Due to the strategic challenges posed by the economic downturn, an increasing number of companies have been facing sudden, unforeseen CEO departures or dismissals. Estimates for 2008 alone indicate that, in the United States, the chief executive officers of more than 1,400 public companies left their positions by the end of the year, a record number for the last decade. And the trend has continued into 2009.

“Of course, some sectors were affected more than others – the financial services industry, for example, given the heightened public scrutiny of the last year and the many banks around the country that became the target of government intervention,” says Matteo Tonello, associate director, corporate governance at The Conference Board and co-author of the report with John C. Wilcox and June Eichbaum. “But this surge in CEO turnover remains a generalized phenomenon and all corporate boards should take notice.”

“When it comes to leadership transition, underperformance can be very expensive,” says June Eichbaum, who advises the board of The Cooke Center for Learning and Development, where she was a founding director. Research shows that the faulty integration of a senior executive can cost the company 10 to 20 times the executive’s salary in opportunity costs and has lasting consequences on the stock price. When taken collectively, succession failures also have repercussions on the U.S. economy, generating productivity losses and social costs valued at nearly $14 billion per year.

“Despite these astonishing numbers, several governance surveys find that as many as half of the U.S. public companies do not rely on a detailed succession plan for C-suite executives,” adds Eichbaum.

Among its recommendations, the report urges directors to make CEO succession planning integral to long-term business strategy and ensure that the compensation committee is fully involved.

Says John Wilcox, chairman of Sodali Ltd. and former head of corporate governance at TIAA-CREF: “The financial crisis showed, once again, that executives do what they are paid to do. The compensation committee charter should reinforce the notion that compensation is central to talent development and should explicitly call for collaboration on issues of succession planning with the full board.”

“Some companies have reinforced this broader strategic role of their compensation committee by renaming it – General Electric, for example, has instituted a management development and compensation committee to assist the board in developing and evaluating potential candidates for executive positions,” concludes Wilcox.

“In these difficult times, The Conference Board is renewing its commitment to provide guidance to the boards of directors of its member companies,” says Tonello, who also directed the entire research series. This report concludes a series encompassing crucial areas of board responsibilities, such as: assessing corporate strategy; overseeing executive compensation and risk policies; CEO succession planning; avoiding shareholder activism; preparing for unsolicited takeover offers; and overseeing internal investigations. The recommendations included in the separate reports are being collected in a single book entitled The Role of the Board in Turbulent Times: Leading the Public Company to Full Recovery, to be released by The Conference Board in the fall.

For more information or to receive a copy of the report, contact Matteo Tonello at 212-339-0335 or matteo.tonello@conference-board.org

A report released yesterday by the Conference Board Governance Center provides a checklist of issues for directors to consider in the event of an unsolicited takeover offer.

Some 47 percent of merger activity in 2009 was accomplished by means of hostile takeovers, up from 24 percent in 2008. “Today’s market conditions permit some companies to be ‘put in play’ more easily than before,” says Frederick H. Alexander, author of the report.

Certain company conditions, such as undervalued share prices and liquidity issues, can invite “bargain hunting” by acquirers. Certain pro-shareholder measures taken over the last few years, such as the elimination of poison pills, may have weakened these companies’ defense against takeover, according to the report.

The report emphasizes the importance of a board maintaining direct oversight on the risk practices of the company, and not simply delegating such responsibility further down the command chain. The report suggests that insufficient risk assessment was directly responsible for the excessively risky mortgage trades that contributed to the downfall of the world economy.

A related point of advice is of course executive compensation and the dangers posed by excessive pay. Besides piquing shareholder ire, the Conference Board report demonstrates that exorbitant pay often accompanies heedless decision-making, so that executives are motivated to take foolish risks, at the expense of shareholder value.

The report, “Overseeing Risk Management and Executive Compensation: Pressure Points for Corporate Directors,” was authored by Matteo Tonello, associate director of corporate governance research at the Conference Board. It is the first in a series of reports designed to advise directors on their new role in the crisis.

“In these difficult times, The Conference Board is renewing its commitment to provide guidance to the boards of directors of its member companies,” said Tonello. “With this series of practical reports and with the recommendations included in this new report, we are drawing upon years of research in corporate governance.”

Individual ownership of U.S. stocks has fallen to a record low. The decrease in ownership underscores the importance of institutional investors in domestic equity markets, according to the Financial Times.

At the end of 2006, retail investors owned 34 percent of all shares and 24 percent of stock in the top 1,000 companies; record lows. Compared to individual investors in 1950, who owned 94 percent of all stocks and 63 percent in 1980, the percentage rates in 2006 are exceptionally low, according to a report of by the Conference Board.

Pension funds, investment companies, insurance companies, banks and foundations, held 76 percent of the shares in the largest 1,000 companies, up from 61 percent in 2000, according to the report. The 66 percent share of all stocks held by institutions was up from 63 percent two years before.

