Annual Survey of Board Leadership 2014 Edition
In partnership with
ANNUAL STUDY OF BOARD LEADERSHIP: 2014 EDITION
Table of contents Preface ........................................................................................................................ 1 Glossary of terms.................................................................................................... 3 Methodology and approach ............................................................................. 5 The trend to separate ........................................................................................... 6 Effect of company size ........................................................................................ 9 Lead directors .......................................................................................................... 12 Type of change ....................................................................................................... 18 Reason for change ................................................................................................ 20 Transitional periods................................................................................................ 24 Industry........................................................................................................................ 27 Appendix New chairmen in the S&P 500 in 2012 ......................................................... 32 Companies with non-standard leadership structure ............................. 34 Companies with no chairman .......................................................................... 34 Companies with CEO-chairman and no lead director .......................... 35 Subsector mapping to sectors ........................................................................ 36
ANNUAL STUDY OF BOARD LEADERSHIP: 2014 EDITION
Preface This is our second annual report on board leadership. The numbers and trends are interesting but the subtleties and substance behind them are extremely valuable as NACD and Korn Ferry continue their study of highperforming boards. The thoughtful selection and performance of board leaders is one of two pillars of leadership that drive long-term shareholder value—the other being the CEO of the company. There is universal agreement that each board must have an independent leader but how each company has achieved this takes many shapes. In this year’s report, we see continued evidence of a slow and deliberate trend toward separation of the roles, higher in mid-cap companies than the large-cap S&P 500. Key catalysts included activism, and a transition of CEO leadership that prompted the board to elect to separate the roles. Between this report and the next, Korn Ferry and NACD will be in active discussion with companies that have changed leadership structures in the last several years and will ask the following questions to uncover what is driving long-term shareholder value:
“There is universal agreement that each board must have an independent leader but how each company has achieved this takes many shapes.”
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• What has changed from the perspectives of the board, CEO, shareholders, and leadership team? We hope to understand both the positive and negative changes. • How have you defined the board leadership role and how would you evaluate success? • Are there best practices in selecting a board leader and, most importantly, are there unique leadership characteristics among board leaders? • Do you think you will combine roles in the future and under what circumstances? • In cases where there is both a non-executive chairman and lead director, how do boards clearly delineate the different roles? In our first report we stated our commitment to remaining an honest broker of facts in the performance debate. Many proponents of separation claim it will enhance long-term shareholder value, yet no study to date has rendered conclusive evidence in either direction. We have now isolated companies that have made the change, documented their performance before and after, and will soon be comfortable debating the results. While we clearly understand the danger in relying solely on numbers and acknowledge that there are many potential ways to slice the data, we believe our attempt to get at the “facts” will generate engaged, healthy debate among our members and clients. We look forward to a rich dialogue at NACD conferences to come.
Robert Hallagan Vice Chairman Korn Ferry Board/ CEO Practice
Dennis Carey Vice Chairman Korn Ferry Board/ CEO Practice
Ken Daly President and CEO NACD
Peter Gleason Managing Director and CFO NACD
ANNUAL STUDY OF BOARD LEADERSHIP: 2014 EDITION
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Glossary of terms Executive chairman: A full-time paid officeholder who typically leads the board and takes a hands-on role in the company’s day-today management. Most often this position is held by a former CEO as part of an orderly transition. Non-executive chairman: A non-employee chairman of the board who does not serve as an executive for the company and has no day-to-day management responsibilities. For the purposes of this report, we used the following criteria to classify a non-executive chairman: • He or she is an independent director of the board, and is neither currently nor formerly an executive officer of the company, and does not have the formal title of “Executive Chairman” as indicated in the company’s proxy file. • NOT included are those who have the formal title of “NonExecutive Chairman” or “Independent Chairman” but currently or formerly served as an executive officer of the company, for the purposes of our analysis. Lead director: A non-management director of a public company who serves as an independent chief among other board directors and thereby helps ensure board relations run smoothly. This individual acts as an ombudsman for the outside directors and presides over executive session meetings (those held without management present). The lead director role has evolved, and may include helping to set the agenda for board meetings and serving as a liaison between the CEO-chairman and outside directors. This report will consider this role more thoroughly.
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Presiding director: An independent, non-management director of a public company whose chief responsibility is to preside over executive sessions of independent directors and communicate on behalf of independent directors to the chairman and CEO. The role of presiding director is likely to rotate on a two- or three-year cycle among independent committee chairs, and is typically filled by a member of the nominating/governance committee.
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Methodology and approach. This study examined changes to and trends in board leadership structure for 900 US companies, namely the constituents of Standard & Poor’s Large Cap 500 Index (S&P 500) and the Mid-Cap Index (the S&P 400) as of December 31, 2012. Companies are added to the S&P 500 if they have unadjusted market capitalization of $4.6 billion or more, and to the S&P 400 if they have unadjusted market capitalization of between $1.2 billion and $5.1 billion. The S&P 500 Index represents a barometer of the state of the largest publicly traded US corporations, and the majority of the research and analysis in this study focuses on this group. To expand the scope beyond large-cap companies, and thus broaden the findings of the research, the constituents of the S&P 400 were also examined in detail. For each company, we looked at the type of board leadership structure in place at the time of its proxy filing for each year between 2008 and 2012. This report focuses primarily on the leadership structure in place as of year-end 2012, and examines each company’s overall leadership approach as it pertains to the roles of chairman, CEO, and lead director (if at all). Proxy filings, annual reports, and the corporate governance section of company websites comprise the source documents for these determinations. Please note that numbers shown in this report reflect actual statistics and not data projected from a random sampling of companies. In addition, each company that had a change in its leadership structure since January 1, 2003 (by replacing either the CEO or chairman) was investigated to understand the reason for the change, and additional details—such as tenure, age, education, committee responsibilities—were sought for the incoming chairman. Company and outside press reports and news articles were used to determine the reason for an executive’s departure, and executive biographical and company data were culled from secondary sources, including Reuters, Businessweek, MarketWatch, and Morningstar.
