Korn/Ferry International
30th
2003
Annual Board of Directors Study
Korn/Ferry International
Table of Contents Observations and Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
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Executive Summary: Highlights of Global Findings . . . . . . . . . . . . . . . . . . . . . . . . .5 Proxy Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 Size of Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 Inside Directors vs. Outside Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 Board Composition and Demographics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 Committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 Committee Composition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 Committee Meeting Frequency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 Full Board Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 Annual Retainer Plus Per-Meeting Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14 Committee Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 Stock as Director Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16 Profile of Proxy Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 Americas Survey Responses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 European Survey Responses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31 Asia Pacific Survey Responses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .55 About Korn/Ferry International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56 Global Board Services Practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56
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30th As part of this 30th Annual Board of Directors Study, we thought it would be interesting to interview a few CEOs, Chairmen and Directors to get their candid opinions and personal insights on a number of board issues. Inside the pages of this Study you will find their thoughts on such matters as: What Really Happens in Executive Sessions?; the True Role of Lead Directors; and Challenging a CEO. Korn/Ferry International
Observations and Commentary: A 30-Year Evolution When the Korn/Ferry Board of Directors Study was launched in 1973, corporate governance was, by no means, perceived to be as significant as it is today. Over the years, cynicism about the real “work” of boards, interpreted as rubberstamping the CEO, fueled quiet but growing dissonance with those advocating a system that was to bring a balance of power and protection to shareholder interests. A new generation of investors has emerged, a group predisposed to instant gratification and protest. They enlisted the previous generation, evolving begrudging acceptance into activism. Evolving social idealism as corporate credo, “We can make a difference” became the mantra of a broad cross-section of shareholders. Executives and directors were among those believing change was needed. Board insularity eroded in the mid-80s, when a judge in the United States allowed the TransUnion board of directors to be sued by shareholders. This landmark decision rocked an entrenched system, spotlighting both weaknesses and strengths inherent in the established structure. Aftershocks were felt throughout the global corporate community and from that point forward, shareholders would continuously scrutinize corporate performance and the board’s role. Crises also spurred change throughout Europe in the 1990s. Poor CEO performance and inattentive boards became the catalyst for major reform. Several guidelines were developed, such as the United Kingdom’s (UK) Cadbury Code of Best Practices and France’s Vienot Report. The Cadbury Code was the first set of practices adopted by a stock exchange. To be listed on the London Stock Exchange, a company must produce an annual report and state within whether or not they comply with the Cadbury Code. More recently, Asia Pacific (APAC) corporate boards have been targets of reform. Prosecutions of major companies, under-funded pension funds and the emerging influence of global shareholders served as catalysts for amendments to the Japanese Commercial Code in 2001 and 2002. Poor performance by prominent Australian organizations led to the development of the Hilmer Report and, in addition, the Australian Stock Exchange recently introduced a new set of Governance Principles. These defining global events made, and continue to impact, the ever changing world of corporate governance. Findings in this 30th anniversary issue of our Annual Board of Directors Study show that many practices now common to boards were considered the antithesis of acceptable or necessary governance just a decade ago.
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Refusing to be prisoners of “It just isn’t done” conventionalism, corporate directors have dealt with the most difficult issue facing boards: establishing an appropriate relationship with management while maintaining independence and representing shareholders’ best interests. Knowing that the future of governance hinged on achieving a productive balance between the chief executive and the board, directors set a course to establish and maintain independence.
Korn/Ferry International Today, outside directors comprise the majority of most corporate boards throughout the world. Nominating committees are standard for the majority of boards in the Americas and Europe. Many do not include the chief executive as a member. The lead director concept is being formalized rapidly by boards in the Americas and in the United Kingdom.
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Increasing numbers of boards conduct CEO performance reviews. In the Americas, 82 percent of boards have a formal process to do so. Equally revolutionary is the concept that boards themselves should improve – and work at it continuously. A formal committee dealing with the specific subject of corporate governance is standard for boards in Germany and the Americas. The majority of boards worldwide have written guidelines concerning corporate governance. Active participation of all board members has become the minimal accepted standard, a departure from the past. Boards are asking directors to resign with unprecedented frequency, most often citing poor performance or a lack of participation as the main reasons. Despite these improvements, shareholders seem more dissatisfied with boards’ execution of duties than ever before. A series of record-breaking corporate scandals begged the question: Where was the board? The immediate shareholder response demanded more government involvement via regulation and legislation. SarbanesOxley, the Higgs and Smith Reports, the Bouton Report, and the German Corporate Governance Kodex were devised. The majority of FORTUNE 1000 boards have been quick to comply with standards for director independence and financial expertise. The intended outcome of these regulations is improved corporate governance: boards comprised of qualified, independent directors who possess specific expertise and experience relevant to making substantive contributions. But to meet board constituencies’ expectations of infallibility, these statutes would have to legislate the determining factor in good governance: integrity. Integrity is the real catalyst for the changes of the past 15 to 20 years. Individuals with integrity have recruited others with the same attribute, building boards of independent outsiders. Their dedication to act in the interests of shareholders is evident.
Charles H. King Board Services Practice Global
Didier Vuchot Board Services Practice Europe
Directors with integrity have created the reality of good governance. They will continue to explore methods to strengthen and improve their contributions, making the current picture of governance as foreign to future generations as that of the one of 1973 is to us today.
Charles H. King Board Services Practice Global
Didier Vuchot Board Services Practice Europe
Sakie Fukushima Board Services Practice Asia Pacific
Sakie Fukushima Board Services Practice Asia Pacific
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Methodology To mirror the globalization of governance, the Korn/Ferry 30th Annual Board of Directors Study expanded the scope of this special anniversary survey to examine board practices and opinions of directors of major corporations throughout the world. Board members in the Americas, Asia Pacific and Europe were invited to participate in this landmark study. Interest and enthusiasm is evident: 1,362 directors from 15 nations completed and returned the questionnaire. CEOs accounted for 32 percent of the respondents; presidents, 17 percent; and board chairmen, 32 percent. Our first section reviews findings on a global level; regional results are then presented in distinct sections. The Americas encompasses Brazil, Canada, Colombia, Mexico and the United States. The European section is based on responses from board members of companies headquartered in France, Germany and the United Kingdom. Asia Pacific includes Australia, Hong Kong/China, Japan, Malaysia, New Zealand, Singapore and Thailand. As with each of our Board of Director studies, selected issues pertinent to boards are examined. This year, corporate governance and regulation are the focus. Data reported in proxies of FORTUNE 1000 organizations is the basis for our Proxy Information section. This data tracks changes in board practices of the largest public organizations headquartered in North America. Where appropriate, comparisons with information gathered during the past 30 years are made.
In Appreciation The Korn/Ferry Board of Directors Study is the most comprehensive, longest running survey of its kind in the world. The company is most grateful to those directors who have participated in these studies during the past 30 years. The information supplied has given the business community a valuable tool in evolving governance. This year, Korn/Ferry is indebted to those directors who elected to be part of a new tradition in presenting a global look at governance. This data will broaden understanding of board practices globally and increase awareness of trends and issues common worldwide.
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Executive Summary: Highlights of Global Findings A significant factor in the evolution of governance worldwide is the globalization of investment. Specific expectations of foreign shareholders and their comprehension of other business cultures have created greater awareness of board practices around the world. Areas distinguishing governance in specific countries, such as structure, composition, the role of investors and traditional business practices, have been subject to question. The actions of directors worldwide indicate an openness to evaluate and, in some cases, embrace changes initiated in other regions.
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While culture and tradition create distinct business and governance practices, directors everywhere share common challenges, according to survey respondents. The following highlights showcase major changes in governance and common issues confronting directors, regardless of the location of the boardroom.
Executive Sessions An astounding 87 percent of the Americas company respondents state that their board holds regular executive sessions without the CEO present during meetings, compared to 41 percent in 2002. In Europe, only 7 percent of respondents of German boards, 7 percent of French boards and 15 percent of United Kingdom boards hold executive sessions. For Asia Pacific, 4 percent of Japanese, 66 percent of Australian and New Zealand and 32 percent of Non-Japan Asian boards follow this practice.
Companies that hold Executive Sessions Americas Australia/New Zealand Non-Japan Asia United Kingdom France Germany Japan
87% 66% 32% 15% 7% 7% 4%
Lead Director The percentage of Americas respondents reporting a lead director almost doubled since 2002, from 32 percent to 62 percent in 2003. Lead directors are in the majority (52 percent) of United Kingdom company boardrooms.
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CEO Evaluation Four of five (82 percent) boards in the Americas have a formal process to evaluate the CEO, compared with 67 percent in 2002. Over half (53 percent) of UK company boards report this.
Succession Planning According to Survey results, the percentage of the Americas boards having a management succession committee or process has more than doubled in two years, from 33 percent in 2001 to 77 percent in 2003.
Compensation Overall, cash compensation for the directors of FORTUNE 1000 companies rose from $40,964 in 2000 to $43,306 this year. Average cash compensation for the directors of FORTUNE 1000 organizations between $5 and $9.9 billion in revenue jumped 9.7 percent since last year, increasing from $42,264 to $46,348 this year.
$43,306
2002
$41,875
2001
$40,964
2000
$0
$50,000 Annual Cash Compensation
Governance Formal corporate governance committees are on the rise: 86 percent of the Americas boards have such a committee, compared with 62 percent in 2002. Nine of ten (91 percent) of German company boards do not have this committee. Nine out of ten (88 percent) Americas boards have written guidelines concerning corporate governance, up from 71 percent in 2002. This is also common to Asia Pacific boards (69 percent) and those in the United Kingdom (84 percent).
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Almost all of the Americas respondents report meeting with the Sarbanes-Oxley requirements for director independence (98 percent) and financial expertise (97 percent). Two-thirds (63 percent) of those on French corporate boards say their board is in compliance with the Bouton Report for director independence. Nine of ten (87 percent) of boards in the United Kingdom meet the Higgs and Smith Reports guidelines for financial expertise and two-thirds (66 percent) for director independence.
