KORN/FERRY INTERNATIONAL
31st
2004
Annual Board of Directors Study Supplement on Technology
KORN/FERRY INTERNATIONAL
Table of Contents Board Practices Among Technology Companies – Survey Responses . . . . . . . . . . . 2 Director Compensation/Perceived Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Stock Ownership and Pension Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Optimal Board Size . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
31st
Annual Board of Directors Study Supplement on Technology
Presence of Former CEOs on Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Perceived Director Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Sessions Without the CEO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Mandatory Retirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Board Meetings and Preparation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Board Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Global Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Sarbanes-Oxley – U.S. Only . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 About Korn/Ferry InternationalGlobal Technology Market . . . . . . . . . . . . . . . . . . 11 About Korn/Ferry International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Methodology Statistical information collected for this analysis of governance trends was reported by the FORTUNE 1000 in their proxies during the period from July 1, 2002 through June 30, 2003. Where appropriate, comparisons are made with data gathered in previous Korn/Ferry International Annual Board of Directors Studies. Technology directors responding to the survey were from the U.S., Europe and Asia/Pacific.
1
KORN/FERRY INTERNATIONAL
31st
Annual Board of Directors Study Supplement on Technology
Board Practices Among Technology Companies – Survey Responses Technology companies, like companies in many other industries, are endeavoring to navigate the complex and ever-changing landscape of corporate governance. These companies face some unique challenges, however, due to the evolving and entrepreneurial nature of the technology industry. For example, founders typically maintain a prominent role in – if not control of - the boardroom even after they give up the corner office. To provide anecdotal evidence of ways in which board practices in this industry are evolving, we have examined the responses of technology company directors to our Korn/Ferry International’s 31st Annual Board of Directors Study.
Director Compensation/Perceived Risk Compensation and incentive practices in technology company boards no longer significantly differ from the practices found in other industries. Like board members in nearly every industry, these directors want to be compensated more in cash and less in stock, a sea change from the go-go Internet era. Now that remuneration is more modest and predictable, we believe that more directors are turning down board opportunities due to the perceived risk/reward equation. Do you think the majority of a director’s compensation should be in stock?
Yes 31%
No 69%
Stock Ownership and Pension Plans In an effort to more closely align boardroom interests with those of shareholders, some companies require board members to hold equity positions. The percentage of technology company directors reporting that they must be shareholders was 44 percent – significantly lower than the U.S. average of 65. Additionally, only 33 percent of technology directors believe that a majority of their compensation should be in 2
KORN/FERRY INTERNATIONAL
stock. Boardrooms may be favoring cash compensation over stock at least partly in recognition of the increased responsibilities, external oversight and time commitment required of directors with the introduction of Sarbanes-Oxley. In addition, recent volatility of technology stocks may make it a less attractive currency for director compensation. Is there a requirement that directors own shares of company stock?
Technology
31st
Annual Board of Directors Study Supplement on Technology
44%
U.S. Average
65%
0%
20%
40%
60%
80%
100%
% of Companies that Require Stock Ownwership
American and European boards differ in many respects, but perhaps no more so than on director pension and retirement plans. While the global average is 20 percent, only six percent of all U.S. respondents indicate they have such plans. This is in sharp contrast to the 60 percent of European directors who indicate their compensation package includes such benefits. In the technology sector 32 percent of companies report retirement or pension plans - almost exactly between U.S. and European sentiment. When comparing industries, a larger percentage of technology companies have director pension and retirement plans than do consumer products companies (17 percent). Does your company have a director’s pension or retirement plan? 6%
U.S.
17%
Consumer Products
20%
Global Average
32%
Technology
60%
Europe 0%
20%
40%
60%
80%
100%
% of Companies With a Director's Pension or Retirement Plan
3
KORN/FERRY INTERNATIONAL
31st
Annual Board of Directors Study Supplement on Technology
Optimal Board Size Size and composition affect a board’s ability to function efficiently and with sufficient independence from management. The average number of inside directors at technology companies in 2004 was eight. Interestingly, directors in this industry felt that a board three quarters this size (six directors) was optimal. Board sizes in this industry tend to be smaller than in other industries. Our study revealed that the average size of FORTUNE 1000 boards is 11. What is your current board size? (Inside and Outside)
Outside
4
Inside
4
0
1
2
3
4
5
6
Current Board Size
What board size do you think is optimal? (Inside and Outside)
Outside
3
Inside
3
0
1
2
3
4
Optimal Board Size
4
5
6
KORN/FERRY INTERNATIONAL
Presence of Former CEOs on Board Most likely due to the degree of high involvement maintained by their founders, technology companies tend not to observe mandatory retirement requirements as often as companies in other industries. Thirty-eight percent of the technology board members polled said that the company’s former CEO should sit on their board. By contrast, only 33 percent of technology board members surveyed reported that their company’s former CEO actually sits on the board. While these figures suggest that technology board members feel that the former CEOs are less prevalent in the boardroom than they ideally should be, their involvement is still greater than in other industries. The global, cross-industry average of board members reporting that their former CEOs remain on the board was just 28 percent.