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The trend to separate. The trend to separate roles continues to move steadily forward. Though board composition is not likely to be an area marked by rapid, significant change, the slow and steady trend to separate chairman and CEO roles continued in 2012. By the end of 2012, 56% of S&P 500 chairmen also held the position of CEO. This marks a significant departure from 2009, when 63% of all chairmen also held the company’s highest executive office. The change comes almost equally from increases in non-executive chairmen and chairmen who have some past affiliation with the company; additional analysis in this report will examine what types of companies are likely to favor the different approaches. Figure 1 Who is chairman? S&P 500 1998 - 2012
9%
10%
13%
16%
19%
21%
23%
Non-executive Former executive
84%
80%
77%
74%
75%
77%
74%
71%
67%
65%
61%
63%
61%
58%
56%
2011
2012
20%
2010
21%
2009
20%
2008
21%
2007
23%
2006
22%
2005
23%
2004
20%
2003
17%
16%
2002
25%
9%
23%
2001
26%
2000
23%
1999
20%
1998
16%
CEO
Source: HawkPartners analysis 2008 – 2012. Deloitte, Center for Corporate Governance, 1998 – 2007. Notes: Data from 1998 – 2003 did not track non-executive chairmen. Numbers do not always add up to 100 due to rounding error.
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While it is reasonable to expect this gradual trend to continue, particularly as activist shareholders keep pushing for separation, some large companies, including IBM, Disney, and Urban Outfitters, are moving in the opposite direction and are recombining roles. In the case of IBM and Disney, the recombinations are part of longterm succession, though IBM Chairman-CEO Ginny Rometty added the Chairman role just 10 months after becoming CEO—faster than many expected. In the case of Urban Outfitters, founder Richard Hayne reclaimed the CEO role after his successor had difficulty maintaining the main brand’s appeal to young people. Our continued perspective is that there is no one-size-fits-all approach to board leadership and that careful analysis and trusted advisors should be leveraged to find the appropriate structure for each organization. In our opinion, chairmen must meet several criteria to qualify as truly “non-executive” or independent. They must not currently hold an executive role (CEO or other), must not be former executives, and must not be founders or family members of founders. From time to time, companies may characterize these types of chairmen as “non-executive” in the language of their proxy reports or even in the chairman’s title, but our analysis re-characterizes them per the criteria above. The idea of an independent chairman is that he or she can bring an impartial and objective perspective to the board, and our experience finds that founders, family members of founders, and former executives tend not to possess that objectivity. This particular debate on nomenclature is a classic case of saying it doesn’t make it so. Being independent in title is not necessarily a reflection of reality. An analysis of the types of chairmen found in the S&P 500 in 2012 is described in Figure 2. The trend toward separation of the chairman and CEO has been more pronounced over time within the mid-cap companies in the S&P 400 than it has been in the S&P 500. Separation rates in both groups rose by two points in 2012, to 44% in the S&P 500 and 55% in the S&P 400.
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Figure 2 Types of chairmen 1998-2012 S&P 500 Number Percent
Chairman role
Who is included
Non-executive chairman
All independent chairmen, which includes those who have had no former executive role at the company
S&P 400 Number Percent
117
23%
117
29%
Founders or family members of founder (not in management role)
6
1%
7
2%
Former non-CEO executive (e.g., CFO, EVP, senior executive)
10
2%
6
2%
Current non-CEO executive (e.g., EVP, VP, senior executive)
3
1%
0
0%
Former CEO
82
16%
81
20%
CEO
Current CEO, or CEO and president
279
56%
181
45%
Lead director
Company does not have a chairman of the board (NVIDIA Corporation, Lennar Corp., TripAdvisor)
3
1%
5
1%
No chairman or lead director
Company has neither a chairman nor a lead director
0
0%
2
1%
500
100%
500
100%
Chairman or executive chairman
Total Source: HawkPartners analysis as of year-end 2012. Notes: Numbers total to greater than 100% due to rounding.
Figure 3 Rate of separation
44%
47% 39%
2008
37%
2009
55%
53%
51% 39%
2010
Source: HawkPartners analysis as of year-end 2012.
S&P 400
42%
2011
44%
2012
S&P 500
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The effect of company size. Larger companies have been less likely to separate CEO and chairman roles. Figure 4 Chairman independence by market cap S&P 500 12% 19%
69%
21% 19%
59%
S&P 400 30%
27%
21%
24%
49%
49%
Market cap Market cap Market cap 1 - 100 1 01 - 250 251 - 500
34%
Outside/independent Previous/current executive CEO
23%
43%
S&P 400 S&P 400 200 largest 200 smallest
Source: HawkPartners analysis as of year-end 2012.
While we see the trend toward separation across the S&P 500, closer inspection reveals that rates of separation vary significantly by market capitalization. The smaller the company, the more likely it is to separate the CEO and chairman roles. While almost 70% of the largest 100 companies in the S&P 500 have combined CEO and chairman roles, just 49% of the smallest 150 companies do. Stepping down to mid-cap companies, those in the S&P 400 are even more likely to separate roles, and follow a similar pattern: 49% of the largest 200 companies have combined CEO and chairman roles, while just 43% of the smallest 200 companies do.
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Even in the largest S&P 500 companies, however, the number of non-executive chairmen is rising slowly over time. The number of Market Cap 100 chairmen fitting that description in 2012 is 12%, up from 9% in 2010. It appears that while companies are motivated to shift away from a combined CEO-chairman model, these largest companies are more likely to choose an intermediate strategy—to retain current or former executives as chairmen. Twenty percent of Market Cap 100 companies took such an approach in 2012, as compared with 12% in 2010. The difference in board leadership structure by size may be explained in part by the fact that the global nature of larger companies makes it more important for a company’s leader to be seen as a strong and standalone leader due to differing cultural norms around the world. In most of these larger companies, an independent lead director can provide an outside perspective when the CEO and chairman roles are combined, but the question of how to help a non-executive chairman get up to speed on a complex business is a question deserving of further study.