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Director Evaluations The practice of individual director performance reviews is most prevalent in Asia Pacific, where 41 percent of respondents’ boards have such reviews. The percentage of the Americas boards conducting these increased from 21 percent last year to 29 percent in 2003. As to whether directors should receive individual performance reviews, “Yes� is the answer from 89 percent of Asia Pacific company respondents, 90 percent of United Kingdom organization directors, 75 percent of French company board members and 79 percent of those serving on boards in the Americas. Should individual directors receive performance reviews? 89%
APAC
79%
Americas
UK
90%
France
75%
0
20
40
60
80
100
% Yes
Two-thirds (65 percent) of the Americas respondents state a board member has been asked to resign or not stand for re-election in the past year, up from 54 percent in 2002. More than half (57 percent) of European company respondents and 37 percent of directors on Asia Pacific boards indicate this has occurred. Companies That Have Asked a Board Member to Resign or Not Stand for Re-election (in the past 12 months.) Americas Europe Asia Pacific
65% 57% 37%
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Proxy Information Proxies collected for the 30th annual survey were reported by the FORTUNE 1000 for FORTUNE year 2001 covering the period of July 1, 2001 through June 30, 2002.
Size of Board Heightened expectations of performance, increasingly complex responsibilities and the ongoing growth of total shareholders have not resulted in enlarging board membership as a means to better execute the duties of corporate boards. However, while the number of members hasn’t increased, the requisite skill sets and required level of commitment have risen dramatically. Proxy data suggests that boards have found 11 members to be the most effective size. Average board size, according to proxy data, is 11 members, unchanged since 1994, when the average board size was 12 members. Thirty years ago, 57 percent of the boards analyzed in the first Korn/Ferry Board of Directors Study had 10 to 15 members, and 21 percent, more than 16 members.
Table A — Present Number of Board Members
Size of Company Under $3 billion $3 billion - $4,999 billion $5 billion - $9,999 billion $10 billion - $19,999 billion $20 billion and over
Average Number Insiders
Average Number Outsiders
Average Number Members
Average Number Board Mtgs.
2 2 2 2 2
7 8 10 10 10
10 10 12 12 12
7 7 8 8 8
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Present Number of Board Members (continued from Table A)
Type of Company Industrial Banks Other Financial Institutions Insurance Companies Consumer Products Retailers Advanced Technology Aerospace Energy Healthcare Providers Pharmaceuticals Entertainment / Hospitality Other Services Miscellaneous All Companies Average
Average Number Insiders
Average Number Outsiders
Average Number Members
Average Number Board Mtgs.
2 3 3 2 3 3 2 2 2 2 2 3 2 3 2 2
8 12 9 10 9 7 7 9 9 9 10 10 7 8 9 9
10 15 12 12 11 10 10 11 11 10 12 13 10 11 11 11
7 8 7 6 7 7 8 9 9 7 7 7 7 7 7 7
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Analysis of the 2002 proxy information shows the average board size to be 11 directors, 2 insiders and 9 outsiders, which is the same as the 2001 proxy data. The average number of members of boards of companies with revenues under $3 billion rose by one. The average number of boards of companies with revenues over $20 billion went down by one. Average Number of Members may not add up to the total number of Average Number of Insiders plus Average Number of Outsiders due to fractional amounts not illustrated in this table.
Inside Directors vs. Outside Directors Perhaps nothing has been a greater influence on the ratio of inside and outside directors on corporate boards than the increased focus upon achieving balance in the boardroom: creating a positive working relationship with management while maintaining independence of thought and action to provide the best possible guidance and counsel. Proxy data from 2002 shows corporate boards typically are comprised of nine outside directors and two inside directors, the same ratio found every year since 1995. In 1972, 74 percent of the boards having 10 to 15 members reported that 4 or more of their members were insiders. Of the boards having 6 to 9 members, 55 percent had 4 to 6 inside directors.
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Board Composition and Demographics Proxy data supports the premise that investors have not been content to merely express concern about governance; rather, they have taken an extraordinarily active role, resulting in a quantum increase in the number of boards with investor representation. Analysis of 2002 proxy data reveals 89 percent of boards have an investor as a director. In 1992, only 28 percent had a major stockholder on the board. The unique combination of experience, time availability and desire to contribute to a growing, vital organization is one explanation for the increase in the number of boards having a retired executive from another company as a member. Additionally, we are seeing a trend of active CEOs, who historically sat on several outside boards, are taking on fewer outside commitments, and the presence of retired audit partners, as a result of recent scandal and legislation, is becoming much more prevalent in the boardroom. In 2002, 94 percent of boards reported having this type of director, a significant increase in frequency from 1992, when 68 percent of boards included a retired executive. In step with much of society, there has been a drive toward diversity in the boardroom in 2002. Almost three-fourths of FORTUNE 1000 companies (71 percent) include an ethnic minority among their membership and 79 percent have a female director. While percentage increases in recent years are small, significant inroads have been made in the past decade. In 1992, ethnic minorities held seats on 46 percent of boards and women on 60 percent. In 1972, the membership of only 9 percent of boards included an ethnic minority and only 11 percent had a woman.
Table B — Percent of Boards with One or More of the Following Individuals Proxy Data from
2002
2001
2000
Retired executive (other companies) Investor CEO/COO (other companies) Woman Former government official Ethnic minority member African-American Latino Asian Academician Commercial banker Non-U.S. citizen
94% 89% 83% 79% 59% 71% 44% 17% 10% 59% 31% 16%
93% 91% 82% 78% 56% 68% 42% 16% 10% 59% 30% 15%
91% 87% 83% 74% 52% 65% 41% 14% 11% 56% 28% 15%
Proxy information indicates a continued increase in women, African-American and Latino board members. The above categories are not mutually exclusive. An executive may fall into more than one of the classifications. 10
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Committees Outside directors’ dedication to active contribution, independence and continuously improving governance is increasingly being formalized as a standing committee. A majority of boards (54 percent) now have a Corporate Governance (Board Organization) Committee, compared with 35 percent of boards reporting a committee dedicated to issues of governance in 1995.
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As actual committee names vary greatly, we elected to track committee functions instead. While Audit Committees are synonymous with the audit function, other committees, such as the Compensation Committee may perform multiple functions. In 2002, a majority of FORTUNE 1000 companies reported that their board committees dealt with six standard functions — an increase over the five reported for the last decade: Audit (100 percent), Compensation (99 percent), Stock Options (86 percent), Nominating (75 percent), Executive (55 percent) and Corporate Governance (54 percent). Changes in governance may be best illustrated by the ongoing evolution of the different functions performed by board committees. In 1972, 72 percent of boards had an Audit Committee and only 2.4 percent reported a Nominating Committee. Proxy data from 1992 revealed that 98.7 percent had an Audit Committee and 60 percent had a Nominating Committee. No board had a committee dealing with stock options; however, the function of reviewing stock option programs is now routinely addressed by either the Compensation Committee or a special committee established for that specific function.
Table C — Evolution of Formal Committees 110 100 90 80 70 60 50 40 30 20 10 0
98.7%
100%
75%
72% 60%
2.4%
1972
1992 Audit Committee
2002
1972
1992
2002
Nominating Committee
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Table D — Percentage of Companies with: Committee
2002
2001
2000
1999
1995
Audit Compensation Stock Options Nominating Executive Corporate Governance Finance Succession Planning Investment Corporate Responsibility Director Compensation
100% 99% 86% 75% 55% 54% 33% 30% 18% 20% 29%
100% 99% 86% 72% 56% 48% 35% 30% 19% 21% 30%
100% 99% 87% 73% 57% 46% 40% 32% 21% 22% 31%
100% 99% 80% 74% 60% 44% 41% 34% 23% 21% 31%
100% 99% 56% 73% 65% 35% 32% 31% 21% 19% n/a
The noteworthy point here is the rise in the number of companies with a committee dedicated to questions of “Corporate Governance.” Variously titled, these are generally committees once described as “Nominating Committees” whose new responsibilities include corporate governance.
Committee Composition Five of the six most prevalent committees are comprised entirely of outside directors. The exception is the Executive Committee, which typically has two inside directors and three outside directors.
Table E — Committee Composition Committee Audit Compensation Stock Options Nominating Executive Corporate Governance Finance Succession Planning Investment Corporate Responsibility Directors Compensation
Average Number Inside Directors
Average Number Outside Directors
Average Number Directors
0 0 0 0 2 0 1 0 1 1 0
4 3 3 3 3 4 4 4 4 4 4
4 3 3 4 4 4 5 4 5 5 4
Average Number of Directors may not add up to be total number of Average Number Insiders and Average Number Outsiders due to fractional amounts not illustrated in this table. 12
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Committee Meeting Frequency As with composition, committee meeting frequency remains unchanged, with one exception. The Audit Committee meets in-person an average of five times, compared with four times reported since 1999. Further, the number of telephonic Audit Committee meetings has also risen as of late; however, the proxy data available does not break out the number of these meetings.
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Table F — Meeting Frequency Number of Meetings
Committee Audit Compensation Stock Options Nominating Executive Corporate Governance Finance Succession Planning Investment Corporate Responsibility Director Compensation
5 4 4 3 4 3 4 4 4 3 4
Full Board Compensation Fewer companies are awarding outside directors a per-meeting fee in addition to an annual retainer. Since 1995, the percentage of companies providing this type of compensation decreased from 84 percent to 70 percent in 2002. During the same time period, the percent of companies paying an annual fee only increased from 14 percent to 21 percent. Only 4 percent have embraced the practice of paying directors in stock only although many boards afford their directors the option of being compensated entirely in equity.
Table G — Full Board Compensation Percentage of companies paying:
2002
2001
2000
1999
1995
Annual plus per-meeting fee Annual fee only Per-Meeting fee only No cash compensation (stock only) Total
70% 21% 5% 4% 100%
72% 20% 5% 3% 100%
75% 18% 4% 3% 100%
77% 17% 4% 2% 100%
84% 14% 2% N/A 100%
There continues to be a decrease in the number of companies that pay both per-meeting and board retainer fees. The trend is to pay a larger lump sum retainer.