31st
Annual Board of Directors Study Supplement on Technology
Does your former CEO sit on the board?
Yes 33% No 67%
Should the former CEO sit on the board?
Yes 38% No 62%
5
KORN/FERRY INTERNATIONAL
31st
Annual Board of Directors Study Supplement on Technology
Perceived Director Risk Technology directors are much more likely than other respondents to turn down board positions due to the perceived risk/reward equation offered today by technology companies. In fact, 35 percent of board members in this industry report declining positions in the past 12 months. This is in sharp contrast to the overall turndown rate of 22 percent, and just 20 percent in the insurance industry – a fairly stable industry. The rapid formation of businesses within the technology industry and the greater historical volatility associated with the technology industry are two key reasons. Have you ever turned down a board position because you felt your risk was too great?
Insurance
20%
Overall
22%
35%
Technology 0%
20%
40%
60%
80%
100%
% That Have Turned Down Board Positions in the Past 12 Months
Sessions Without the CEO Common best board practices recommend that the CEO not be present during a board’s regular executive session. Given the tendency of technology company CEOs to be founders and holders of significant equity positions, one would expect them to have greater involvement in board meetings. Surprisingly, 70 percent of technology boards hold regular executive sessions without a CEO. This is well below the current Americas average of 93 percent, but significantly above the rate of such sessions in Europe and Asia/Pacific. The tendency of technology companies to meet without the CEO present is greater than for companies in industries such as banking and consumer products
6
KORN/FERRY INTERNATIONAL
Does the board typically hold regular executive sessions without the CEO present
Banking
57%
Consumer Products
Annual Board of Directors Study Supplement on Technology
60%
Healthcare
31st
68%
70%
Technology
Insurance
75% 0%
20%
40%
60%
80%
100%
% of Boards that Meet Without the CEO
23%
Europe
27%
Asia/Pacific
93%
U.S.
0%
20%
40%
60%
80%
100%
% of Boards that Meet Without the CEO
7
KORN/FERRY INTERNATIONAL
31st
Annual Board of Directors Study Supplement on Technology
Mandatory Retirement Given their entrepreneurial culture, technology companies tend to lag other industries in terms of observing mandatory retirement provisions. Our survey revealed that only 51 percent of technology companies require retirement at a standard age - typically at 70 years of age. By contrast, 69 percent of boards in the U.S. and 61 percent of U.K. boards uphold mandatory retirement provisions. Figures within the banking and the healthcare industries stand at 74 percent and at 66 percent, respectively. Does your board have a mandatory retirement age?
No 31%
No 49%
Yes 51%
Yes 69%
Technology
U.S. Overall
No 26%
No 34% Yes 74%
Banking
8
Yes 66%
Healthcare
KORN/FERRY INTERNATIONAL
Board Meetings and Preparation Increased regulation such as Sarbanes-Oxley places a heavier time burden on board members already tasked with navigating the complex landscape of global business. Technology company respondents to our study reported a monthly investment in board matters of 18 hours. This is in line with numbers reported around the globe in other industries.
31st
Annual Board of Directors Study Supplement on Technology
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?
16
Insurance
Healthcare
17
Technology
18
Global Average
18 15.0 15.5 16.0 16.5 17.0 17.5 18.0 18.5 19.0 Average Numberof Hours Per Month
Board Independence Recent regulatory policy has resulted in a call for increased independence in the boardroom. Seventy-five percent of technology company directors feel that their board is working more independently than in years past. This percentage held true for respondents in the U.S., and in Asia/Pacific (excluding Japan). Far fewer respondents in Germany and France reported a greater sense of independence in the boardroom (58 percent and 56 percent, respectively). Do you feel your board is working more independently this year, as compared with past years?