Figure 5 Chairman independence in Market Cap 100 2010-2012
2012
2011
12%
11%
20%
16%
68%
73%
Non-executive chairman Chairman or executive chairman Also CEO
2010
9%
12%
79%
Source: HawkPartners analysis as of year-end 2012.
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S&P 400 companies are more likely to have a separated structure in general, which leads to a higher rate of sustained separation since 2003. S&P 500 companies, which are more likely to have combined structures, are also more likely to have temporary (generally one year or less) separations but eventually recombine.
Figure 6 Differences between S&P 500 and S&P 400 for most recent leadership change since 2003 as of 12/31/12 Type of change
S&P 500
S&P 400
Roles separated
25%
Roles combined
21%
21%
Sustained separation
21%
34%
Sustained combination
11%
6%
Combined after temporary separation
18%
9%
Separated after temporary combination
0%
1%
Temporarily separated
1%
0%
Temporarily combined
0%
0%
1%
1%
New company
27%
Effect on leadership structure Changed structures
45%
48%
Stayed the course
31%
40%
Resumed the course after temporary change
18%
10%
In transition
1%
1%
New company
1%
1%
With change since 2003
48%
62%
With no change since 2003
19%
22%
Percent of companies with separated CEO and chairman
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Lead directors. The roles of lead directors and non-executive chairmen are similar, providing independent board leadership. Figure 7 Lead director presence by leadership structure S&P 500
4%
No lead director Lead director
62%
96% 38% Combined
Separated
Source: HawkPartners analysis as of year-end 2012. Notes: Three companies lacking a chairman of the board with a lead director classified as separated leadership structure and included in analysis.
Companies that opt to combine the role of CEO and chairman nearly always appoint a lead director, though a select few companies do not. As of the end of 2012, just 11 of the 280 S&P 500 companies with combined CEO and chairman roles were without a lead director. In the Market Cap 100, the group that is most likely to have combined roles, just five companies lack an independent chairman or lead director—the most famous of which
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is Warren Buffett of Berkshire Hathaway. Buffett, who has said he believes either combined or separated CEO and chairman roles can be appropriate, depending on the situation, has announced that Berkshire Hathaway will have a separated structure upon his retirement, with his son Howard (currently a director) taking over as chairman but not CEO. Warren Buffett aside, companies with a combined structure and no independent lead director face criticism from shareholders, and most are adding or expanding the role of their lead director. At DuPont’s annual investors meeting in 2012, after shareholders rejected a proposal calling for an independent chairman, the board decided to ramp up the responsibilities of the lead director— perhaps as a peace offering. Though the independent chairman proposal was raised again in 2013, it was rejected by a wider margin, and outcry over the issue appears to be subsiding. Other companies, like Ralph Lauren, have continued to justify their lack of lead director by emphasizing the ease with which their independent directors meet to discuss issues (see quote). However, the fact that the board must defend its lack of a lead director demonstrates the degree to which this position is considered standard, and to not have one is a departure from the norm. As stated in our Corporate Governance Policies, our Board of Directors believes that appointing a lead director is not desirable because the Board’s size makes interaction among all members relatively easy. As a result, we do not have a lead director. At each of our regularly scheduled Board of Directors and committee meetings, the independent directors participate in an executive session without the Chairman and CEO or any members of our management present. In Fiscal 2012, all of our non-management directors met together as a full Board of Directors five times without any management representatives present. During these executive sessions of independent directors, the Chairs of each of the Audit Committee, the Compensation Committee and the Nominating & Governance Committee preside on a rotating basis based on the topics to be discussed. – Ralph Lauren Proxy 2013
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On the other side of the spectrum, 38% of the S&P 500 has a separated structure as well as a lead director. What may seem like redundancy can actually be a mutually beneficial relationship among a chairman, CEO, and lead director. Lead directors are often chosen for their ability to facilitate communication and decision making, which may complement the skills the chairman brings to the board. The interplay among these three roles, and the different strengths required to form an optimal partnership, is an area deserving of closer study. Figure 8 Responsibilities by role type/structure
Nonexecutive chairman
Combined CEO-chair with a lead director
Lead director at company with NEC
Serves as mentor and sounding board to CEO on issues facing the enterprise
?
Chairs board meetings
?
Chairs executive sessions
?
Calls meetings of independent directors when necessary
?
Consults with CEO and directors and defines meeting schedule, agenda, and materials
?
Acts as liaison between the CEO and members of the board
?
Acts as liaison between executive and independent board directors
?
In cooperation with the CEO, responds to shareholder inquiries and approves company responses to outside communications
?
Works with the chair of the compensation committee on CEO performance evaluation and compensation
?
Manages intra-board relationships
?
Advises the nominating/governance committee on selection of committee chairs and board members
?
Advises committee chairs and helps to manage the overall workload of the board
?
Ensures that the board has the appropriate performance monitoring tools in place
?
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Founder as chairman: Succession planning for leaders who built the business Many chairmen of S&P 500 companies have names that seem almost interchangeable with the companies they serve—Michael Dell, Jeff Bezos, Ralph Lauren, Howard Schultz. The common thread among these high-profile leaders is that they built their companies from the ground up. Founders are a unique subset of chairmen and can create situations in which succession planning is both more important and more difficult. At these companies, there is often intense speculation as to the successor’s or successors’ identities, which can overshadow the other stories companies are trying to tell. Take the case of Warren Buffett (who is, for all intents and purposes, the founder of Berkshire Hathaway), whose succession plan has been the topic of endless speculation. Buffett’s strategy has been to provide succession planning information slowly, piece by piece. He announced the future leadership structure in 2010, and has named key team members one by one over time, including his choice for future non-executive chairman— his son Howard. In cases such as these, where the identity of the company itself is so intertwined with that of its leader, it can be difficult for shareholders, employees, and customers to picture the company with someone new at the helm. Careful communication about the succession plan can ease concerns. Succeeding a founding chairman can also place enormous pressure on the new chairman, but a thoughtful succession plan can make all the difference. Microsoft’s legendary founder Bill Gates recently stepped down as part of a leadership change that involved a new CEO (internal candidate Satya Nadella) as well as a new chairman—former lead independent director John Thompson. In a Microsoft video interview recorded about six months before the leadership change, Thompson described part of his role as lead independent director as helping to set the agenda for board meetings alongside Gates and then-CEO Steve Ballmer, indicating that Thompson was already comfortable with one of the key duties of the chairman. To further ease the transition, Gates and Ballmer will remain on the board, presumably to help transfer knowledge and insights to the new team. Collectively, these measures and Thompson’s previous interactions with Gates and Ballmer as lead independent director are likely to aid the adjustment to their new roles.