Carolyn Brancato, a co-author of the report, said that the rise of institutional ownership meant shareholders are becoming more vocal, organized, and activist. Brancato also said that pension funds were moving further into more aggressive investments such as hedge funds, as they tried to lift returns to meet their liabilities, according to FT.

The proposed recommendations are supported by a white paper discussing the Working Group’s findings.

The Working Group focused on the following areas:

1. What corporations can do to better monitor securities holdings and learn about those accumulations of stock or extraordinary trading patterns that may reveal a hedge fund’s activism tactic.
2. What measures corporations can adopt to avoid becoming a target.
3. How boards and senior executives can react to an activism campaign and how they should respond to requests for change made by hedge funds.
4. How companies and large institutional investors can ensure integrity of the voting process in those situations where hedge funds borrow shares for the sole purpose of influencing a shareholders’ vote.
5. What considerations institutional investors should be mindful of when allocating some of their assets to hedge funds pursuing activism strategies.

The paper is available here.

The confidence level of chief executives’ dropped 44 percentin the third quarter and 39 percent in the fourth (a reading of more than 50points reflects more positive than negative responses). The last time themeasure fell below 40 was in the final quarter of 2000, when it dropped to 31.

“CEOs’ confidence in the state of the U.S. economy continues to wither and is now at aseven-year low,” said Lynn Franco, director of the Conference Board Consumer Research Center, in astatement. “Given continued trouble in the housing and credit markets, persistentvolatility in financial markets and increases in energy prices, it’s notsurprising that confidence has eroded. Looking ahead, the majority of business leadersexpect these lackluster economic conditions to prevail throughout the firsthalf of 2008.”

CEOs’ assessments of current economic conditions wereconsiderably less positive, with just 7 percent of CEOs – down from 14 percentlast quarter – stating economic conditions had improved. In looking at theirown industries, businesses leaders were also less optimistic. About 15 percentclaim conditions are better, down from 17 percent in the third quarter.

Moreover, the outlook for six months out has alsoturned negative. Presently, about 16 percent of business leaders expectconditions in the economy to improve in that time, a drop from 20 percent lastquarter. And only 17 percent are anticipating an improvement in their ownindustries, down from 27 percent last quarter.

Other key findings of a report released today, which are part of a larger study by The Conference Board that will be released early in 2008, include:

• The highest median total compensation ($3.9 million) is recorded in Utilities, Food and Tobacco, and Insurance industries, with Construction a close fourth. Median CEO compensation was computed for 22 industry groupings. Total compensation is defined as the sum of annualized salary, bonus, non-equity incentive compensation, the reported grant date present value of options, the value of stock awards, the change in pension value, and all other compensation.

• While the highest median CEO total compensation is recorded in Utilities and Food and Tobacco industries and the median CEO compensation in the Insurance industry ranks third, the median CEO cash compensation (sum of annualized salary, bonus, and non-equity incentive compensation) is highest in the insurance industry ($1.6 million).

• Not surprisingly, larger companies (in terms of revenue) compensate their CEOs at a higher level (see Chart 2). But less obvious is the notably smaller portion of compensation that is delivered through salary for CEOs of larger companies (see Chart 3). The smallest (in terms of revenue) 10 percent of companies deliver 57 percent of their total compensation in salary and the largest 10 percent of companies (in terms of revenue) deliver only 12.45 percent as salary. Inversely, the fraction of compensation delivered in the form of stock and stock options (both forms of “at-risk” compensation) increases as the revenue of the company increases.

There are several likely reasons for this mix of compensation elements. The million dollar cap on corporate tax deductibility for elements of compensation not related to performance makes it relatively more costly to compensate executives in cash using traditional vehicles such as salary and bonuses above one million dollars.

“Small companies could also rely more heavily on salary because, in general, the impact of CEO leadership (new products, marketing or processes) may be more immediate and thus effectively rewarded using shorter-term compensation,” state the authors.

The survey, sponsored by management consultancy Oliver Wyman,found that 55 percent of the risk, audit and finance executives from the nearly 200 companies thatparticipated  indicate that theircorporate boards are a top driver of their enterprise risk management program –a 6 percent increase from two years ago.

Still, ERM is not being integrated in corporate cultures ona daily basis, the study finds.  Theprogress has been mainly in early stage efforts like creating a risk inventoryand assessment process.  As a result, thebenefits of ERM – a strategic method of understanding and managing risks – havenot yet accrued in most companies.

Among other highlights, the study also found that executivesthat were surveyed indicated that in 2006, 34 percent of their boards believethat ERM is significant or highly significant in carrying out their stewardshiproles, an increase from 29 percent in 2004.

Meanwhile, there are substantial differences in ERM maturityacross several industries, including financial services, energy and utilities,which have more developed ERM processes than other industries.  Still, there has been rapid growth in ERM inthe healthcare sector over the past several years.

“Once adopted and implemented boradly throughout the firm, ERM becomes truly part of how companies do business,” Ellen Hexter, head of The Conference Board Enterprise Risk Managment Center and author of the report, said in a statement. “The goal isto create greater awareness of risk and reward tradeoffs, and to drive riskthinking and appropriate risk management throughout businesses. Ownership is acritical operational and cultural component to enterprise risk management.”

