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CEOs are still the 'ideal' choice.

Korn/Ferry International, a leading executive search firm, released in June its 19th Annual Board of Directors Study, an annual tracking of significant trends in corporate governance. The firm surveys the CEOs of the Fortune 500 industrial and service companies and 150 selected smaller companies. Highlighted below are some of the key findings from the latest study on board composition and director-selection issues.

Today's directors are more sensitive than ever to the concerns of their ever-expanding constituencies. Directors must answer not only to CEOs but also to institutional and individual shareholders, employees, regulators, the media, and the court of public opinion. As a consequence, directors have become more assertive on a variety of management issues from succession planning to senior executive compensation.

Nevertheless, many of the old rules continue to apply. Getting seated on a board still depends, in large part, on who you know:

* Fully 89% of the companies surveyed locate board members through the recommendation of the chairman.

* 81% use recommendations of individual existing board members.

* 63% locate outside directors through recommendations of other corporate officers.

* 51% use nominating committees.

* Only 3% of the boards surveyed locate outside board members through the referral of their institutional investors.

Board Composition: The top two categories from which directors are drawn are chief executive and chief operating officers of other companies (81%) and retired executives of other companies (62%).

CEOs look to their directors to give them sound counsel and a broad perspective, but they also exhibit a marked preference for individuals who understand the complexities of corporate leadership firsthand. The ideal director, from the CEOs' viewpoint, is an experienced, active CEO of a similar size or type of company. But, increasingly, CEOs say they are looking for women and minorities to expand the boards' outlook.

The presence of women on boards is at an all-time high. Women were seated on 60% of the boards surveyed, up from 56% in last year's survey and 53% five years ago.

Minority membership on corporate boards is also on the rise, having increased from 36% in the previous study to 38% in 1991. As in the past, both women and ethnic minority directors come primarily from the ranks of academia and CEOs/COOs of other companies.

There was a decline in the number of companies that reported seating attorneys and investment bankers.

Size of Board: The average corporate board continues to comprise 12 directors, the same as reported when our study began in 1973. As would be expected, companies with revenues under $400 million have the smallest boards, with an average of eight members (down from nine members in 1991), while companies with revenues of $5 billion and over report seating an average of 13 members. The largest boards are found among banks and other financial institutions, which now average 16 members. Even these boards have been downsized, however. In the past, banks and other financial institutions have reported seating an average of as many as 18 members.

Inside vs. Outside Directors: Corporate boards continue to have an average of three inside directors and nine outside directors. Five years ago, however, boards averaged four inside and 10 outside directors. According to the respondents, CEOs agree that the ideal board would seat a total of 12 directors, three of whom are insiders.

Is the Chairman Also the CEO?: Eighty percent of this year's respondents report that their chairman is also the chief executive officer, up from the 77% reported last year but the same as reported five years ago (1987). Seventy-four percent of all chief executive officers surveyed (and 85% of those at $5 billion-plus companies) see no advantage to separating the chairman and chief executive officer functions.

Locating Outside Directors: Twenty-two percent of respondents had outside directors resign from their boards during the past year, down from 28% in 1990 and 27% five years ago. Time demands was the reason most often cited, followed by retirement. Companies experiencing the most resignations of outside directors were insurance companies, at 37%, followed by banks and other financial institutions, at 28%.

Sixty-four percent of all responding companies have replaced or intend to replace all directors who retired or resigned in 1991. Forty-eight percent of all respondents expected a board vacancy in 1992, up slightly from the 46% reported last year.

While board vacancies continue to be filled predominantly through recommendations of the chairman, the use of executive search firms to locate directors was cited by 18% of the total respondents, up from 14% last year and compared with 12% five years ago. At billion-dollar companies, 22% used the services of an executive search firm to locate new directors.

Twenty-one percent of this year's respondents report that board candidates declined to serve on their boards in the past year, down from 28% in 1990 but about the same as reported five years ago.

Tenure: The average tenure of directors was reported at 10 years, the same as for last year. Forty-two percent of the respondents believe that there should be a limit to a director's term of service, up from 29% in 1990. Those who favor a limit believe that it should be 12 years.

The average age of the CEO is unchanged at 57. Outside directors, on average, are 60 years of age.

Role of Institutional Investors: Sixty-four percent of all respondents surveyed believe that institutional investors exert an influence on corporate policy, down slightly from 67% last year.

Fifty-five percent of all responding CEOs and 66% of the CEOs at the largest industrials ($5 billion and over) anticipate an increase in the involvement of institutional investors in board decisions. Only 6% expect the influence of institutional investors to diminish; 39% predict that it will remain the same.

Board Functions: For the third consecutive year, chief executive officers of responding companies rated maximizing shareholder value as a major area of concern facing their boards. Seventy-eight percent of the participants cited this issue as extremely important, up from 76% last year and 70% two years ago.

Financial results and management succession were the next most important issues considered extremely important and were ranked by 69% and 67%, respectively. Larger companies are more concerned than smaller ones with issues of management succession.

Corporate boards use various criteria to measure senior management performance. Sixty-three percent of the boards rate earnings growth as the most important factor in evaluating senior executives, followed by return on equity, at 52%. For all respondents, 47% believe return on invested capital is the best criteria; at the $5 billion-and-over companies, this rises to 63%.

Observes Richard M. Ferry, Chairman and CEO of Korn/Ferry International, "Today's CEOs are not seeking to fill their boardrooms with people like themselves because they are looking for 'rubber stamps' but because they most value the counsel of individuals who are well versed in the opportunities and challenges confronting today's businesses. CEOs are seeking visionary leaders who bring more than a dignified image to the boardroom. They look for people who have the experience to help set the company's direction and who possess the stature, seniority, and independence to advise senior management to outperform the competition."
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Title Annotation:chief executive officers
Publication:Directors & Boards
Date:Sep 22, 1992
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