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Lead directors are more common at large companies. Figure 9 Presence of lead directors by company size
S&P 500 16%
84%
28%
72%
S&P 400
36%
40%
64%
Market cap Market cap Market cap 1 - 100 1 01 - 250 251 - 500
60%
No lead director
49%
Lead director
52%
S&P 400 S&P 400 200 largest 200 smallest
Source: HawkPartners analysis as of year-end 2012
Since larger companies are more likely to have combined chairman and CEO roles, they are also more likely to have lead directors—84% of the largest 100 companies in the S&P 500 have lead directors, compared with just 64% of the smallest 150. The trend continues when we examine the even smaller companies that make up the S&P 400, as almost half of the smallest 200 companies have no lead director. We continue to see that companies approach board independence differently according to size, with larger companies being more likely to combine the chairman and CEO roles but retain a lead director, and smaller companies being more likely to have a non-executive chairman.
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The trend to separate roles has grown over time. Figure 10 Structure by date of last leadership change S&P 500
19%
81%
39%
61%
Separated
53%
Combined
47%
No change since 2003
Change 2003-2007
Change 2008-2012
(n=72)
(n=137)
(n=291)
Source: HawkPartners analysis as of year-end 2012.
Examining leadership transition events over time indicates that the decision to separate the chairman and CEO roles is becoming more common; among companies that have not experienced a change in the last 10 years, over 80% have a combined structure. As the data show, companies that experienced a turnover event in the past five years simultaneously reevaluated the structure, with only 47% of these companies opting for a combined CEO-chairman. Short of legislation requiring it, it is not likely that this trend will continue indefinitely, with all companies choosing to separate roles. All the same, it certainly demonstrates the effect that increased attention to the issue has had.
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Type of change. When choosing a new CEO or chairman, about half of companies change their structure. Figure 11 Nature of most recent succession event S&P 500 (2003 - 2012)
32+19+147 1%
32%
47%
1%
19%
Maintained structure Maintained structure after a transition period In transition (as of year-end 2012) Changed structure New company
Source: HawkPartners analysis as of year-end 2012.
Among S&P 500 companies with a succession event occurring in the previous decade, nearly half changed the leadership structure that had been in place. About a third maintained the current structure, and an additional 19% temporarily changed structures (for a year or less) before reverting to the prior configuration. These figures comport with the oft-repeated declarations in proxy statements that the leadership structure of the company “is subject to discretion and review.� Indeed, the events of the previous 10 years suggest that a company’s leadership model is dynamic and anything but fixed, given the significant proportion that have changed structures during the most recent leadership transition.
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Just over half of companies experiencing a succession event chose a combined structure. Figure 12
21+11+2012225
Outcome of most recent succession event S&P 500 (2003 - 2012)
21%
25%
11%
21%
1%
18%
Roles combined Sustained combination Combined after temporary separation Temporarily separated Sustained separation Roles separated
Source: HawkPartners analysis as of year-end 2012.
Further breaking down succession events in the previous decade among S&P 500 companies, the majority, by a slim margin, have resulted in a combined structure. Conversely, a quarter of companies opted to separate the roles, going from a dual CEOchairman to having two separate positions. Likewise, 21% of companies had already split the role, and maintained that structure in the most recent leadership change. Despite the scrutiny given to companies that persist in having a CEO-chairman and the high profile proxy battles over the matter that we read of in the news, 21% of companies still opted to combine the roles in the most recent event. What may appear to be contrarianism or even obstinacy is perhaps evidence of just the opposite. Their example indicates that the optimal structure for any given company is a unique decision and not simply a matter of conforming to the popular sentiment of the time.
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Reason for change. Retirement is the most common reason for a succession event, and most are planned. Figure 13 Reason behind most recent succession event S&P 500 (2003 - 2012)
62+16+985 8%
4%
9%
62%
16%
Retired - planned succession Resigned - shareholder pressure/crisis M&A, spinoff, IPO, or new company Founder steps aside Death or medical emergency
Source: HawkPartners analysis as of year-end 2012.
Note: Figures do not add up to 100% due to rounding error.
Just as the resulting structure of a succession event can be examined, so too can the reason causing it. An analysis of the same subset of the S&P 500 companies that experienced a transition in the previous 10 years shows that succession events occurred according to a predetermined plan 62% of the time, making succession planning the leading cause for a change. The case of a founder, or a member of the founder’s family, stepping aside can be thought of as a subset of planned successions1. Such instances make up a minority of all events, but are treated separately given
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the individuals involved and the differing forces that may lead to such an event. All other reasons for a change account for a significantly smaller proportion of turnover, though the second leading cause, at 16%, is an unplanned resignation or company crisis. In such instances, time pressure and the need for an operational management and oversight team preclude careful planning, and companies often appoint an interim chairman or CEO, a matter covered more extensively later in the report.
1 According to the methodology, instances that would have otherwise qualified as “Retired – Planned Succession” but involved a founder or family member of the founder were classified as “Founder Steps Aside.” Any other reason for change involving a founder or family member of a founder was classified according to the other circumstances.
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Separation is more likely when there is an unexpected resignation or crisis. Figure 14 Breakdown of reason for change by structure in place S&P 500 (2003 - 2012) Combined leadership
Split leadership
Retired - planned succession
Resigned - shareholder pressure/crisis
Founder steps aside
M&A, spinoff, IPO, or new company
Death or medical emergency
74+10+853 50+23+115 8%
5% 3%
11%
10%
5%
11%
74%
23%
50%
Source: HawkPartners analysis as of year-end 2012.
