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In July, Deutsche Bank AG’s plans for CEO succession made headlines. Although current CEO Josef Ackermann’s contract does not expire for two years, the bank hoped to soothe investor concerns and ease political tensions by naming a successor. In fact, it named two. Closer to home, the board of Apple had—in uncharacteristic fashion—begun talking publicly about succession planning just prior to the announcement that Tim Cook would replace Steve Jobs as CEO.
Despite growing attention on succession planning among investors, regulators, and other constituencies, only 39 percent of all U.S. public companies have a formal succession plan for CEOs and senior executives set forth in corporate disclosure documents, according to preliminary data from the 2011 NACD Public Company Governance Survey. The survey includes responses from 1,281 directors, senior managers, general counsels and corporate secretaries at U.S. public companies.
The issue of CEO succession has been among the hottest topics of 2011 with a large number of shareholder proxy proposals filed at annual meetings seeking disclosure of succession planning strategies. For their part, board members are well aware of their responsibilities in this important area, highlighting it as one of the most important functions of the board in the annual NACD Directorship “What Society Thinks?” survey, although in the survey of public company directors, 26 percent of respondents listed executive development and talent management as a major priority.
While less than half of the companies in the Public Company Governance Survey reported having formally defined succession plans, some 52 percent of directors attest to having general discussions on the topic of CEO succession throughout the year. These conversations typically center on replacing the CEO in an emergency and identifying potential internal successors. Perhaps surprisingly, nine percent of respondents say their board has no plans at all for CEO succession.
In addition to succession planning, directors face a broad array of issues, and with the enactment of many Dodd-Frank provisions, such as say on pay and enhanced d
irector qualification disclosure requirements, the duties and concerns of board directors have become more onerous. Despite the shifting landscape and the changes forced upon corporations in the aftermath of the global financial crisis, in excess of 90 percent of directors report they are comfortable with the composition and structure of their boards and suggest that current governance structures enhance their ability to do their jobs.
While issues such as succession planning and say on pay have been the focus of media attention, those inside the boardroom point to strategic planning and oversight, corporate performance and valuation, and risk and crisis oversight as the most important issues facing boards and companies this year.
Most boards continue to operate under a similar structure to 2010, with a majority having a combined CEO and chairman position, especially at companies with larger market capitalizations. Of those companies with combined leadership positions, 65 percent have a designated lead director. It is widely considered to be a best practice to appoint a lead director to represent the voice of independent directors and to lead executive sessions of the board. A majority of those surveyed by NACD who represent public company boards with a combined CEO/chair and a lead director on board believe that having a lead director enhances the effectiveness of the board. A mere 29 percent of companies surveyed have an independent chairman.
For companies with independent lead directors, 50 percent have tenure of one year, while almost 16 percent have tenure of six years or more. The level of shareholder activism around this issue saw an unexpected decline in 2011 with only 24 proposals added to proxy statements calling for the establishment of an independent board chair. This represents a decrease of more than 38 percent from 2010 and 2009 levels, according to ISS data.
Attendees at a recent roundtable hosted by NACD Directorship in Chicago argued that for a lead director to have any significant impact he or she must control the board meeting agenda and lead—not just the executive session—but also the board meeting. Failure to do so creates the position in name only and does not have any significant impact on the structure or functioning of board governance. To this point, a full 81 percent of public company survey respondents who serve on boards with a lead director declared that the “lead” either sets or assists in setting the board agenda and determining the board’s informational needs.
Boards and management typically share a collaborative relationship and, in most cases, management has ownership of corporate strategy while there are some elements of strategy and function that are more likely to be the sole purview of the board. Slightly more than 28 percent of those surveyed said that the establishment of nonfinancial goals for the CEO was the sole responsibility of the board, whereas only two percent said development of a long-term strategy is solely the board’s responsibility.
Compensation is increasingly becoming part of the conversation with regards to corporate strategy and performance. Most directors—80 percent, in fact—said they believe that the company’s compensation program has improved corporate performance. Furthermore, 76 percent believe that CEO performance is commensurate with compensation. In order to have that conversation, it is necessary to measure performance, a task that can be among the most vexing and confusing for directors and outside experts alike. There are many different elements that must be taken into account when assessing performance. The most common measure among activist shareholders and the media is share price, but directors weight this metric less heavily than other factors when measuring overall performance. For directors, profits appear to be the most relevant measure followed by revenue.
Of course, it is not possible to measure performance without a time frame. Most compensation commentators discuss long-term performance but don’t necessarily define “long term.” In the NACD survey, 65 percent of public company board members define long term as three years or less while only 19 percent define it as five years or greater.
More results from the 2011 NACD Public Company Governance Survey will be featured in upcoming issues. NACD members will receive an electronic copy of the full report. Nonmembers may buy the report at NACDonline.org.