Spencer Stuart Board Index: How Boards Are Changing

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division of labor: CEO vs. chairman

Boards now seek directors with experience in finance, risk management, and technology, for example, or they look for executives who have global experience. While this change has undeniably resulted in the loss of some of the leadership expertise and big-picture perspective that CEOs can bring, it also has infused many boards with energy, fresh ideas, and a broader diversity of perspectives.

• Strategy, risk management, and succession planning are high on the board agenda. Some 67% of respondents in the SSBI study said the board's role in corporate strategy discussions was among the issues demanding the most focus from the board, compared with 31% in 2008. S&P 500 boards also are placing more focus than before on risk management (50% said this was a top concern) and CEO succession planning (45%), according to the survey.

• More boards are considering whether to split the responsibilities of the chairman and CEO. Governance activists have long advocated that American public companies divide the chairman and CEO roles between two people, a practice that is already commonplace in the United Kingdom. The financial crisis reignited demands from a range of stakeholders that boards establish the nonexecutive chairman role. Many boards have made the decision in favor of this division of labor. Ten years ago, 80% of S&P 500 company CEOs were also the chairmen of their boards. Since then, the percentage of boards that combine the chairman and CEO roles has steadily declined, to 74% in 2004, and 63% in 2009.

• The board of directors has taken ownership of director recruitment. No longer tapped through social or professional networks by CEOs, boards have assumed responsibility for director recruitment and put in place a thoughtful process to attract and evaluate director candidates. Boards approach the task of identifying and screening new director candidates in a more strategic and hands-on manner than in the past, and director candidates typically undergo rigorous vetting by the nominations committee before joining the board. As a result of this new recruiting mindset and process, the mix of directors around the board table is starting to look quite different.

Of new directors in 2009, 17% were retired senior executives, including retired CEOs, COOs, and presidents; 18% had financial backgrounds; 21% were corporate executives in general management roles; and 8% were academics and nonprofit leaders.

be proactive, anticipate, communicate

What's next for corporate boards? Whatever the specific requirements that ultimately emerge from the SEC or Congress, directors should understand that the rules of corporate governance have changed. The environment in which boards operate today is highly dynamic, influenced by the changing expectations of shareholders, regulators, employees, and even customers. Boards will face pressure to continually raise the bar on their governance practices as shareholders push for more transparency into board activities and more influence over certain board decisions—including executive compensation and director recruitment. All this suggests several implications for corporate boards:

• Boards need to be sensitive to the fact that corporate governance is dynamic. Directors should stay abreast of developments in governance and be willing to question how they do things and what can be done better. Boards will want to have robust discussions about the range of issues and potential consequences of governance changes. Boards should continue to move along directions that are sound and not wait to adopt useful practices until they are mandated. By understanding the forces behind change, boards and CEOs can work closely together to define and implement the most effective governance practices for their organizations.

• Boards should improve communication with shareholders. Ongoing communication between the board and the company's top shareholders can improve shareholders' understanding of the board's corporate governance practices and help the board stay ahead of investor concerns. In addition, communication with investors through vehicles such as the proxy should reflect a genuine interest in transparency.

• Directors should ensure that the board has the right mix of skills. Directors should continuously review the board's skill sets relative to the company's strategy and direction to ensure that the board as a whole has the knowledge, experience, and skills to guide the management team as it addresses new challenges and market opportunities. The annual board self-evaluation is a natural platform for the full board to review its composition and discuss the expertise that it will need in the future.

• Finally, boards should have in place a CEO succession-planning process that is robust, sustainable, credible, and based on the company's strategic direction. Increasingly, boards will be asked to disclose some dimensions of their succession-planning process, and should be prepared to do so. In addition to planning for long-term succession needs, boards also should be in a position to accelerate a CEO transition in response to performance problems or other emergency succession needs. In the most effective processes, the board gets to know potential internal candidates in both formal and informal settings, ensuring that they are benchmarked against the external talent marketplace.

Julie Hembrock Daum leads Spencer Stuart's director recruiting efforts and is the co-leader of the North American Board and CEO Succession Practice of Spencer Stuart, the leading executive search firm in the boardroom.

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