As might be expected, the reason behind a succession event and the resultant structure are interrelated, with certain outcomes being more likely depending on the precipitating event or reason. Considering all changes that resulted in a combined structure, the vast majority, nearly three-quarters, occurred according to succession planning. The remaining quarter was fairly evenly split across alternate reasons. Among all changes resulting in separation, only half occurred according to a determined plan. Indeed, nearly a quarter of companies with a separated structure arrived at it due to a company crisis such as the resignation of the CEO or chairman, or shareholder pressure. Though in some cases the board may be perfectly happy with the separated outcome, the idea of being rushed into a decision should concern boards and encourage them to ensure that a solid succession plan is always ready to go if crisis strikes.
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Planned succession events are more likely to result in combined leadership. Figure 15 Probability of combined or split leadership by reason for change S&P 500 (2003 - 2012) Retired - planned Succession Resigned shareholder pressure / crisis Founder steps aside M&B, spin-Off, IPO, or new company Death or medical emergency
61% 39% 33% 67% 44%
Combined Leadership Split Leadership
56% 34% 66% 35% 65%
Source: HawkPartners analysis as of year-end 2012. Notes: Not to be confused with Figure 14, the data above should be interpreted as follows: for any given reason for change, the sum of the blue and red bars equal 100. That is, for each reason, the propensity for a combined or separated structure is shown.
For each possible reason for a change in leadership structure, there is an associated probability of ending up with either a combined or separated structure. For example, in cases of a founder stepping aside, there is a 44% chance of that event ending with a combined structure and a 56% chance of it ending with a separated structure. Consistent with the previous data, planned succession events more often result in a combined structure, and sudden events, such as a company crisis or a death or medical emergency, are more likely to conclude with separate leaders. Interestingly, when a founder steps aside, the more common outcome is to separate the roles. One possible explanation for the phenomenon is that such companies are under increased scrutiny for lack of independence, and are more prone to accusations of nepotism and mismanagement. Consequently, separating the roles of CEO and chairman provides a means to communicate greater board independence and curtail criticism.
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Transitional periods. Transitional periods are commonly seen in two very different situations. In 2012, of the 80 succession events that occurred, 32 employed a transitional period of some type. Often, a former CEO and chairman stayed on as chair before handing the reins to the new CEO. In some cases, an interim leader was elected until a permanent candidate could be selected. Though the exact series of events and the accompanying rationale naturally differ by case, a few trends prevail. Transitions to ease into change. Many times, the decision to phase in new leadership speaks to a thorough and thoughtful planning process. Recognizing the aches and pains, so to speak, when it comes to installing a new executive, many boards find the best approach is to ease into it gradually. By keeping a former CEO on as chairman, change is ushered in over time, rather than in a single sweep. In fact, many companies have set a precedent for this model, showing a preference for a dual CEO-chairman, but never handing over all the power at once to a new CEO. In such cases, the CEO-chairman retires as CEO but remains chairman for a period of time, often a year, as the new CEO settles into the position. This succession model is often referred to as “passing the baton.” At Johnson & Johnson, this rationale prevailed when the company’s CEO-chairman of over 10 years, William C. Weldon, retired as CEO in early 2012 and later stepped down as chair, making way for the new CEO, Alex Gorsky, to assume that role as well. As the company’s 2013 Proxy Report explains:
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“During this eight-month transitional period, Mr. Weldon worked closely with Mr. Gorsky to ensure a seamless transition of leadership, transferring all day-to-day management and operational responsibilities to Mr. Gorsky. The Board saw Mr. Weldon’s contributions during this eight-month transitional period as critical to the success of the company’s leadership transition.”
Transitions for tumultuous times. Other times, a transitional period indicates just the contrary—a sudden event can leave a board scrambling to find new permanent leadership, and a board member or former or current executive might serve on a temporary basis until a permanent replacement can be located. One such instance occurred with Yahoo!, an organization fraught with frequent and controversial departures over the past several years. In 2012, after Carol Bartz was ignominiously dispatched via e-mail, her replacement, Scott Thompson, was soon discovered to have padded his resume with an embellished academic history. Activist investment firm Third Point precipitated the scandal in a bid to capture four seats on Yahoo’s board. At first, the Internet company was uncooperative with the demands, prompting Third Point to disclose the damning revelations of Thompson’s resume. As part of the resolution of the ensuing proxy battle, Third Point gained three seats on the company’s board and removed key company leaders, including CEO Thompson and then- Chairman Roy Bostock. Ross Levinsohn, Yahoo!’s media chief, stepped up as interim CEO and board member Fred Amoroso took over as chairman. While Levinsohn’s appointment had always been on a temporary basis, Amoroso was expected to stay on in a permanent capacity. However, with the appointment of Marissa Mayer as CEO, in opposition to Amoroso’s first choice of retaining Levinsohn, Amoroso departed. He was immediately replaced by Maynard Webb, a Silicon Valley veteran with a year of experience on Yahoo!’s board, who was initially brought on to serve on an interim basis. However, in August 2013, Maynard’s appointment was
26
made permanent, demonstrating another common trend among transitional appointments. Frequently, at the end of his or her term, an interim CEO or chairman ends up staying on permanently. Given the multifaceted succession of events and circumstances that lead companies to institute a transitional period, the wisdom of doing so cannot be settled in a uniform way. Arguments in favor of this approach rely mainly on the stability it maintains during what could otherwise be a turbulent transition. Generally, such an approach works best when the outgoing CEO and the incoming one have an effective working relationship. Indeed, arguments against transitioning a CEO into the chairman role cite the opportunity for conflict between the two. Further, the continued presence of the former leader can impede the new CEO, preventing him or her from assuming the critical mass of autonomy to effectively guide the organization. As Yahoo!’s example illustrates, the appointment of transitional leadership is not so much a disciplined choice but a necessity.
ANNUAL STUDY OF BOARD LEADERSHIP: 2014 EDITION
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Industry. Not all industries take the same approach to board leadership structure. Figure 16 Separation rate by industry S&P 500
Source: HawkPartners analysis as of year-end 2012.
