KORN/FERRY INTERNATIONAL
29th Annual Board of Directors Study 2002 Technology Markets
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 Technology Markets
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 Technology 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: ■
66 percent of technology boards have written guidelines on corporate governance.
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Only 34 percent of boards formally evaluate the entire board’s performance on a regular basis; and
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58 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.
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 Technology companies 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 22 percent of boards currently conduct such evaluations, and
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28 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.
●
71 percent of directors say the board should hold regular executive sessions without the CEO during board meetings, yet ▲
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only 18 percent of boards hold such sessions.
Directors are spending an average of 12 hours per month on board matters, or approximately 144 hours annually.
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Most directors (54 percent) say their company’s CEO compensation program is effective.
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69 percent of directors think the majority of a director’s compensation should be in stock.
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50 percent of boards have a requirement that directors own shares of company stock.
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63 percent of directors would like to see their board become more diverse by increasing its minority representation.
29th Annual Board of Directors Study 2002 Technology Markets
Korn/Ferry’s 29th Annual Board of Directors Study — Technology companies highlights provides a comprehensive and illuminating look into the state of board practices at the nation’s leading technology 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 170 Technology 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 seven outside. 29th Annual Board of Directors Study 2002
Current Board Size
Optimal Board Size
Technology Markets 2
Inside
7
Outside 0
2
4
6
Does the former CEO sit on the board?
63% of respondents said they would like to see their board become more diverse by increasing its minority representation.
4
2
Inside
Outside
8
10
7 0
2
6
8
Should the former CEO sit on the board?
Yes 23% No 77%
4
Yes 27% No 73%
10
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 59%
Yes 41%
No 35%
Yes 65% 29th Annual Board of Directors Study 2002 Technology Markets
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 29%
Yes 44%
Yes 71%
Diversity in the Boardroom
Do you have any of the following minorities currently represented on your board? Women
86%
African American
34%
Hispanic
Is there a limit to the number of other boards on which the CEO and board members may serve as outside directors?
7%
Asian
10%
Other
3%
Yes CEO
24%
8%
Outside Directors 0
20
40
60
80
100
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Board Meetings Board commitment and activity continues to intensify. The majority of technology boards meet on a quarterly basis. With 51 percent of directors spending more time on board matters. Face to face meetings are still the way most boards continue to meet.
Does your board typically have board members who attend meetings electronically?
Yes 26%
29th Annual Board of Directors Study
No 74%
2002 Technology Markets
Has your board ever held a virtual board meeting via the Internet? Yes 3%
12 average hours per month spent on board matters. No 97%
Compared to last year how many hours are you spending per month on board matters? More
51%
Fewer
7%
About the Same
Would you feel comfortable holding a board meeting in a secure Internet environment?
42%
Yes 43% No 57%
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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, 59% of technology companies have such committees. 66% of these companies have written guidelines on corporate governance and 87% believe these guidelines are helpful to a board.
Does your board have a formal committee that reviews corporate governance processes and board operations?
No 41%
29th Annual Board of Directors Study 2002
Yes 59%
Technology Markets
Does the board have written guidelines on corporate governance?
No 34% Yes 66%
Do you believe written governance guidelines are helpful to a board?
No 13%
Yes 87%
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Management Succession Data reveals that in the last three years only 56% of technology companies have undergone a management succession process. Only 48% of these companies have a management succession committee or process.
Does the board have a management succession committee or process?
29th Annual Board of Directors Study 2002
No 51%
Yes 49%
Technology Markets
In the last three years, has your company undergone a management succession process?
No 44%
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Yes 56%
Evaluating Performance 66% of technology company boards evaluate the full boards performance while only 22% of the boards evaluated individual directors performance. However, 80% of respondents feel individual directors should be evaluated.
Is the entire board’s performance formally evaluated on a regular basis?
If YES: How effective is the evaluation?
