Few Boards Splitting the Chairman and CEO Roles Among Highest Market Cap U.S. Companies
- Role of non-executive board leader is increasingly prominent
- Compensation for non-executive chairmen is significantly higher than independent board leaders with different titles -- for the same jo
NEW YORK, Nov. 1, 2010 /PRNewswire via COMTEX/ --
A relatively small percentage of the most valuable U.S. public companies have installed non-executive chairmen on their boards. This was one of the key findings of The Korn/Ferry Market Cap 100 (KFMC 100), a report released by the Board & CEO Services Practice of Korn/Ferry International, the global leader in executive search and director recruitment.
The KFMC 100 tracks corporate governance practices - this year focusing on board leadership models - at America's highest market cap companies. The report draws from proxy data from fiscal year 2009 as well as interviews with non-executive board leaders.
The financial crisis, government regulation and increased shareholder activism have all combined to bolster the requirement for companies to demonstrate greater independent board leadership. The Dodd-Frank Act, signed into law on July 21, 2010, requires further disclosure on a company's annual proxy, including whether the roles of the CEO and Chairman are split and why companies have chosen a given approach.
"The perceived surge of splitting the Chairman and CEO roles by installing a non-executive chairman just simply hasn't materialized, at least among the highest market cap companies. Further, each has adapted its governance model in unique and appropriate ways to enhance shareholder value," says Dennis Carey, vice chairman of Korn/Ferry International.
In its report, The KFMC 100 found that only nine percent of boards have a non-executive chairman as the independent board leader. Instead, of the remaining 91 percent, many have fashioned a more robust role in the form of a non-executive lead and/or presiding director to demonstrate board independence and add value to the board. Three-quarters of these non-executive board leaders also serve on the nominating/governance committee, as chair in about half of those cases.
The report also notes that 11 percent of KFMC 100 boards have executive chairmen who would not be considered "independent," most often a former CEO, a founder, or someone else who would be defined as an insider. The role is usually the result of a company emerging from crisis, historical precedent, or CEO succession.
Accordingly, The KFMC 100 revealed a series of best practice recommendations related to non-executive board leadership, including:
Define the role: As a team, the board should agree on what is required in a non-executive board leader, develop a position specification that reflects those priorities, and select a leader who aligns to those criteria.
Establish a board leadership succession plan: Maintaining a steady flow of leadership is as important in the boardroom as it is in the executive suite. Boards should establish an ongoing succession process to ensure they are never caught without a capable leader.
Determine length of terms: While a defined term of service for board leaders has yet to be implemented widely, it should be considered a best practice. A three-year, renewable term provides sufficient time to assess progress against agreed-upon objectives.
Compensate fairly: The responsibilities of non-executive board leaders demand significant time and effort over and above that of the average board member. That, and the value board leaders provide, should be reflected in compensation.
"The non-executive board leader began as a means of meeting an independence requirement," said Steve Mader, vice chairman and managing director of the Board Services Practice of Korn/Ferry International. "Today's non-executive board leader plays a key role in determining what the board will focus on and how it will fulfill its responsibilities."
Other key findings of the 2010 KFMC 100:
Non-executive chairmen are compensated at higher levels than lead directors or presiding directors - even though the jobs of all three are functionally the same. Of the board leaders that do receive additional compensation, non-executive chairmen receive a median retainer of $87,500 over and above the customary board retainer, whilethe median retainer for lead directors is $25,000 and for presiding directors, $17,500. (Forty percent of the boards in the KFMC 100 do not provide any additional compensation.)
"Boards should be taking a hard look at the compensation for all non-executive board leaders to ensure that their significant time investment and responsibilities are rewarded as befits this critical role," explains Carey.
Current or former CEOs are the most sought-after group for the role of non-executive board leader. About three-quarters of non-executive board leaders have held one or more top corporate titles (chairman, president or CEO) and 8 percent are active CEOs at public companies.
Thirteen percent of companies rotate the role of non-executive board leader. The methods vary from switching among committee chairs to an alphabetical rotation of directors. This model clearly works well for some companies as long as it ensures continuity in the board's important work.
For additional information about The KFMC 100, a full copy of the report is available at: http://www.kornferry.com/Publication/11735
Korn/Ferry Board & CEO Services Practice
Korn/Ferry International's Board & CEOServices Practice assists clients with board director search and selection, CEO search and selection, CEO succession planning and assessment, board effectiveness, and director/executive compensation consulting.
About Korn/Ferry International
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SOURCE Korn/Ferry International