34%
51
31
32% 34
In du st ria l
41
35%
Ba sic
67
35%
He a ph thc ar ar m e/ a
19
39%
Ut ilit y
22
42%
Fi na nc ia l
18
47%
Te le co m
104
49%
Se rv ic es
57
50%
Co ns um er
55%
IT In su ra nc e
52
Number of companies in sector
S&P 500 separation rate
RE IT s
67%
Notes: Excludes Diversified sector, which contains only four companies
Certain industries have historically tended to favor the more “traditional” approach of combining the chairman and CEO roles. In contrast, the IT sector, which tends to include newer companies, has by far the highest rate of CEO-chairman role separation. Yet another factor affecting the rate of separation relates to the chairman’s status as the founder of the company. The IT, REIT, and Services sectors all have a higher than average rate of founders serving as chairman, which may be driving their relatively higher rate of separation. To protect against the hazards that sometimes come with a founder holding both roles, many boards often find it prudent to simply separate them.
28
Within the larger industry categories, certain subsectors stand out for their particularly high or low rates of separation and are detailed below. Figure 17 Subsectors by separation rate
Subsectors with >60% separation rate: Data processing and outsourced services Semiconductors Industrial machinery Packaged foods and meats
Subsectors with <30% separation rate: Aerospace and defense Regional banks Pharmaceuticals Multi-Utilities
Source: HawkPartners analysis as of year-end 2012. Note: Subsectors with fewer than seven companies excluded. See chart in appendix depicting how subsectors map into sectors.
As a whole, individual industries have maintained relatively consistent rates of separation since our analysis began in 2008, though the balance of the predominant leadership structure within certain categories has shifted. The insurance industry, for example, has moved from a 45% separation rate in 2011 to a 55% separation rate in 2012, with two companies (Torchmark and Genworth) transitioning to a separated structure and no companies choosing to combine their chairman and CEO roles. Many industries, including healthcare/pharmaceuticals and financial services, have seen a fair amount of change in 2012 but are relatively evenly split between companies choosing to separate roles and those deciding to combine them.
ANNUAL STUDY OF BOARD LEADERSHIP: 2014 EDITION
29
Aerospace and defense: Combined structure preferred. The aerospace and defense subsector saw no board leadership structure changes in 2012â&#x20AC;&#x201D;all companies retained a combined CEOchairman role. The majority of companies in this subsector do have a lead director, though Honeywell and Rockwell Collins choose to use rotating presiding directors in lieu of permanent lead directors. Some change appears to be in the air, however, as Lockheed Martin has separated its chairman and CEO role as of January 2013.
Figure 18 Rate of separation within aerospace and defense subsector as of 12/31/12 Company (in order
Leadership
Leadership
Most recent
of market place)
status 2008
status 2012
change
United Tenologies Corp.
Separated
Combined
Jan-10
The Boeing Company
Combined
Combined
Jul-05
Honeywell International Inc
Combined
Combined
Jul-02
Lockheed Martin Corp.
Combined
Combined
Apr-05
Precision Castparts Corp.
Combined
Combined
Aug-03
General Dynamics Corp.
Combined
Combined
May-10
Raytheon Co.
Combined
Combined
Jan-01
Northrop Grumman Corp.
Combined
Combined
Jul-11
Rockwell Collins Inc.
Combined
Combined
Jun-02
L-3 Communications Holdings Inc.
Combined
Combined
Oct-08
30
Electric utilities: Moving more toward separation. The electric utility subsector has seen a significant uptick in companies choosing to separate the chairman and CEO roles since 2008. While in 2008 only one company in the subsector (FirstEnergy) had a separated structure, four additional companies (NextEra, Exelon, American Electric Power, and Northeast Utilities) have followed suit. Of the five electric utilities that experienced a change to the chairman or CEO role in 2012, three chose to separate roles and two chose to continue combining roles (Duke Energy and PPL). Nearly all electric utilities have a lead or presiding director except for FirstEnergy, which arguably has less of a need due to its having a non-executive chairman in place.
Figure 19 Rate of separation within electric utilities subsector as of 12/31/12 Company (in order
Leadership
Leadership
Most recent
of market cap)
status 2008
status 2012
change
Duke Energy Corporation
Combined
Combined
Jul-12
Southern Company
Combined
Combined
Dec-10
NextEra Energy Inc.
Combined
Separated
Jul-12
Exelon Corporation
Combined
Separated
Mar-12
American Electric Power Co. Inc.
Combined
Separated
Nov-11
FirstEnergy Corporation
Separated
Separated
Jan-04
PPL Corporation
Combined
Combined
Apr-12
Edison International
Combined
Combined
Aug-08
Northeast Utilities
Combined
Separated
Apr-12
Entergy Corporation
Combined
Combined
Aug-06
Pinnacle West Capital Corporation
Combined
Combined
Jan-09
Pepco Holdings, Inc.
Combined
Combined
May-09
ANNUAL STUDY OF BOARD LEADERSHIP: 2014 EDITION
31
Data processing and outsourced services: Favoring separation. The data processing and outsourced services subsector, which includes most of the major payment processing companies, has the highest rate of separation (among subsectors with more than seven companies). The subsector saw several changes in 2012, including Visa and Computer Sciences Corporation deciding to separate chairman and CEO roles, and Fidelity National Information Services combining roles. The companies in this subsector that have chosen to combine roles all have lead directors (Fidelity and Total System Services). Figure 20 Rate of separation within data processing and outsourced services subsector as of 12/31/12 Company (in order
Leadership
Leadership
Most Recent
of market cap)
Status 2008
Status 2012
Change
Visa Inc.
Combined
Separated
Nov-12
MasterCard Incorporated
Separated
Separated
Apr-10
Automatic Data Processing Inc.
Separated
Separated
Nov-11
Paychex Inc.
Separated
Separated
Sep-10
Fiserv Inc.
Separated
Separated
Dec-05
Fidelity National Information Services Inc.
