entire board’s performance on a regular basis, and
■
57 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 Life Sciences directors reveals that: ■
only 52 percent of boards have a management succession committee or process, and
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 Life Sciences company survey also shows that evaluation of individual directors clearly has not yet taken hold as a board practice. ■
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78 percent of respondents say that individual directors should be evaluated regularly regarding performance. However: ●
only 19 percent of boards currently conduct such evaluations, and
●
only 18 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: ●
73 percent of directors say the former CEO shouldn’t sit on the board.
●
69 percent of directors say the board should hold regular executive sessions without the CEO during board meetings, yet ▲
■
only 14 percent of boards hold such sessions.
Directors are spending slightly less time on board matters than their Fortune 1000 counterparts — average of 13 hours per month, or approximately 156 hours annually, compared with 183 hours annually for Fortune 1000 companies.
■
Most directors (55 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.
■
Only 43 percent of boards have a requirement that directors own shares of company stock.
■
60 percent of directors would like to see their board become more diverse by increasing its minority representation.
29th Annual Board of Directors Study 2002 Life Sciences
Korn/Ferry’s 29th Annual Board of Directors Study — Life Sciences company highlights provides a comprehensive and illuminating look into the state of board practices at the nation’s Life Sciences 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 80 Life Sciences companies.
Board Composition The average board in our survey consists of three inside directors and eight outside directors. According to respondents, the optimal board size is two inside directors and seven outside. 29th Annual Board of Directors Study 2002
Current Board Size
Optimal Board Size
Life Sciences 3
Inside
8
Outside 0
2
2
Inside
4
6
Does the former CEO sit on the board?
8
Outside
10
7 0
2
4
6
8
Should the former CEO sit on the board?
Yes 33% No 67%
4
Yes 27% No 73%
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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?
Yes 22%
No 37%
Yes 63%
No 78%
29th Annual Board of Directors Study 2002 Life Sciences
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?
Yes 14%
No 31% Yes 69%
No 86%
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
52%
0
20
60
80
100
African American
56%
Hispanic
11%
Asian
33%
Other
8%
54%
Outside Directors 40
94%
85%
CEO
10%
Outside Directors
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, 57% of Life Sciences companies have such committees. 62% of these companies have written guidelines on corporate governance and 92% 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
No 43%
2002
Yes 57%
Life Sciences
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Does the board have written guidelines on corporate governance?
average hours per month spent on board matters.
No 38%
Compared to last year how many hours are you spending per month on board matters? More
58%
Fewer
4%
About the Same
39%
Yes 62%
Do you believe written governance guidelines are helpful to a board?
No 8%
Yes 92%
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Management Succession Data reveals that in the last three years 57% of these Life Sciences companies have undergone a management succession process. In spite of the frequency of change at the top, 52% 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 48%
Yes 52%
Life Sciences
In the last three years, has your company undergone a management succession process?
28% No 43%
Yes 57%
of respondents feel there is a Director on their board that should be replaced.
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Evaluating Performance 48% of the companies responding evaluate the full board’s performance on a regular basis with 19% of those individual directors being evaluated. However, 78% of respondents felt individual directors should be evaluated as to their performance.
Is the entire board’s performance formally evaluated on a regular basis?
If YES: How effective is the evaluation? 29th Annual Board of Directors Study 2002
Very Effective 17%
No 52%
Very Ineffective 3%
Yes 48%
Life Sciences Effective 35%
Does your board evaluate individual directors on a regular basis?
78% of respondents felt that individual directors should be evaluated regularly as to their performance.
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Yes 19%
No 81%
Board Experience How difficult has it been for your board to add directors with the following skill sets?
100
Very Difficult
Somewhat Difficult
80
Not At All Difficult
74.1% 69.7% 62.3%
60 40 20
43.4% 44.8%
42.5%
31.2%
27.6%
22.2%
21.9%
2002
11.8% 6.5%
3.7%
0
29th Annual Board of Directors Study
35.6%
International
Technical
Financial
2.7%
Marketing
Life Sciences Legal
Compensation More than half of the respondents think that a director should be paid in stock. 72% feel that stock options should be the primary form.
Do you think the majority of a director’s compensation should be in stock?
If YES: What form of stock? Other 7%
No 45%
Primarily Stock Grants 22%
Yes 55% Primarily Stock Options 71%
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Is there a requirement that directors own shares of company stock?
No 57%
Yes 43%
29th Annual Board of Directors Study 2002
Average number of shares: 3440
Life Sciences
How do you feel about your company’s CEO compensation program?
Ineffective 1%
Very Effective 34% Effective 55%
Should audit committee chairs be paid more than chairs of other committees?
Yes
62%
No
38%
10
Fairly Effective 10%
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. The majority of the directors (67%) indicated that their board and management team had not developed or discussed a crisis management plan prior to September 11th. However, 60% have taken action post September 11th.. As to assessing personal risk, the majority (52%) of directors report they have declined a board invitation because the risk was too great. Eighteen percent indicate they turned down an offer to serve in the past 12 months for this reason.
Had your board and management team developed or discussed a crisis management plan prior to September 11th?
29th Annual Board of Directors Study 2002 Life Sciences
Yes 33% No 67%
Has your board taken any action to address crisis management since the tragedy of September 11th?
No 40%
Yes 60%
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Survey Demographics What is your title or status with your primary company? Board Chairman
21.4%
President
15.5% 31%
CEO General Counsel
3.6%
Vice Chairman
6%
Chief Financial Officer
6% 1.2%
Chief Technical Officer Corporate Secretary
2.4%
Retired CEO
29th Annual Board of Directors Study
13.1%
Retired
14.3%
Other
2002
17.9%
0
5
10
15
20
25
30
35
40
45
Life Sciences
How long have you served on this board?
1.2%
Less Than One Year 1-2 Years
17.2%
33.3%
3-5 Years 6-10
20.7%
27.6%
Over 10 Years 0
10
20
30
40
50
Are you responding as an Inside or outside director?
Inside
24%
Outside
76%
Your age: 0%
34 Years or Younger
3.4%
35-44 Years 45-54
26.4%
55-64
44.8%
65-74
23.1%
2.3%
75 Years or Older 0
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10
20
30
40
50
50
Korn/Ferry International North American Life Sciences Practice With close to 40 seasoned and dedicated client partners, Korn/Ferry International’s Global Life Sciences Market understands the critical issues facing healthcare companies today. In 2001, our Life Sciences team handled more than 490 assignments, representing 11-percent growth from the previous fiscal year. Korn/Ferry’s global network of Life Sciences consultants possesses expertise in a range of related fields, including: Pharmaceuticals Biotechnology Medical Devices Life Sciences Contract Services Healthcare Services Korn/Ferry’s Global Life Sciences Market 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 Life Sciences executives on a timely basis - worldwide.
29th Annual Board of Directors Study 2002 Life Sciences
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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