Conant, who has been CEO of Campbell Soup since January2001, was also elected as a director of the company at the time, and is thecompany’s 11^th leader in its nearly 140-year history.  Conant has brought with him to Campbell, and now to theConference Board, 25 years experience in the food industry from three of theworld’s leading companies: General Mills Inc., Kraft Foods and Nabisco.

Additionally, Conant is also a director of Applebee’sInternational Inc., Chairman of the board of directors of Students in FreeEnterprise, a trustee of the International Tennis Hall of Fame, and a boardmember of the Grocery Manufacturers Association/Food Processors of America.

The Conference Board, which creates and distributesknowledge about management and the marketplace to help businesses strengthentheir performance and better serve society, conducts conferences, makesforecasts and assesses trends, publishes information and analysis, and bringsexecutives together to learn from one another.

Vice Chairmen of the Conference Board’s Board of Trustees:

• Josef Ackermann, Chairman of the Management Board and the Group Executive Committee, Deutsche Bank AG
• Alan M. Dachs, President and CEO, Fremont Group, L.L.C.
• Harry M. Jansen Kraemer, Jr., Executive Partner, Madison Dearborn
• Nandan M. Nilekani, Co-Chairman, Infosys Technologies Limited
• Anne M. Tatlock, Director, Former Chairman and CEO, Fiduciary Trust Company International

Other Members of the Board of Trustees:

• Herbert M. Allison, Jr., Chairman, President and CEO, TIAA, President and CEO, CREF
• Alan J.P. Belda, Chairman and CEO, Alcoa Inc.
• Patrick Cescau, Group Chief Executive, Unilever PLC
• Richard T. Clark, Chairman, President and CEO, Merck & Co., Inc.
• Ian E.L. Davis, Worldwide Managing Director, McKinsey & Company
• Samuel A. DiPiazza, Jr., Chief Executive Officer, PricewaterhouseCoopers
• Jeffrey E. Garten, Juan Trippe Professor of International Trade, Finance and Business, Yale School of Management
• Anne Golden, President and CEO, The Conference Board of Canada
• Francisco González, Chairman and Chief Executive Officer, BBVA
• Klaus Kleinfeld, President and Chief Operating Officer, Alcoa Inc.
• Lim Chee Onn, Executive Chairman, Keppel Corporation Limited
• Padraig McManus, Chief Executive Officer, Electricity Supply Board
• Hutham S. Olayan, President and CEO, Olayan America Corporation
• Michael E. Roach, President and CEO, CGI Group Inc.
• Edward B. Rust, Jr., Chairman and CEO, State Farm Insurance Companies
• Mayo Schmidt, President and Chief Executive Officer, Saskatchewan Wheat Pool
• Samuel C. Scott III, Chairman, President and CEO, Corn Products International, Inc.
• Jonathan Spector, Chief Executive Officer, The Conference Board, Inc.
• Anton van Rossum, Member of the Board of Directors, Crédit Suisse Group
• G. J. (Hans) Wijers, Chairman, Board of Management, Akzo Nobel nv
• Ronald A. Williams, Chairman of the Board, Chief Executive Officer and President, Aetna Inc.
• Marjorie Yang, Chairman, Esquel Group of Companies
• Jaime A. Zobel de Ayala II, Chairman and CEO, Ayala Corporation

 
“Thisyear’s overall top challenge shows that CEOs from around the world arerealizing that strong execution is a critical factor in driving profits andrevenues,” said Jonathan Spector, president and CEO of The Conference Board.“These executives are also becoming increasingly aware of the crucial role thatpeople play in growing their companies.”

CEOs in Asia cited findingqualified managerial talent as their top concern while it ranked sixth amongCEOs in the U.S. and Europe.

“Thisyear’s overall top challenge shows that CEOs from around the world arerealizing that strong execution is a critical factor in driving profits andrevenues,”  Jonathan Spector, The Conference Board

 
Another striking differences amongglobal chieftains: Asian CEOs are more focused on seizing opportunities in China (fourthplace) compared to European CEOs (19^th place) and U.S. CEOs (20^thplace.) Similar results were seen for expansion into India:Asian executives ranked this 10^th while European leaders rated it 27^thand U.S.executives 30^th.

 
The Conference Board’s annual CEOChallenge Survey, conducted during the first quarter of this year, was based onresponses from 769 CEOs in 40 countries. Respondents were asked to rate themagnitude that each challenge poses over the next six to 12 months on a scaleof 0 (not applicable) to 5 (greatest concern).

Top 10 Concerns of CEOs:

• Excellence in execution
• Sustained and steady top-line growth
• Consistent execution of strategy by top management
• Profit growth
• Finding qualified managerial talent
• Customer loyalty and retention
• Speed, flexibility, adaptability to change
• Corporate reputation
• Stimulating innovation, creativity and enabling entrepreneurship
• Speed to market