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Annual Retainer Plus Per-Meeting Fee Outside directors receiving an annual retainer plus a per-meeting fee were awarded an average of $43,306 in 2002, representing a 3.4 percent increase over the $41,875 paid in 2001. Outside directors of $20 billion+ companies saw an average increase of 8.3 percent, bringing their average cash compensation to $61,307. Peers on boards of $5-$9.9 billion companies were given a 9.7 percent increase, receiving $46,348.
Table H — Annual Retainer Plus Per-Meeting Fee Size
2002
Average Compensation 2001
2000
Under $3 billion $3 billion - $4,999 billion $5 billion - $9,999 billion $10 billion - $19,999 billion $20 billion and over Type of Company
$34,336 $38,378 $46,348 $48,667 $61,307
$33,792 $37,567 $42,264 $47,589 $56,587
$33,687 $35,910 $41,202 $48,484 $51,774
Industrial Banks Other Financial Institutions Insurance Companies Consumer Products Retailers Advanced Technology Aerospace Energy Healthcare Providers Pharmaceuticals Entertainment / Hospitality Other Services Average
$42,550 $40,934 $48,643 $43,788 $45,709 $34,206 $41,183 $56,818 $41,216 $39,881 $47,750 $45,724 $34,570 $43,306
$40,467 $38,418 $45,138 $40,998 $42,781 $33,716 $40,744 $58,182 $40,664 $38,741 $50,500 $40,309 $33,716 $41,875
$37,978 $38,415 $42,162 $37,317 $39,476 $32,299 $41,891 $54,042 $40,276 $38,803 $50,785 $43,975 $35,114 $40,964
Average compensation denotes cash compensation only, not total compensation. While fees rose in all other categories, there was a slight decline this year in Aerospace and Pharmaceuticals. Averages were calculated this year by Industry Group and based on this, averages for prior years have been revised slightly.
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Committee Compensation Although the data reflected in this year’s proxies preceeds Sarbanes-Oxley, it represents a period in which corporate scandals had begun to impact the boardroom. Subsequently, proactive companies, seeing the writing on the wall, began to strengthen committee chairs and in turn, compensation began to rise. The per-meeting fees for committee members continued to increase marginally. The average amount paid in 2002 was $1,148, compared with $1,036 awarded in 1997.
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Table I — Average Cash Retainer for Committee Chairs 2002 $5,779 $5,500 $5,136
Audit Chair Retainer Compensation Chair Retainer Governance Chair Retainer
2001 5,331 5,055 5,200
2000 4,987 4,946 4,902
Table J — Average Cash Compensation by Type of Committee*
Committee Function/Name Audit Compensation Corporate Governance (Board Organization) Corporate Responsibility Directors Compensation Executive Finance Investment Nominating Stock Options Succession Planning
Chair Retainer
All Companies Chair Member Meeting Fee Retainer
$5,779 $5,500 $5,136 $5,614 $4,947 $6,516 $6,172 $5,577 $4,978 $5,576 $5,264
1,256 1,250 1,334 1,395 1,244 1,248 1,344 1,278 1,298 1,244 1,328
5,102 4,820 4,815 4,513 4,810 7,899 5,350 5,441 4,496 4,819 5,400
Member Meeting Fee 1,170 1,165 1,238 1,315 1,169 1,163 1,247 1,172 1,203 1,162 1,258
* This data was not used in last year’s Board Study.
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Table K — Average Committee Fees by Size and Type of Company Committee Member Meeting Fee
Committee Chair Meeting Fee
Committee Chair Retainer
Under $3 billion $3 billion - $4,999 billion $5 billion - $9,999 billion $10 billion - $19,999 billion $20 billion and over Type of Company
$1,155 $1,097 $1,246 $1,238 $1,238
$1,243 $1,181 $1,334 $1,325 $1,301
$4,635 $4,250 $5,199 $8,131 $7,551
Industrial Banks Other Financial Institutions Insurance Companies Consumer Products Retailers Advanced Technology Aerospace Energy Healthcare Providers Pharmaceuticals Entertainment / Hospitality Other Services Miscellaneous All Companies 2003 All Companies 2002
$1,256 $1,189 $1,388 $1,109 $1,105 $1,031 $1,290 $1,095 $1,186 $1,204 $1,285 $1,100 $1,105 $1,073 $1,173 $1,148
$1,368 $1,233 $1,500 $1,118 $1,235 $1,096 $1,338 $1,257 $1,276 $1,329 $1,422 $1,294 $1,131 $1,245 $1,274 $1,231
$4,992 $5,261 $9,862 $6,080 $5,100 $4,718 $9,151 $5,403 $4,872 $6,427 $10,168 $7,417 $4,287 $3,583 $6,237 $5,554
Size
Stock as Director Compensation Of the 906 companies examined, 784 include stock options and grants as part of the compensation awarded to outside directors. Proxy data shows that 47 percent of the companies award stock options, 28 percent provide restricted grants, and 12 percent, stock grants. Thirteen percent of companies include a combination of options and grants in director compensation. In 1972, 4 percent of the companies examined provided some type of stock program as part of director compensation. Only 6.9 percent of participants thought directors should be compensated with stock options.
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Table L — Stock Options & Grants Summary (Of companies that give directors some form of stock compensation)
Restricted Grants
Options & Grants 13% Stock Grants Only
28%
12% Stock Options Only
47%
More companies awarded a mixture of stock options and grants this year rather than using stock options as the only form of stock compensation. There was a decline in the total number of companies paying stock compensation, perhaps due to the decline in stock value, and the change in the way that companies must now expense stock options.
Profile of Proxy Companies
Table M — Participating Companies Size Under $3 billion $3 billion - $4,999 billion $5 billion - $9,999 billion $10 billion - $19,999 billion $20 billion and over Total
Number of Companies
Percent of Companies
441 149 141 86 89 906
49% 16% 16% 9% 10% 100%
continued on page 18
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Participating Companies (continued from Table M) Type of Company* Advanced Technology Aerospace Banks Consumer Products Energy Entertainment / Hospitality Healthcare Providers Industrial Insurance Companies Miscellaneous Other Financial Institutions Other Services Pharmaceuticals Retailers Total
Number of Companies
Percent of Companies
125 11 47 60 109 16 33 202 39 13 23 62 13 153 906
14% 2% 5% 7% 12% 2% 4% 22% 4% 1% 2% 7% 1% 17% 100%
The biggest changes this year are in the increase in the number of Advanced Technology companies from 105 last year to 125 this year; the increase in the number of Other Services companies which includes Advertising, Transportation, Freight and Mail Delivery, Security Systems, Waste Management and Diversified Outsourcing companies from 44 last year to 62 this year; and the decline in the number of Industrial companies from 244 last year to 202 this year. There are 9 more Energy companies included this year than last, 8 more Insurance companies, 2 more Pharmaceutical companies and one more each in the Consumer Products and Miscellaneous categories. There are 6 fewer Healthcare Provider companies, 4 fewer Other Financial Institutions and one less each in the Bank and Entertainment/Hospitality categories of companies. * Manually calculated.
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Board Practices In The Americas — Survey Responses A tumultuous business environment and new regulations have strengthened the resolve of directors to provide outstanding counsel. While responding quickly to Sarbanes-Oxley and concerns of constituencies, survey respondents indicate their boards maintained a steady focus on increasing their independence from management while providing guidance of the highest caliber. Continuously improving board operations, embracing board and individual director evaluations and intolerance of poor performance of peers are becoming the norm for these boards, establishing emerging trends as standard practices.
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Board Composition What is your current board size? (Inside and Outside Directors)
Inside
4
Inside
Outside
8
0
2
4
6
8
3
Outside
10
9
0
2
4
6
8
10
Optimal Board Size
Current Board Size
Responses from survey participants underscore the importance placed on composition in attaining greater independence and improving effectiveness. Typically, respondents’ boards average 12 members, eight outside directors and four inside directors. While respondents believe 12 is the optimal size for a board, they state the representation should be shifted to nine outside and three inside directors. Survey results differ from proxy data that indicates 11 is the average board size for the period from July 1, 2001 to June 30, 2002. Does your former CEO sit on the board?
Yes 23%
No 77%
Yes 28%
No 72%
2003
2002
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Having the former CEO remain an active member of the board is a tradition with waning support. More than three-fourths (77 percent) of the respondents report that the company’s former CEO is not a board member. Additionally, four of five (80 percent) believe this individual should not serve as a director.
Board/CEO Balance If your chairman is also the CEO, do you have an elected or appointed lead director among the outside directors who will preside at executive sessions and evaluate the CEO?
No 38% Yes 62%
Robert H. Bohannon Chairman, President & CEO Viad Corp “I am in my seventh year as chairman of Viad, and I am the only insider on the ten-member Board. Our Board is quite independent. I have never nominated a candidate for Board membership because our Board believes that a CEO should concur with a nomination but not initiate it. During the past year, a lead director was nominated to function as Chairman of the Board’s Executive Sessions. These Executive Sessions are held without the CEO in attendance. The lead directorship rotates to a different member of the Board every year. If I had ever asked the directors to suspend Viad’s conflict of interest rules, such as that which happened at Enron, they would have fired me on the spot. I think it’s very important for the directors as well as the officers and other executives to have a
20
The lead director concept, until recently met with conservative acceptance, is rapidly become a valued, standard practice. The percentage of respondents stating their boards have an appointed or elected director filling this role almost doubled in one year, rising from 32 percent in 2002 to 62 percent in 2003. Should a board that has an inside director as chairman elect or appoint an outside director as the lead director?
No 28%
Yes 72%
Director support for the practice increased substantially during the same period. Last year, 55 percent thought a board chaired by an inside director should have an elected or appointed lead director. This year, 72 percent advocate the practice.
Korn/Ferry International Does the board typically hold regular executive sessions without the CEO present?