No 66%
Very Very Ineffective 2% Effective 3%
Yes 34%
29th Annual Board of Directors Study
Ineffective 11%
2002 Effective 38%
Technology Markets
Does your board evaluate individual directors on a regular basis? If YES: How effective is this evaluation of individual directors?
Yes 22%
Very Effective 8%
No 78%
Effective 28%
Somewhat Effective 60%
Ineffective 4%
Should individual directors be evaluated regularly as to their performance?
No 20% Yes 80%
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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 74.5%
72.2%
60
53.6% 48.5%
44.8%
29th Annual Board of Directors Study
41%
39.9%
40
32.9% 24.2%
23.7%
2002 Technology Markets
20
18.6%
15.3%
5.4%
4.1%
0
International
Technical
1.3%
Financial
Marketing
Legal
Compensation More than half (69%) of the respondents think that directors should be paid in stock. 67% suggested stock options as the primary form.
Do you think the majority of a director’s compensation should be in stock?
If YES: What form of stock? Primarily Stock Grants 26%
No 31% Yes 69%
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Primarily Stock Options 67%
Other 8%
Is there a requirement that directors own shares of company stock?
No 50%
Yes 50% 29th Annual Board of Directors Study 2002
If YES, average number of shares: 1811
Technology Markets
How do you feel about your company’s CEO compensation program?
Very Effective 18%
Effective 54% Fairly EffectiveNeeds Some Changes 25% Ineffective 3%
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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 (58 %) of the directors indicated that their board and management team had not developed or discussed a crisis management plan prior to September 11th. 29% reported action has not 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 Technology Markets
Is there a director on your board you feel should be replaced?
No 58%
Yes 48%
Has your board taken any action to address crisis management since the tragedy of September 11th?
Yes: 38% No: 62% Yes 29%
Have you ever turned down a board position because you felt your risk was too great? Yes, but not in the last 12 months
31%
Yes, in the past 12 months
19%
No
50%
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No 71%
Survey Demographics What is your title or status with your primary company? 27.6%
Board Chairman 20%
President CEO
41.2% .6%
General Counsel Vice Chairman
1.2%
Chief Financial Officer
2.4%
Chief Technical Officer
2.4% 0%
Corporate Secretary Retired CEO
7.6%
Retired
29th Annual Board of Directors Study
17.1%
Other
14.1%
0
5
10
15
20
25
30
35
40
45
50
2002 Technology Markets
How long have you served on this board?
5.5%
Less Than One Year 1-2 Years
15.5%
3-5 Years
22.7%
6-10
26%
Over 10 Years
30.3%
0
10
20
30
40
Your age: .6%
34 Years or Younger 35-44 Years
3.8%
45-54
28.9%
55-64
44.4%
65-74
21.7%
.6%
75 Years or Older 0
10
20
30
40
50
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Global Technology Practice Korn/Ferry International Korn/Ferry International’s Global Technology Market is about industry and functional knowledge - our team has significant experience helping our clients solve their human capital needs in the technology space. By staying on top of the industry and partnering with our clients and top executives, we are able to anticipate trends and produce substantive, measurable results. Korn/Ferry Technology consultants utilize our market knowledge and worldwide relationships to benefit our clients. Our areas of expertise range across all of the key technology platforms. Specialties include: 29th Annual Board of Directors Study
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Communications & Convergence
2002
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Professional & IT Services
Technology Markets
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Software & Emerging Technologies
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Systems & Electronics
Korn/Ferry takes pride in the one-on-one commitment we make to each and every client. Our team-based approach allows us to be proactive and responsive - and to exceed your expectations in regard to the quality of candidates, ease of communication and speed of execution. Armed with our industry expertise and track record of performing challenging assignments, Korn/Ferry’s Technology group serves as a strategic partner and trusted advisor, helping our clients attract leaders who embrace, anticipate and lead change.
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.kornferry5.com or the Futurestep web site at www.futurestep.com.
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For additional copies of this study, please call the Global Marketing Department at (310) 552-1834.