Separated
Combined
Mar-12
The Western Union Company
Separated
Separated
Sep-10
Computer Sciences Corporation
Combined
Separated
Mar-12
Combined
Jan-06
Total System Services Inc
Combined
32
Appendix Companies with new chairmen in the S&P 500 in 2012. Company
Chairman
3M Company
Inge G. Thulin*
Altria Group Inc.
Martin J. Barrington*
Apollo Group Inc.
Peter V. Sperling
Becton, Dickinson and Company
Vincent A. Forlenza*
Best Buy Co. Inc.
Hatim A. Tyabji**
Chesapeake Energy Corporation
Archie W. Dunham**
Citigroup Inc.
Michael E. Oâ&#x20AC;&#x2122;Neill**
CME Group Inc.
Terrence A. Duffy
Computer Sciences Corporation
Rodney F. Chase**
ConocoPhillips
Ryan M. Lance*
Covidien PLC
JosĂŠ E. Almeida*
Cummins Inc.
Norman Thomas Linebarger*
DaVita HealthCare Partners Inc.
Kent J. Thiry* (Co-Chairman)
E*TRADE Financial Corporation
Frank J. Petrilli*
Exelon Corporation
Mayo A. Shattuck III
Fidelity National Information Services Inc.
Frank R. Martire*
First Horizon National Corporation
D. Bryan Jordan*
First Solar Inc.
Michael J. Ahearn
Fluor Corporation
David T. Seaton*
Genworth Financial Inc.
James S. Riepe**
Harley-Davidson Inc.
Keith E. Wandell*
Harris Corporation
Thomas A. Dattilo**
Helmerich & Payne Inc.
Hans Helmerich*
Hospira Inc.
John C. Staley**
Illinois Tool Works Inc.
Robert S. Morrison**
* Also CEO **Non-executive chairman
ANNUAL STUDY OF BOARD LEADERSHIP: 2014 EDITION
Company
Chairman
Intel Corporation
Andy D. Bryant
International Business Machines Corporation
Virginia M. Rometty*
J. C. Penney Company Inc.
Thomas Engibous**
Johnson & Johnson
Alex Gorsky*
Kraft Foods Group Inc.
John T. Cahill
Legg Mason Inc.
W. Allen Reed**
Masco Corporation
Verne G. Istock**
MetLife Inc.
Steven A. Kandarian*
Micron Technology Inc.
Robert E. Switz**
Moody’s Corporation
Henry A. McKinnell Jr.**
Morgan Stanley
James P. Gorman*
Murphy Oil Corporation
Claiborne P. Deming
Nabors Industries Ltd.
Anthony G. Petrello*
PetSmart Inc.
Robert F. Moran*
Phillips 66
Greg C. Garland*
Pitney Bowes Inc.
Michael I. Roth*
PPL Corporation
William H. Spence*
QEP Resources Inc.
Charles B. Stanley*
Quest Diagnostics Inc.
Daniel C. Stanzione**
SAIC Inc.
John P. Jumper*
Schlumberger Limited
Tony Isaac**
Sealed Air Corporation
William V. Hickey*
Sempra Energy
Debra L. Reed*
Stryker Corporation
William U. Parfet**
SunTrust Banks Inc.
William H. Rogers Jr.*
The ADT Corporation
Bruce Gordon**
The Nasdaq OMX Group Inc.
Börje E. Ekholm**
The Walt Disney Company
Robert Iger*
Verizon Communications Inc.
Lowell C. McAdam*
Walgreen Co.
James A. Skinner**
Waste Management Inc.
W. Robert Reum**
WellPoint Inc.
Jackie M. Ward**
Yahoo Inc.
Alfred J. Amoroso**
* Also CEO **Non-executive chairman
33
34
Companies with non-standard leadership structure (as of year-end 2012). Co-chairman
No chairman
Molex Incorporated
NVIDIA Corp.
Loews Corporation
TripAdvisor Inc.
DaVita HealthCare Partners Inc.
Chipotle Mexican Grill Inc. Nordstrom Inc. Torchmark Corporation
Lennar Corp.
Adobe Systems Inc.
No CEO
Co-CEO
Prologis Inc. Whole Foods Market Inc.
Bed Bath & Beyond Inc.
The J. M. Smucker Co.
Companies with no chairman (as of year-end 2012). Company
Lead director
CEO
Notes There has never been a chairman since the founding in 1993. Corporate
NVIDIA Corporation
William J. Miller
governance allows for Jen-Hsun Huang but does not require a (co-founder)chairperson: â&#x20AC;&#x153;The board may select a chairperson of the board in the manner and upon the criteria that the board deems appropriate at the time of selection.â&#x20AC;? Role left vacant from
TripAdvisor Inc.
None
December 2012 to February Stephen Kaufer 2013 when Gregory B. Maffei was appointed. Company has a history of leaving the role unfilled. Chairman Leonard Miller died in 2002, and the role was unfilled for two
Lennar Corp.
Sidney Lapidus
years until Robert Strudler Stuart A. Miller assumed the position in 2004. He died in 2006, leaving the role empty again, and it was again left unfilled. Lead director manages board meetings. The CEO is the son of Leonard Miller.
ANNUAL STUDY OF BOARD LEADERSHIP: 2014 EDITION
35
Companies with CEO-chairman and no lead director (as of year-end 2012). Company
Notes
CEO-Chairman
“Garmin does not have a lead Garmin Ltd.
Dr. Min Kao
independent director. Instead, all of the independent directors play an active role on the board of directors.” “The board believes that the combined role of chairman and CEO promotes
Monster Beverage
Rodney C. Sacks
Corporation
consistency and efficiency in the development and execution of the company’s business strategy. The board does not have a lead independent director.”
FLIR Systems Inc.
Earl Lewis
Roles separated in 2013
Boston Properties Inc.
Mortimer B.
Roles separated in 2013
Zuckerman “Further, the board of directors believes Urban Outfitters Inc.
Richard A. Hayne
designating a ‘lead independent director’ could inhibit the free flow of ideas among the independent directors.”
Helmerich & Payne Inc.