No 13%
Yes 14%
Yes 87%
Americas
No 86%
Europe
Directors’ seriousness concerning independence is unmistakable: an astounding 87 percent of respondents serve on boards that hold regular executive sessions without the CEO present. This more than doubled since last year, when 41 percent of the respondents said their boards embraced this practice. Such action seems uncommon to European directors. Only 14 percent say their boards regularly meet in executive session without the chief executive. Is there a limit to the number of other boards on which the CEO may serve as an outside director?
Yes 23%
Yes 39%
No 61%
No 77%
2003
2001
30th personal stake in the company’s fortune. Our Board adopted stock ownership guidelines for the officers and directors. Directors have to own stock equivalent to five times their annual board fee. Officers who make $125,000 or greater must own Viad stock equivalent to 1 to 5 times their annual base salary, depending upon their salary level. Directors and officers are granted stock options, but are expected to hold on to the options for the duration of their terms. If I had been told two or three years ago that companies in the FORTUNE 100 had been guilty of the type of wrongdoing we have seen since that time, I would have been extremely shocked. But greed has been a ‘constant’ throughout history. It is very difficult for even the most conscientious directors to detect fraud in extremely complex accounting arrangements. What will have as great an impact as directors’ dedication to keeping CEOs honest will be that wrongdoers will likely serve real jail time.”
The percentage of boards limiting the CEO’s freedom to accept invitations for outside board service has risen dramatically, from 23 percent in 2001 to 39 percent this year. Boards with formalized limitations specify the number of outside seats as two or three. Instituting this practice has tremendous support from respondents. The vast majority (84 percent) believe there should be such limits and state the CEO should be allowed to serve on only one or two external boards.
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Evaluations of CEO Performance, Compensation Does the board have a formal process for evaluating CEO performance?
No 18%
No 33%
Yes 67%
Yes 82%
2003
Jon Boscia Chairman & CEO Lincoln National Corporation United States “Lincoln National has only one inside director, myself, and there are eleven outsiders. I serve as the chairman, but we also have a lead director who sets the agenda for board meetings along with me. At each meeting of the board, there is an executive session at which I am asked to leave the room, and the lead director takes over. That meeting absolutely assures that every question on a director’s mind is addressed. I don’t think that there should be term limits on board members, but I do think that there should be term limits on chairmanships. At Lincoln National a committee chairman can serve only two terms of three years.
22
2002
Four of five (82 percent) respondents say their boards have instituted a formal process to evaluate CEO performance. Last year, 67 percent reported this practice. Financial performance and thought leadership are the two major criteria used in assessing the effectiveness of the chief executive. How effective do you feel your company’s CEO compensation program is? 33%
2003
26%
Very Effective
2002
33%
1998 48% 55%
Effective
50% 19%
Fairly Effective, but needs some change
17% 15% 1% 2% 1%
Ineffective
0
10
20
30
40
50
60
Four of five (81 percent) respondents state the compensation program awarded to the CEO is “very effective” or “effective.” The percentage holding this opinion is virtually unchanged in the past five years.
Korn/Ferry International
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Management Succession Does the board have a management succession committee or process? No 36%
No 23%
No 67% Yes 33% Yes 64%
Yes 77%
2002
2003
2001
Stories of the effects of poor management, entrenched CEOs reticent to relinquish the reins and virtually nonexistent internal pipelines reinforce directors’ resolve to formalize management succession. Since 2001, the percentage of boards reporting a management succession committee or process more than doubled, from 33 percent to 77 percent in 2003. Outside directors continue to exert greater influence in choosing a successor. This year, respondents believe the ratio of influence between the board and CEO in the decision process is 76 to 24. Last year the ratio was 65 to 35.
Board Meetings and Preparation On average, how often does your full board meet?
Not all committees are created equal. The audit committee does have a higher calling, and it is important for the audit committee to operate independently of the CEO. I do not routinely attend meetings of the audit committee. I have served on other boards and have seen that when a director asks a question of the CFO or the general counsel, the eyes of the CFO or the general counsel dart to the CEO. So the director has to wonder whether he is getting all the information he wants, or whether the interviewee is being inhibited by the presence of the CEO. I stay away from those sessions, even though I know that most CEOs would rather have root canal without Novocain than be left out in that way.�
Monthly Less Than 9% Quarterly 1% Quarterly 37%
Quarterly 44%
Monthly 34%
Other 46% Other 23%
Americas
Europe
Less Than Quarterly 6%
More than half (53 percent) of the Americas respondents indicate their full boards convene monthly or quarterly, compared with 71 percent of European boards. However, 6 percent of European boards cite meeting less than four times a year while only 1 percent of boards in the Americas do so.
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How many hours per month do you spend on board matters for this company, including review and preparation time, meeting attendance and travel?
13
2001
2002
15
19
2003
0
10
20
Average Number of Hours
Samir Gibara Retired Chairman and CEO The Goodyear Tire & Rubber Company United States “One of the most important changes at Goodyear over the past ten years has been the reduction in the size of the board, down from as many as 18 directors to no more than 12, only one or two of whom are insiders. A smaller board is more effective, because each member feels essential. On a board of twenty an individual director can let somebody else volunteer for an assignment or head a committee. When there are only a dozen everyone must contribute. Because more than half of Goodyear’s revenues come from sales outside the U.S., the board thinks globally. Seven or eight of the directors have had significant international experience. Recently, the board elected a lead director who helps the chairman, who is also CEO,
24
Time required to execute fiduciary responsibilities continues to escalate. Since 2001, the average number of hours spent on board matters has increased 46 percent, from 13 hours a month to 19 reported this year.
Risk Have you ever turned down a board position because you felt your risk was too great? Yes, in the past 12 months 23%
No 50%
Yes, but not in the past 12 months 38% No 49%
Yes, but not in the past 12 months 27% Yes, in the past 12 months 13% 2003
2002
Record-breaking bankruptcies, financial improprieties and less than forthcoming senior executives have heightened awareness of the risks of board service. Almost one-fourth (23 percent) of the respondents have declined a board invitation in the past 12 months compared with 13 percent who did so in 2002.
Korn/Ferry International
Pension Plans and Stock Ownership Does your company have a director’s pension or retirement plan? Yes 6%
No, canceled 4%
No, canceled 28%
Yes 52%
No, never had one 66%
No, never had one 44%
Americas
Europe
Retirement and pension plans for directors of boards in the Americas appear to be a non-issue. Only 6 percent of respondents indicate they receive such benefits. However, the majority (52 percent) of directors of European boards indicate their compensation package includes a retirement or pension plan. Is there a requirement that directors own shares of company stock?
No 43%
Yes 57%
2003
No 49%
Yes 51%
30th organize the board agenda. Goodyear introduced a system of formal appraisals in which the board evaluates its performance overall, but not of individual directors. Every board meeting is followed by an executive session from which the chairman is excused and at which the other directors can speak freely about anything, including the chairman if they like. The chairman meets at least once a year with each director individually. I retired in July of this year. Looking back on my career, I wouldn’t feel good about myself if I didn’t express outrage at the behavior at Enron and some other companies. But I still believe that miscreants are a very small minority of corporate leaders. Can an astute board detect a miscreant? I don’t believe that a board exists primarily to oversee the CEO’s ethics. It is there primarily to support and oversee the CEO’s strategy and the company’s financial performance.”
2002
More organizations stipulate that directors invest in the company. This year, 57 percent of the respondents state they are required to own stock, a slight increase from the 51 percent in 2002. However, support for stock as part of the director compensation package is ebbing. This year, 54 percent of respondents think the majority of director compensation should be in stock compared with 58 percent in 2002 and 66 percent in 2001.
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Corporate Governance Does your board have a formal committee that reviews corporate governance processes and board operations?
No 14% No 38% Yes 62%
Yes 86%
2003
Frank E. Weise, III Chairman & CEO Cott Corporation Canada “At Cott we have had in place for several years, well before the Enron scandal, some practices that help assure that the board performs its job well and maintains an independence from management. Directors get together at every board meeting for a time without management and they do the same with the outside auditors. Our former chairman is the lead director, and it is he who interviews and screens candidates for the board. The lead director also oversees the process of board assessment in which we review overall performance and that of individuals. If an individual director is not meeting expectations, has missed several board meetings, for example, or has not read the extensive material we send out before meeting and is therefore unprepared, we let that director know about it.
26
2002
The manifestation of directors’ desire to continuously improve effectiveness is a formal committee devoted to corporate governance processes and board operations. Last year, 62 percent of boards had such a committee. This year, the figure jumped to 86 percent. Does the board have written guidelines on corporate governance?
No 12% No 29%
Yes 71%
Yes 88%
2003
2002
Commitment to better corporate governance continues to fuel development of documented policies. Approximately nine of ten (88 percent) respondents say their boards have written guidelines about corporate governance. In 2002, 71 percent did.
Korn/Ferry International How important are each of the following factors in determining “good governance”? The board is made up of a majority of independent outside directors
73.5%
The board or a committee conducts a formal CEO performance review
30th
61.1%
A formal management succession process is in place
58%
The board holds regular executive sessions without the CEO
56.8%
A board committee develops and reviews governance guidelines
48.3%
0
10
20
30
40
50
60
70
80
% of very important
Factors enabling directors to achieve a constructive balance with management are cited by a majority of respondents as most important to good governance: a board comprised mainly of outside directors, a formal review of the CEO, establishing a formal management succession process and holding regular executive sessions without the CEO.
Board and Director Performance Evaluations Regular formal evaluations of the full board’s performance are conducted by 65 percent of respondents’ boards, a major increase from the 37 percent reported last year. Only 30 percent of European boards undertake this process. A majority (55 percent) of European directors undergoing evaluation describe the process as “effective” or “very effective.” Only 45 percent of their counterparts in the Americas hold this opinion.