No% 25
Yes 75%
9
KORN/FERRY INTERNATIONAL
31st
Annual Board of Directors Study Supplement on Technology
Global Perspective Relative to companies in other industries, technology companies are more likely to have strong board representation from members with extensive global experience (average of five members.) Please indicate the number of board members that fall into the following categories: U.S. Nationals with Extensive Global Experence (Global Average)
4
U.S. Nationals with Extensive Global Experence (Technology Average)
5
0
2
4
6
8
10
Number of Board members in Each Category
Sarbanes-Oxley – U.S. Only The costs associated with meeting regulatory requirements are considerable. Almost all (99 percent) of technology directors surveyed in the U.S. report having complied with Sarbanes-Oxley, and they estimate the cost of ongoing compliance to be $4.8 million. The estimated average cost of ongoing compliance reported across all industries in the U.S. is $3.7 million. What is the cost to your company of ongoing compliance with the requirements mandated by Sarbanes-Oxley?
$3.7
U.S. Average
Technology
$4.8
$0.0
$2.0
$4.0
$6.0
Cost ($ Million)
10
$8.0
$10.0
KORN/FERRY INTERNATIONAL
About Korn/Ferry International Global Technology Market The consultants in our Global Technology Market offer executive search expertise with in-depth knowledge of the technology market and the leaders therein who have demonstrated success through execution, excellence and unparalleled strategic and competitive passion. Our team, sector and function are focused and located in every major technology center throughout the world.
31st
Annual Board of Directors Study Supplement on Technology
About Korn/Ferry International Korn/Ferry International (NYSE:KFY), with more than 70 offices in 36 countries, is the premier provider of executive search, outsourced recruiting and leadership 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 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.
11
Korn/Ferry International Global Technology Market Regional Market Leaders Richard Spitz Global Managing Director, 310-226-2655 richard.spitz@kornferry.com Lisa Behlmann Regional Managing Leader, Europe +44-20-7312-3199 lisa.behlmann@kornferry.com Carlos Gonzales Regional Managing Leader, Latin America +5255-52015437 carlos.gonzales@kornferry.com Kaori Iwamoto Regional Managing Leader, Asia Pacific +813-3560-1411 kaori.iwamoto@kornferry.com
12
www.kornferry.com
Korn/Ferry International Worldwide Offices The Americas Atlanta 404-577-7542 Bogota 57-1-629-2301 Boston 617-345-0200 Buenos Aires 54-11-4114-0000 Calgary 403-269-3277 Caracas 58-212-285-0067 Chicago 312-466-1834 Dallas 214-954-1834 Denver 303-542-1880 Houston 713-651-1834 Irvine 949-851-1834 Lima 51-1-221-4202 Los Angeles 310-552-1834 Mexico City** 52-55-5201-5400
Miami 305-377-4121
Toronto 416-365-1841
Shanghai 86-21-6256-7333
Luxembourg 35-2-46-43-421
Minneapolis 612-333-1834
Tysons Corner 703-761-7020
Singapore 65-6224-3111
Madrid 34-91-701-4380
Monterrey** 52-81-8220-5959
Vancouver 604-684-1834
Sydney 612-9006-3400
Milan 39-02-80600-1
Montreal 514-397-9655
Washington, D.C. 202-822-9444
Tokyo 81-3-3560-1400
Oslo 47-22-82-39-00
New York 212-687-1834
Asia Pacific
Wellington 64-4-460-4900
Paris 33-1-45-61-8686
Philadelphia 215-496-6666
Auckland* 64-9-309-4900
Europe
Rome 39-06-80687-090
Princeton 609-452-8848
Bangkok 662-636-1466
Amsterdam 31-20-799-9000
Stockholm 46-8-611-5015
Quito* 5932-2986-562
Beijing 8610-6505-2989
Athens 30-210-722-8000
Vienna 43-1-531-03-0
Rio de Janeiro 55-21-2518-1380
Hong Kong 852-2971-2700
Brussels 32-2-640-3240
Warsaw 48-22-622-28-29
San Francisco 415-956-1834
Jakarta 62-21-573-9933
Budapest 36-1-346-0600
Zurich 41-43-366-77-88
Santiago 562-233-4155
Kuala Lumpur 603-2078-1655
Middle East
S達o Paulo 5511-3708-2222
Melbourne 613-9631-0300
Frankfurt/ Koenigstein 49-6174-2905-0
Seattle 206-447-1834
Mumbai 91-22-5651-5959
Silicon Valley 650-632-1834
New Delhi 91-124-235-8866
Stamford 203-359-3350
Seoul 82-2-399-7475
Geneva 41-22-310-2071
Dubai 971-4-299-6002
Gothenburg 46-31-13-4710 Helsinki 358-9-61-22-560 London 44-20-7312-3100
*Satellite Offices **Affiliate Offices
BOD0405TS