Hans Helmerich
Ralph Lauren Corporation
Ralph Lauren
Roles separated in 2013 “The board of directors believes that appointing a lead independent director is not desirable because the board’s size makes interaction among all members relatively easy.” “The board of directors has not named a
Berkshire Hathaway Inc.
Warren E. Buffett
lead independent director.”
Netflix Inc.
Reed Hastings
2013 lead director added
Microchip Technology
Steve Sanghi
“Microchip does not have a lead
Inc.
independent director.” “The board has not found it necessary to
Emerson Electric Co.
David N. Farr
designate a ‘lead director’ from among the non-management directors.”
36
Subsector mapping to sectors. Basic Materials
Consumer Goods
Industrial Goods
Aluminum*
Agricultural Products*
Aerospace and Defense
Coal and Consumable Fuels
Apparel, Accessories, and Luxury Goods
Agricultural Products*
Diversified Chemicals
Automobile Manufacturers*
Auto Parts and Equipment
Diversified Metals and Mining
Beverages - Wineries and Distillers*
Building Products
Fertilizers and Agricultural Chemicals
Brewers*
Construction and Farm Machinery and Heavy Trucks
Gold*
Consumer Electronics*
Construction Materials
Independent Oil and Gas
Distillers and Vintners*
Diversified Machinery
Industrial Gases*
Electronic Manufacturing Services
Electrical Components and Equipment
Integrated Oil and Gas
Footwear
Farm and Construction Machinery
Metal and Glass Containers
Forest Products*
Industrial Machinery
Oil and Gas Drilling
Home Furnishing and Fixtures*
Marine*
Oil and Gas Equipment and Services
Home Furnishings*
Metal and Glass Containers
Oil and Gas Exploration and Production
Household Appliances*
Packaging and Containers
Oil and Gas Refining and Marketing
Household Products
Paper Packaging
Oil and Gas Storage and Transportation
Housewares and Specialties*
Specialty Chemicals
Leisure Products
Steel
Motorcycle Manufacturers* Office Electronics* Packaged Foods and Meats Paper Products Personal Products Soft Drinks Tires and Rubber* Tobacco
* Indicates fewer than seven companies within this subsector
ANNUAL STUDY OF BOARD LEADERSHIP: 2014 EDITION
Diversified
Financial Services
37
Insurance
Industrial Conglomerates
Asset Management
Insurance Brokers
Diversified
Asset Management and Custody Banks
Life and Health Insurance
Conglomerates*
Consumer Finance
Multi-Line Insurance
Industrial Conglomerates
Diversified Banks*
Property and Casualty Insurance
Investment Banking and Brokerage
Reinsurance*
Other Diversified Financial Services* Regional Banks Specialized Finance Thrifts and Mortgage Finance
Healthcare and Pharmaceuticals
IT/Telecom
REITs/Real Estate Services
Biotechnology
Alternative Carriers*
Building Products
Healthcare Technology
Application Software
Diversified Real Estate Activities*
Healthcare Distributors
Cable and Satellite
Diversified REITs
Healthcare Equipment
Communications Equipment
Home Building
Healthcare Facilities
Computer Hardware
Industrial REITs
Healthcare Services
Computer Storage and Peripherals
Office REITs
Healthcare Supplies
Electronic Components
Real Estate Services*
Life Sciences Tools and Services
Electronic Equipment and Instruments
Residential Construction
Managed Healthcare
Home Entertainment Software*
Residential REITs*
Medical Appliances and Equipment
Integrated Telecommunication Services
Retail REITs
Medical Instruments and Supplies
Internet Software and Services
Specialized REITs
Pharmaceuticals
Semiconductor Equipment Semiconductors Systems Software Technology Distributors Wireless Telecommunication Services
* Indicates fewer than seven companies within this subsector
38
Services Advertising
Human Resource and Employment Services
Air Freight and Logistics
Hypermarkets and Super Centers*
Airlines
Internet Retail
Apparel Retail
IT Consulting and Other Services
Automotive Retail
Leisure Facilities*
Broadcasting*
Movies and Entertainment
Casinos and Gaming
Music and Video Stores
Catalog Retail*
Office Services and Supplies
Commercial Printing*
Publishing
Computer and Electronics Retail*
Railroads*
Construction and Engineering
Research and Consulting Services
Data Processing and Outsourced Services
Restaurants
Department Stores
Security and Alarm Services*
Distributors*
Specialized Consumer Services
Diversified Support Services
Specialty Stores
Drug Retail*
Trading Companies and Distributors
Education Services
Trucking
Environmental and Facilities Services
Utility
Food Distributors
Electric Utilities
Food Retail
Gas Utilities
General Merchandise Stores
Independent Power Producers and Energy Traders*
Home Furnishing Retail
Multi-Utilities
Home Improvement Retail*
Water Utilities*
Hotels, Resorts, and Cruise Lines * Indicates fewer than seven companies within this subsector
ANNUAL STUDY OF BOARD LEADERSHIP: 2014 EDITION
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About Korn Ferryâ&#x20AC;&#x2122;s Board Practice Korn Ferry has recruited board directors for more than 40 years. Our dedicated Board Practice is committed to improving governance practices worldwide. Our services include individual director searches as well as building new boards for IPOs, spin-offs, carve-outs and companies emerging from bankruptcy. In addition, our Practice consults on board effectiveness and board & CEO succession planning. Visit http://www.kornferry.com/board-and-ceo-services Key contacts - Korn Ferry:
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About NACD The National Association of Corporate Directorsâ&#x20AC;&#x2122; (NACD) mission is to advance exemplary board leadershipâ&#x20AC;&#x201D;for directors, by directors. We deliver the knowledge and insight that board members need to confidently navigate complex business challenges and enhance shareholder value. We amplify the collective voice of directors in setting a substantive policy agenda. NACD was founded in 1977 as the only national membership organization created for and by directors. Today, more than 14,500 directors and key executives from public, private, and nonprofit companies rely on us for board development, education, resources, and connections. Visit www.nacdonline.org for more information. Key contacts - NACD:
Ken Daly President & CEO NACD 202-775-0509
Peter Gleason Managing Director & CFO NACD 202-775-0509
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