Clearly, being a board member is very demanding these days, and it is increasingly difficult for companies to find directors. As a company headquartered in Canada, we had an especially difficult search, because Canadian law used to require that a majority of board members be Canadian. Fortunately, the law was changed a year ago. As for myself, I have turned down all invitations to be on the boards of other public companies. Accepting them at this time, while I am a full-time CEO, is not worth the time demanded and the risk of litigation growing out of the Sarbanes-Oxley legislation. I have talked to CEOs at several large companies who now serve on the boards of other companies. They say that once their stint is up, that’s it. They won’t go on anyone else’s board.”
Does your board evaluate individual directors on a regular basis?
Yes 29%
No 71%
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The percentage of boards tackling the sensitive issue of evaluating individual director performance continues to grow, increasing from 21 percent last year to 29 percent in 2003. The top five factors used to assess individual performance are contribution, attendance, preparedness for meetings, committee participation and interaction with peers. This emerging trend has strong support; 79 percent of the respondents think individual director performance should be evaluated regularly. Has your company ever asked a director to resign or not stand for re-election?
No 35%
No 46% Yes 54%
Yes 65%
2002
2003
Two-thirds (65 percent) of the respondents indicate a member of their board had been asked to resign or not stand for re-election. In 2002, 54 percent reported this. The graying of the boardroom, especially with many boards adding retired corporate executives, may account for this trend. More than one-fourth (27 percent) of the respondents say the board’s retirement age was the reason for the resignation. However, 23 percent point to poor performance as the catalyst.
Director Recruitment Do you have a nominating committee? No 9% No 40%
Yes 60%
Yes 91%
Americas
28
Europe
Korn/Ferry International During the past two decades, issues concerning composition, management succession, board quality and independence made having a nominating committee the norm for boards in the Americas. This year, 91 percent report the presence of such a committee. The practice is far less common in Europe, instituted by only 60 percent of boards.
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How difficult has it been for your board to add directors with financial expertise? 2003
15% Very difficult
2002 3%
39% Somewhat difficult 22%
46% Not at all difficult 75%
0
10
20
30
40
50
60
70
80
Increased scrutiny of accounting practices coupled with the high demand for available, qualified directors has seriously affected boards’ abilities to recruit members with requisite financial expertise. Two years ago, 25 percent of respondents termed it “somewhat difficult” or “very difficult” to add directors possessing this specialization. That percentage more than doubled in 2003 to 54 percent.
Sarbanes-Oxley Does your board meet the requirements of Sarbanes-Oxley with respect to Director Independence and Financial Expertise? No 2%
Yes 98%
Director Independence
No 3%
Yes 97%
Financial Expertise
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Boards responded quickly to demands of new regulations set forth in Sarbanes-Oxley. The vast majority meet the requirements for director independence (98 percent) and financial expertise (97 percent). However, 8 percent of boards had to add or replace a director in the past 12 months to meet the tests for independence and 15 percent did so to comply with the financial expertise rules. Should audit committee chairs be paid more than chairs of other committees?
No 25%
Yes 75%
Increased oversight and stricter regulations for financial reporting translate to additional time commitment, requisite specialized expertise and greater responsibilities for the chair of the audit committee. In recognition of the contributions needed, 75 percent of the respondents believe the audit committee chair’s compensation should be greater than that of other committee chairs.
30
Korn/Ferry International
Board Practices In Europe — Survey Responses Directors of boards in France, Germany and the United Kingdom confront universally shared challenges, yet their perspectives and opinions are products of distinct board cultures and experiences. A two-tiered board structure is used by German public companies (Aktiengesellschaft), consisting of a management board (Vorstand) and a supervisory board (Aufsichtsrat) that includes elected outside directors and labor representatives. The vast majority of French public companies (Societes Anonymes) use a unitary structure comprised of company executives and outside directors. Some utilize a two-tier structure comprising a Directoire, the senior management board and the Conseil de Surveillance, the supervisory board of outside directors. In the United Kingdom, Public Limited Companies use a unitary structure consisting of senior executives and outside, or non-executive, directors.
30th
The following data illustrates the varied opinions of respondents from across Europe. In the UK, many of the FTSE 350 along with other large private companies were surveyed. Respondents include directors from CAC 40-listed companies and a broad spectrum of other major French organizations. The German survey findings presented in this section focus on those responses from members of German supervisory boards, illustrating both shared and divergent opinions of labor and stakeholder members.
Composition Board size of European companies varies according to structure, company size and incorporation requirements. German supervisory boards average 16 directors. Boards of United Kingdom companies typically comprise five inside directors and five outside members. Membership of boards in France usually consists of three inside and eight outside directors in accordance with statutory requirements.
16*
Germany
Executive Directors Non-Executive Directors
5 UK 5
3 France 8
0
2
4
6
8
10
12
14
16
18
*In Germany, 50 percent of outside directors are elected by domestic employees.
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Like boards in the Americas, the desire to diversify membership has influenced composition of UK boards. Four of five (84 percent) of UK board respondents indicate a woman serves as a director of their board. Asians are present in 14 percent of respondents’ boardrooms and Africans in 7 percent. The issue of allowing a former CEO to retain a seat on the board seems less controversial in Europe than in the Americas. Almost two-thirds (65 percent) of responding directors of German boards believe this executive could be elected to the supervisory board (Aufsichtsrat) after retirement from the board of managing directors. This practice is supported by half of the respondents of UK companies. However, 71 percent of directors of French companies think a former chief executive should not continue to serve on the board, as do 80 percent of the Americas respondents. Should the former CEO sit on the board?
Sir Peter L. Bonfield Senior Non-Executive Director AstraZeneca PLC United Kingdom
20%
Americas
Germany
“A decade before there were scandals like Enron in the U.S., we had corporate ethics issues in the U.K., such as the collapse of Robert Maxwell’s communications empire, which had been supported largely by fraud. So abuses of executive power are familiar to us, not simply problems of another place. At AstraZeneca we have established a system of checks and balances on the board that is a model of how inside and outside directors should relate to one another. Of the 13 members of the board only the CEO and one other director are AstraZeneca executives. The rest of us are non-executives. We have a chairman, who is in charge of hiring the CEO and firing him if necessary. I have the title of Senior NonExecutive Director and have the responsibility of leading the non-executives and addressing issues with the chairman should that become necessary for succession planning.
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65%
29%
France
UK
50%
0
10
20
30
40
50
60
70
80
% Yes
Board/CEO Balance Does the board typically hold regular executive sessions without the CEO present?
Yes 7%
Yes 15%
No 85%
No 93%
UK
France
Yes 7%
No 93%
Germany
Korn/Ferry International Boards of European companies rarely hold regular executive sessions without the CEO present, a stark contrast to the recent yet common practice of boards in the Americas. Only 7 percent of German company directors, 7 percent of French company respondents and 15 percent of UK directors say their members convene regularly without the chief executive. Should the board typically hold regular executive sessions without the CEO present during board meetings? No 7%
Yes 21% No 58%
Yes 42% Yes 93%
No 79%
UK
Germany
France
Four of five (79 percent) French company directors are opposed to holding regular executive sessions without the chief executive as are 58 percent of respondents of UK organizations. However, the vast majority (93 percent) of directors of German companies believe the board should embrace the practice.
30th The system works well in part because the separate responsibilities of the CEO and chairman are carefully spelled out. It is clear that the CEO runs the company. Employees know that he is the top of the management tree. Also, he is the one who talks to securities analysts and gets quoted in the newspapers. For this system to work it is essential that the chairman, most likely a retired CEO, accepts his transition from the role of leader to one of oversight. Until a year ago, I was CEO of BT, and I can understand and empathize with the difficulty of that change.�
Board Meetings, Preparation How many hours per month do you estimate that you spend on board matters for this company, including review and preparation time, meeting attendance and travel?
UK
25
France
15
14
Germany
0
10
20
30
Average Number of Hours
Board service commands a major time commitment according to respondents. The average number of hours devoted each month to board matters is 14 for directors of German companies and 15 for members of French corporate boards. Directors of UK company boards report investing the greatest amount of time, 25 hours monthly. 33
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Have you ever turned down a board position because you felt your risk was too great?
UK
46%
52%
France
0
10
20
30
40
50
60
% Yes
George Cox Director General Institute of Directors United Kingdom “In the old days in the UK if you sat on a board as a nonexecutive director, you could often get away with little more than offering a few sage-like words of wisdom every now and then. Not now. Although the UK has had its share of corporate scandals, what is driving the increased demands on nonexecutives is not a need for greater probity, but pressures on company performance. The world has become so much more dynamic, unpredictable and competitive; if a company doesn’t respond to today’s environment, it is dead. Moreover, not only do boards have to deliver higher performance, they have to do so under far greater scrutiny. It is, therefore, much more demanding to serve on a board these days. I work as Director General of the Institute of Directors, a century-old organization that has several functions. It provides
34
A majority (52 percent) of directors of French corporations have declined an invitation to serve on a board, perceiving the risk as too great. Almost half (46 percent) of their counterparts on UK company boards have done so. In Germany, directors were asked if they have stepped down from a board seat because of personal risk, only 11 percent reported having done so.
CEO Compensation In terms of how directors feel about the effectiveness of their organization’s CEO compensation program, European opinion is consistent. In the UK, 71 percent of directors feel that the CEO compensation program is either “Very Effective” or “Effective,” compared to 77 percent and 65 percent in France and Germany respectively. How effective is your organization’s CEO compensation program? 13% 16% 11%
Very Effective
UK France Germany 58% 61% 54%
Effective
26%
Fairly Effective
16% 28% 3%
Ineffective
7% 7% 0
10
20
30
40
50
60
Korn/Ferry International
Director Compensation, Stock Ownership Is there a requirement that directors own shares of company stock?
UK
30th
37%
87%
France
0
10
20
30
40
50
60
70
80
90 100
% Yes
The vast majority (87 percent) of respondents serving on French corporate boards indicate director ownership of stock is mandatory. In contrast, only a little over one-third (37 percent) of UK company respondents report this requirement.
Management Succession Does the board have a management succession committee or process?
UK
67%
France
26%
Germany
40%
0
10
20
30
40
50
60
support facilities, including the use of magnificent premises, for directors; it acts as spokesman to both the media and to government on issues that concern business; and the Institute sets standards for boards of directors. In the latter context we have introduced Chartered Director, the world’s first independently accredited qualification in boardroom competency: an award which requires directors go through formal and rigorous training. In the wake of recent scandals U.S. government action to make boards behave better has introduced new rules with strong emphasis on punishment for misdemeanour. In the UK the stress is on wider adoption of best practice. The recent reviews by Higgs and Smith extend the established code of best practice. Companies are not obliged to adhere to every item of the code, but if they deviate they have to explain to shareholders why they have deviated.�
70
% Yes
Two-thirds (67 percent) of UK company respondents state their board has a management succession committee or process. Less than half (40 percent) of German corporate boards do. Only one-fourth (26 percent) of French organization boards approach management succession this way.
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Corporate Governance Does your board have a formal committee that reviews corporate governance processes and board operations?
41%
UK
France
15%
Germany
9%
0
10
20
30
40
50
% Yes
Daniel Lebegue Chairman French Institute of Directors France
Does the board have written guidelines on corporate governance?
84%
UK
“When I was first a director of a French company 20 years ago we met an average of three or four times a year, and the meetings would only last for a couple of hours. All of the directors, except one or two, were executives of the company, and there was no audit committee. But in the past few years boards have changed dramatically and for the better, driven by market forces that demand a much higher performance from directors. Today, I serve on the boards of five French companies. As is typical in many French companies these days, one-third to one-half of the directors are independent. They are expected to bring expertise to the board, such as knowledge in legal, financial, insurance matters or even experience particular to the company’s industry. Companies that are listed on the Euronext stock market hold six to eight board meetings a year,
36
France
36%
Germany
9%
0
10
20
30
40
50
60
70
80
90 100
% Yes
Nine of ten (91 percent) directors serving on German company boards do not have a formal committee dedicated to corporate governance and board practices. Though only 41 percent of the UK company directors indicate formalization of a governance committee, 84 percent state their companies have written guidelines concerning corporate governance. Similarly, only 15 percent of the directors of French companies say such a committee exists, while 36 percent report documentation has been created. The vast majority of respondents serving on UK and French corporate boards believe these guidelines are helpful, 91 percent and 75 percent respectively.
Korn/Ferry International
Director Evaluation When asked if European boards evaluate individual directors on a regular basis, results varied greatly. Germany reported that just 1 percent of supervisory boards regularly evaluate individual directors, France reported 23 percent and in the UK, 52 percent of boards regularly evaluate individual directors. Are individual directors regularly evaluated? Yes 1%
Yes 23%
No 99%
Yes 52%
No 77%
Germany
No 48%
France
UK
Should individual directors be evaluated regularly as to their performance?
UK
90%
France
75%
Germany
49%
0
10
20
30
40
50
60
70
80
30th lasting three or four hours. Members of audit committees get together for an additional three or four hours half a dozen times a year. Boards are playing a much greater role in analyzing risk for the corporation and in advising on acquisitions, sales of business units and mergers. One area in which boards have been reluctant to get involved is in establishing salaries, bonuses, stock options and other compensation for executives. I hope that will change and that boards will assume that function. I have helped create in France an Institute of Directors, based on the British model, which will give directors a place to meet and exchange ideas on best practices and will also serve as a resource for everything from legal expertise to directors’ insurance. Over the next year we hope to offer training for 2,000 to 3,000 directors.�
90 100
% Yes
Though regular performance evaluation of individual directors is not widespread, the practice is gaining support from directors around the globe. Nine of ten (90 percent) UK board respondents believe individual directors should receive regular performance evaluations. Three-quarters (75 percent) of French company directors hold this opinion. The idea is not embraced by a majority of counterparts on German boards: only 49 percent saw value in conducting such reviews.
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How important are each of the following factors in determining “good governance”? An outside director serves as Chairman of the Board
The board endorses that directors receive additional education
68%
A formal management succession process is in place
The board or a committee conducts a formal CEO performance review
59%
There is an elected lead director when an inside chairman is present 10
20
30
40
50
60
70
36%
0
80
10
20
30
40
50
60
70
France
UK
54%
There is a mandatory retirement age
Klaus-Peter Müller Chairman of the Board of Managing Directors Commerzbank AG Frankfurt
42%
Both board and director performance is evaluated
52%
0
51%
Stakeholder Representatives
58%
A formal management succession process is in place
Labor Representatives
48% 46%
The board endorses that directors receive additional education
42% 25% 0
10
20
30
40
50
60
70
Germany
“The composition of the supervisory board at Commerzbank AG has not changed significantly over the last few years. It consists of 20 members (according to the German law) almost all of them German. Scandals such as Enron have raised the members’ awareness of the importance of their role in monitoring the performance of the executive board. That awareness and the greater time required to carry out the responsibilities of the supervisory board has made it more difficult to find suitable directors. But I think the board could perhaps actually work more efficiently if it were scaled down in size. Also, employee interests should be represented solely by employees of the company and not by external
For respondents serving on French corporate boards, continually improving performance is critical to good governance. Having the board support additional education for directors, conducting a CEO performance review and having full board and individual director evaluations are the top three factors in good governance. Counterparts on UK company boards identified achieving greater independence and better balance with management as their highest priorities. Having an outside director serve as chairman, a formal succession process and a lead director if an insider serves as board chair are the greatest influences in determining good governance. Established processes that provide the basis for uninterrupted leadership are vital to good governance, according to directors of German company boards. These respondents cite having a mandatory retirement age, a formal management succession process and support for continuing director education as factors exerting the greatest influence on the quality of governance.
Foreign Nationals The presence of international directors living abroad currently holding board seats is fairly consistent throughout European organizations. The UK and Germany respondents reported an average of 1 foreign national director on the board and French participants reported an average of 2 foreign directors on the board.
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Questions Specific to the United Kingdom Governance & the Higgs and Smith Reports Should a code of corporate governance be supported by statute?
Yes 17%
No 83%
30th trade unionists, as is the case at present. I support the German Corporate Governance Code, which is excellent. I do not think we need any additional regulations. In fact, I see a potential danger of overregulation in the current environment, that is, the reaction to the scandals.�
When it comes to legislating good governance, respondents on UK boards are resoundingly opposed: 83 percent do not believe a code of corporate governance should be supported by statute. Does your board meet the requirements of the Higgs and Smith Reports with respect to director independence?
No 34% Yes 66%
Having board members possessing outstanding financial expertise is a universal concern. According to UK company directors, where the Higgs and Smith Reports refer to the guidelines for financial expertise and standards for director independence, the vast majority (87 percent) of UK boards are in compliance with the requisite guidelines for financial expertise and two-thirds (66 percent) meet the standards for director independence. Twenty-four percent of respondents indicated that their board has or plans to add or replace a director in order to meet the requirements for director independence and 15 percent have had or are planning to replace directors to meet the requirements for financial expertise. 39
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Questions Specific to Germany Director Recruitment How difficult has it been for your board to add directors with financial expertise?
Stakeholder Representatives
46%
Labor Representatives
46%
0
10
20
30
40
50
60
70
80
90
% Very Difficult or Somewhat Difficult
Claudio Sonder Chief Executive Officer Celanese AG Kronberg (Rhein-Main-Area) “The relationship at Celanese AG between the executive board and the supervisory board is very open and marked by trust on both sides. The supervisory board is a diverse group that includes six employees and six shareholder representatives, two of them German, two American, one Dutch and one an entrepreneur from Kuwait… We at Celanese have certainly noticed that since the events at Enron and elsewhere investors are much more focused on finance and risk management issues. They are also more concerned with matters like pensions, liability risks and regional exposure… Celanese is listed on both the Frankfurt and New York stock exchanges and because of new regulations in Germany and the U.S., the tasks of all committees have grown significantly. The German Corporate Governance Code is as demanding as any corporate code in the world, or more so, and Celanese strictly adheres to it.”
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Like peers in the Americas, members of German company boards are encountering greater challenges in recruiting directors with financial expertise. Stakeholder Representatives and Labor Representatives share this view, with nearly half reporting the endeavor as either “Very Difficult” or “Somewhat Difficult.” Would the services of someone whose experience is not in the field of business add value to your board in the role of non-executive director?
Stakeholder Representatives
39%
Labor Representatives
49%
0
10
20
30
40
50
60
70
80
90 100
% Yes
Nearly forty percent of Stakeholder Representatives see wisdom in augmenting the board’s expertise with individuals other than business people. Labor Representative members feel more strongly about this: 49 percent are in favor of recruiting nonexecutive members without career experience in business.
Korn/Ferry International Should – as considered by the German Government at present – legal regulations be introduced to limit the compensation of members of the Executive Board?
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Yes 34%
No 66%
Should shareholders of German companies be able to vote for the compensation of the members of the Executive Board at the annual shareholders meeting?
Yes 22%
No 78%
Respondents serving on German corporate boards take a dim view of external constituencies exerting influence on executive board compensation. Two-thirds (66 percent) do not support legal regulations that would limit executive board member compensation. Four of five (78 percent) do not believe executive board member compensation should be subject to a shareholder vote at the annual meeting.
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Is the German Corporate Governance Kodex as presently formulated too non-committal?
Yes 33%
No 67%
Directors of German corporate boards share their UK counterparts’ opinions of government involvement in governance. Two-thirds (67 percent) of responding directors do not view the formulation of the German Corporate Governance Kodex as too non-committal.
Questions Specific to France Does your board meet the requirements of the Bouton Report with respect to director independence?
Yes 63% No 37%
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Korn/Ferry International Have you had to, or are you planning to, add or replace directors in order to meet the Bouton Report requirements for director independence?
Yes 17%
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No 83%
Almost two-thirds (63 percent) of respondents of French corporate boards report their membership meets the Bouton Report criteria defining director independence. Considering this, it is not surprising that 83 percent reveal that their board does not intend to recruit new members to meet compliance requirements. What are the criteria that will guide your search for a Non-Executive Director?
Seek younger directors
57%
Seek more women
44%
Limit the number of other directorships held by your members
41%
0
10
20
30
40
50
60
Search Criteria
Directors of French corporate boards indicate future recruitment will diversify opinion and composition. To perhaps counter a global “graying of the boardroom� trend and introduce new perspectives, 57 percent indicate age as a factor. Their boards will target younger members. Female members will be sought by 44 percent. Limiting the number of outside board commitments of members is another avenue that will be used to strengthen the quality of members’ contributions.
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30th Nobuyuki Idei Chairman and Group CEO Sony Corporation Tokyo “The scandals in the U.S., that of Enron and others, and the possibility to adopt the system of ‘Company with Committees’ upon revision of the Japanese Commercial Code had prompted us to look again at the board structure at Sony and make some changes, even though we were under no legal obligation to do so. We had already separated the roles of chief executive and chairman a few years ago. But the chairman nonetheless was a Sony executive. Now, to make a clear distinction between the management and supervision of the company, an outside director, Mr. Iwao Nakatani has become chairman. Also, we have appointed a highlyqualified financial expert, who is an outside director, to chair the recently-formed audit committee. Improving and broadening the board is not a new idea at Sony. It’s a process that has been going on for the past 30 years. In the
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Board Practices in Asia Pacific — Survey Responses Governance in Asia Pacific perhaps best illustrates the influence of global business and shareholders on boards ranging from major global forces to those comparatively new to the international spotlight. Unlike corporations in other regions, many Asia Pacific companies are single-investor, closely-controlled or family-controlled in terms of investment and management, especially in Non-Japan Asia. Directors in Asia Pacific face the challenge of developing corporate governance while building on the positive aspects of existing, time-tested practices and instituting measures to broaden external focus. Governance in Japan is undergoing major reforms with the recent amendments to the Japanese Commercial Code dealing with management structure separating management and the board, director liability, statutory auditors, committee structure and creation of an Important Asset Committee. This Study represents the direction in which the corporate governance landscape is moving in Japan. Directors in Australia and New Zealand are focusing on corporate financial performance, auditing and foreign investment. Peers serving on boards of companies in Non-Japan Asia are evaluating reforms identified by the Asian Roundtable of Corporate Governance concerning protection of minority shareholders, bank governance, enforcement and corporate governance culture. The following findings are broken-down and reported in three major areas to better show the changes underway in Asia Pacific. For purposes of this Study, Non-Japan Asia includes Hong Kong, Singapore, China, Malaysia and Thailand.
Composition What is your current board size?
12 Japan 2
3
Australia/ New Zealand
Inside Directors Outside Directors
6
4 Non-Japan Asia 5 0
2
4
6
8
10
12
Korn/Ferry International Boards of Japanese companies average two outside and twelve inside directors. In Australia and New Zealand, board membership usually consists of six outside directors and three inside directors. Non-Japan Asia reported the smallest board size of our global Study with an average of nine total directors.
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Does the former CEO sit on the board? (Asia Pacific (APAC) compared to Europe)
Yes 27%
1970s we began to bring outside directors onto the board and now almost half of our directors are non-executives. Five years ago we added a compensation committee and a nominating committee to the board.
Yes 31%
No 73%
No 69%
Europe
APAC
In APAC, 27 percent of respondents report that the former CEO sits on the board. This is similar to Europe, where 31 percent of respondents have former CEOs on the board.
One of the things the board of directors should do is monitor whether management follows due process and uses due diligence in making material decisions, such as formulating the company’s strategy and in meeting the agreed goals and objectives. We at Sony believe that investors should inquire more on each company’s corporate governance system.”
Should the former CEO sit on the board? Yes 8% Yes 40% No 60%
Yes 40% No 92%
Japan
Australia/New Zealand
No 60%
Non-Japan Asia
Japan and Non-Japan Asia respondents reported similarly, where the majority (60 percent) believes the former CEO should not be present on the board. Australia/New Zealand took an even greater aggressive stance on the matter with 92 percent reporting that the former CEO should not be on the board. As a whole, when asked whether the company’s former chief executive should serve as an active board member, 72 percent of directors of Asia Pacific organizations, like 80 percent of peers in the Americas, are opposed to the practice.
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Board/CEO Balance Does the board typically hold regular executive sessions without the CEO present? Yes 4%
No 96%
No 34%
Japan
Vincent H.S. Lo Chairman & CEO Shui On Holdings Limited Hong Kong “In the mid 1980s, there were several other members of my family on the board of Shui On, but today, there are none. That is deliberate. We actively seek outside independent directors with a strong track record and experience who can contribute to the strategic development of the company and its business and are willing to give their time. I believe that the remuneration of outside independent directors should be tied to the performance of the company to ensure board effectiveness. Today, of the ten directors on the board of Shui On Construction and Materials Limited, two are outside independent directors who also head the Audit and Remuneration committees.
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Yes 66%
Yes 32% No 68%
Australia/New Zealand*
Non-Japan Asia
In Japan, the CEO is present at almost all board meetings. Only 4 percent of boards will meet regularly without the CEO. The Americas are nearly the exact opposite, with 87 percent of boards holding such sessions. When asked if these meetings should take place, a higher percentage (23 percent) of Japanese respondents say “Yes” as do the majority (78 percent and 55 percent respectively) of Australia/New Zealand and Non-Japan Asia responders. Should the board hold regular sessions without the CEO?
Yes 23%
No 77%
No 22%
No 45%
Yes 78%
Japan
Australia/New Zealand*
Yes 55%
Non-Japan Asia
*For Australia/New Zealand the terminology of these questions was slightly different. The questions canvassed whether or not, and should, the non-executive directors hold regular sessions without the executive directors. We have included these questions in this section due to the similarity of the subject matter, but point out that they are not identical to the Japan and Non-Japan Asia questions.
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Is there a limit to the number of other boards on which the CEO may serve as an outside director? Yes 10% No 29% No 90%
No 52% Yes 71%
Japan
Australia/New Zealand
Yes 48%
Non-Japan Asia
This Study found that Japan is the least stringent with regard to the ability of CEOs to serve on other boards. The remainder of Non-Japan Asia is almost equally split, while Australia/New Zealand takes a more conservative position on the issue. When asked whether or not there should be a limit to the number of other boards on which the CEO could serve as an outside director, over half (54 percent) of Japanese responders stated that there should be limits. Meanwhile, 91 percent of Australia/New Zealand and 79 percent of Non-Japan Asia also expressed that there should be limits on the CEO.
I also think that other reforms might be advisable as well. For now, we have a formal appraisal of the executive directors on the board, but it might be a good idea to consider such appraisal for independent directors in the near future. I think that it would be wise to separate the roles of chairman and CEO. The chairman should be responsible for defining the overall direction and strategic development of the company, and the CEO for executing that strategy. I foresee myself evolving slowly into a chairman role entirely in three years’ time.�
Is there a limit to the number of other boards on which directors may serve as an outside director?
Yes 14% No 100%
No 33%
Yes 67%
No 86%
Japan
Australia/New Zealand
Non-Japan Asia
Significantly fewer companies place restrictions on the number of boards on which a director may serve. However, when asked if there should be limits placed on directors, the level rises dramatically. Twenty-two percent in Japan believe there should be limits, 52 percent in Australia/New Zealand and 70 percent in Non-Japan Asia.
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Evaluation of CEO Compensation How effective do you feel your company’s CEO compensation program is?
62%
APAC
Americas
80%
0
20
40
60
80
100
% Indicating Very Effective or Effective
Tan Sri Nik Mohamed Group Chief Executive Sime Darby Berhad Kuala Lumpur “The authorities in Malaysia introduced a new code of governance for companies here in the aftermath of the 1997/98 Asian financial crisis. The code, drawing from what they believed to be the best practices around the world, spelled out in great detail the composition and responsibilities of the board of directors. We at Sime Darby Berhad were already in compliance with most of the regulations, so for us it was just a matter of refining our practices a little. Of the 12 members of the board only myself and the Group Finance Director are executives of the company. The others are mainly independent directors drawn from members of various professions as well as entrepreneurs.
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Sixty-two percent of Asia Pacific directors have a positive opinion of the effectiveness of their CEO’s compensation program. While high, this figure is still lower than the Americas, where 80 percent of directors say that their CEO’s compensation program is either “Effective” or “Very Effective.” The sub-regional break-down of response on the effectiveness of the CEO’s compensation program is as follows:
Effectiveness of CEO Compensation Program Sub-Region Japan Australia/New Zealand Non-Japan Asia
Very Effective 3% 37% 19%
Effective 40% 47% 34%
Fairly Effective 44% 16% 34%
Ineffective 13% 0% 13%
Board Preparation, Meetings Members of Asia Pacific boards invest an average of 25 hours per month in board service. However, 11 percent of respondents state the time devoted to board matters decreased from the previous year. It should be noted that the APAC respondents, particularly in Australia/New Zealand, had a large concentration of chairmen responders (Chairmen frequently spend more time on board matters than other directors.). This could attribute to the high number of hours per month reported by APAC respondents.
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On average, how often does your full board meet? Twice per month 3%
Less Than Quarterly 7%
Quarterly 21%
Other 14%
Other 46%
Quarterly 44%
Monthly 55% Less Than Quarterly 1%
APAC
Other 23% Less Than Quarterly 6%
Quarterly 37%
Monthly 34%
Monthly 9%
Europe
Americas
APAC leads the world in frequency of board meetings and time spent on board matters. Fifty-five percent of boards meet monthly. APAC directors on average devote 25 hours a month to board matters, which is more than their counterparts in Europe and the Americas. Despite the long hours put in by APAC board members, 11 percent of directors within APAC actually report that they are spending less time than last year on board matters. Sub-region break-down of board meeting frequency is as follows:
Meeting Frequency Sub-Region Japan Australia/New Zealand Non-Japan Asia
Quarterly
Monthly
0% 2% 45%
78% 77% 26%
Less than Quarterly 0% 0% 15%
Twice per Month 9% 0% 3%
Other 13% 21% 11%
Personally, I don’t think we need any additional reforms. In fact, I think that at the moment we suffer from an overabundance of rules. There are so many that for a time there was concern that boards would be more compliance-oriented than business-oriented. The balance of time spent on compliance and business is better now, but there are still too many requirements for directors. For example, directors must attend various educational classes in such matters as the legal environment in which companies operate and how to detect financial manipulation. If it were ‘once-off’, the educational program would be reasonable. But directors, who are very busy people with a lot of responsibilities in addition to their board duties, are also required to attend refresher courses every year. Added up, the regulations are a heavy burden.”
Stock Ownership Is there a requirement that directors own shares of company stock? Yes 12%
Yes 28%
No 72%
Yes 43% No 57%
Japan
Australia/New Zealand
No 88%
Non-Japan Asia
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Twenty-seven percent of all APAC directors are required to own company stock. This is a rather small number, in comparison to the Americas, where 57 percent are mandated to own a stake in the company. The requirement for director share ownership is lowest in the world among executive directors in Non-Japan Asia, where only 12 percent are required to own stock.
Corporate Governance Does your board have a formal committee that reviews corporate governance processes and board operations? 50 Japan 44% 40
Australia/New Zealand 36%
Non-Japan Asia
30 % Yes
19%
20
10
0
In a year when corporate governance issues seem to dominate headlines in other parts of the globe, Asia Pacific companies haven’t rushed to set up formal committees to review governance. In fact, only 34 percent of directors said that such committees were in place at their company. By contrast, in the Americas, 86 percent of boards have corporate governance committees. Does the board have written guidelines on corporate governance? No 3% Yes 41% No 59%
Yes 97%
Japan
50
No 39%
Australia/New Zealand
Yes 61%
Non-Japan Asia
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Do you believe written governance guidelines are helpful to the board? No 6%
No 7%
No 43%
Yes 57%
Japan
Yes 93%
Australia/New Zealand
Yes 94%
Non-Japan Asia
Similar to the rest of the world, a disconnect exists in Asia Pacific between corporate governance perceptions and realities. While 86 percent of those surveyed feel that written governance guidelines are helpful to the board, only 69 percent of boards have such measures in place. In Australia/New Zealand, only those that responded that the board has written guidelines on corporate governance answered the follow up question as to whether or not they believed the guidelines to be helpful. In fact, Japanese directors indicate an even lower percentage, with only 41 percent saying such written guidelines are in place.
Board, Director Performance Evaluations Is the entire board's performance formally evaluated on a regular basis?
No 48%
No 36% Yes 52%
Japan
No 61% Yes 64%
Australia/New Zealand
Yes 39%
Non-Japan Asia
When it comes to evaluating the entire board’s performance, Japan seems to be almost evenly split. Fifty-two percent of directors say that their entire board is regularly reviewed. The figure is much higher in Australia/New Zealand where 64 percent of boards are evaluated on a normal schedule. Non-Japan Asia reported the lowest percentage for full board evaluation at just 39 percent. Interestingly, less than half (46 percent) of Asia Pacific respondents say that this evaluation is at least “effective.”
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Does your board evaluate individual directors on a regular basis?
Yes 42%
Yes 48%
No 58%
Yes 31%
No 52%
Japan
No 69%
Australia/New Zealand
Non-Japan Asia
While 51 percent of companies within Asia Pacific regularly review their entire boards, on average, only 41 percent evaluate individual directors. When asked if individual directors should be evaluated regularly, an overwhelming 89 percent of respondents say yes. Has your company ever asked a director to resign or not stand for re-election? 37%
APAC
Europe
57%
65%
Americas
0
10
20
30
40
50
60
70
% Yes
Only 37 percent of APAC directors say that their companies have asked directors to resign or not stand for re-election, while in the Americas, this has occurred at 65 percent of companies and, in Europe, at 57 percent of companies. Sub-regional break-down on the issue of asking a director to resign or not stand for re-election is as follows: Japan
10%
Australia/New Zealand
58%
Non-Japan Asia
32%
0
52
10
20
30 % Yes
40
50
60
70
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Director Recruitment Does your board have any reservations about bringing in a new director with no previous board experience?
Japan
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22%
Australia/New Zealand
47%
Non-Japan Asia
27%
0
10
20
30
40
50
60
70
% Yes
Asia Pacific boards are more likely than other boards around the world to welcome novice members. In fact, as a region, only a third (33 percent) of respondents indicated reservations about bringing on such a person. In Europe, almost half of boards (48 percent) are reluctant to do so. How difficult has it been for your board to add directors with international expertise?
APAC
29%
18%
Global
0
10
20
30
40
% Very Difficult
Asia Pacific boards report challenges in recruiting certain kinds of directors. Specifically, 29 percent of directors say that it is “Very Difficult” to add international experts to the board. While globally, only 18 percent of directors found recruitment of those with international expertise to be “Very Difficult.” Geographic location, time commitment and travel are among the challenges Asia Pacific boards face in recruiting members with international experience.
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Sub-region break-down on the issue of recruiting directors with international experience is as follows:
Adding Directors with International Expertise Sub-Region
Very Difficult 13% 13% 46%
Japan Australia/New Zealand Non-Japan Asia
Somewhat Difficult 45% 62% 33%
Not at all Difficult 42% 25% 21%
Is there an induction process in place to develop and maintain the required skills for directors? (Australia/New Zealand and Non-Japan Asia Only.)
No 19%
No 47%
Yes 81%
Australia/New Zealand
Yes 53%
Non-Japan Asia
In Australia/New Zealand, induction processes prove rather popular. Eighty-one percent of companies have an induction process for board members. In Non-Japan Asia, the number was not quite as high, but still the majority (53 percent) reported having an induction process. When asked if continuing education processes are in place to help board members develop and maintain skills, only 32 percent of Australia/New Zealand and 43 percent of Non-Japan Asia respondents say yes.
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Conclusion In boardrooms around the world, today’s directors entertain challenges foreign to their predecessors. Shareholders expect to influence boards that are perceived as lax in executing fiduciary responsibilities. These global investors fully expect governments of other nations to respond to their concerns. Regulations concerning governance have been enacted with never-before-seen swiftness. Relationships with chief executives must be collegial yet have the proper distance allowing directors the independence to question and act. The definition of dedicated oversight now includes continuous improvement of corporate governance.
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Directors dedicated to good governance are breaking with those traditions that impede their abilities to continuously improve, more frequently voicing opinions that evolve into practice and policy. They are even taking action concerning peers not meeting standards of performance or sharing the dedication needed to offer the best possible counsel. In comparing and contrasting practices of boards around the world, this 30th anniversary issue of the Korn/Ferry Annual Board of Directors Study shows a continuum of meaningful change initiated by individuals of integrity. As interaction within the global business community increases, directors will continue to refine governance, incorporating valid practices and ideas that enhance capabilities to protect shareholder interests. We believe our Study is now the world’s most comprehensive, long-term analysis of its kind. We have broadened our analysis beyond that of the FORTUNE 1000 to reflect a truly world-wide perspective and thus, the mission of the Study continues to evolve. The Korn/Ferry Board of Directors Study is conducted to promote an understanding and awareness of emerging and established trends in governance. It is a unique resource for board members and board constituencies dedicated to increasing their knowledge concerning the board practices and opinions of directors guiding the world’s leading companies. Again, we would like to thank all of the individuals involved in preparing this Study. We look forward to updating the Corporate Governance community once again in next year’s 31st Korn/Ferry Annual Board of Directors Study.
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Data Integrity For survey preparation and analysis, Korn/Ferry partnered with PeopleMetrics, Inc., a leading full service market research firm based in Philadelphia, PA. PeopleMetrics, using state-of-the-art techniques in statistical analysis and data visualization has assured the integrity and validity of the data in this Study. The survey results are presented with a +/- 4.5 percent margin of error, at a 95 percent confidence level. PeopleMetrics considers the directors surveyed to be sufficiently representative of the entire population of directors to draw conclusions about this group. Korn/Ferry is grateful to PeopleMetrics for its part in this landmark Study.
About Korn/Ferry International Korn/Ferry International (NYSE:KFY), with more than 70 offices in 36 countries, is the world’s leading provider of executive recruitment and development solutions. The firm works closely with clients to provide solutions tailored to their recruitment and assessment needs, through the company’s executive search business, identifying CEOs, COOs, CFOs and other senior-level executives; through the firm’s Global Board Services Practice, recruiting for boards of directors and consulting on matters of corporate governance; through the firm’s Management Assessment and Coaching business, which provides evaluation and development of senior management teams; and through Futurestep, Korn/Ferry’s middle management recruiting provider. For more information, visit the Korn/Ferry International Web site at www.kornferry.com or the Futurestep Web site at www.futurestep.com.
About Korn/Ferry International’s Global Board Services Practice Since 1972, Korn/Ferry International has been a premier provider of director recruiting and corporate governance consulting. We understand the difficulties of assembling an effective, knowledgeable and cohesive board of directors prepared to meet growing demands for greater accountability and more effective board performance. The shortage of experienced directors, the tightening of governance policies and the desire on the part of corporations to diversify their boards have made the identification and recruiting of top-flight talent more difficult than ever. We have a dedicated team of global professionals whose sole focus is recruiting for boards of directors for clients worldwide and whose depth and expertise on matters of corporate governance are unparalleled. For additional copies of this Study, please call the Global Marketing Department at 1 (310) 552-1834. 56
Korn/Ferry International Global Board Services Practice Representatives by Region/Country Charles H. King New York 212-687-1834
The Americas
Asia Pacific
Europe
Canada Jeffrey Rosin Toronto 416-365-1841
Australasia Gary Reidy Sydney 612-9006-3400
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Non-Japan Asia Andrew Tsui Hong Kong 852-2971-2700
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Japan Sakie Fukushima Tokyo 81-3-3560-1400
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www.kornferry.com
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