October 18, 2002
Board of Directors Survey Reveals Progress and Gaps in Corporate Governance
by William Baue
A recent survey of board directors at Fortune 1000 companies found improvement in some areas, but
also identified areas in need of improvement.
Yesterday, the executive search firm Korn/Ferry International released
its 29th Annual Board of Directors Study of directors at Fortune 1000 companies. The study
found some progress on corporate governance issues, but also revealed significant gaps in corporate
governance practices. Specifically, the study identified advancements in the implementation of
written corporate governance guidelines, board performance evaluations, and corporate governance
performance review committees. However, the directors expressed the need for improvement on the
issues of management succession processes, individual director evaluations, and minority
representation on boards.
The study is based on responses from 908 directors from
209 boards of Fortune 1000 companies and was conducted with Corporate Board Member magazine.
The results show an increase in the number of boards that have written corporate governance
guidelines (from 65 percent in 1995 to 71.2 percent). Other findings include an increase in the
number of boards that formally evaluate the entire board's performance on a regular basis, from 26
percent in 1995 to 36.9 percent. As well, the number of boards that have a formal committee to
review corporate governance processes and board operations rose from 41 percent in 1995 to 62.3
percent this year.
"While progress is being made, corporate boards will have to do more,
especially in light of new regulatory mandates designed to formalize corporate governance processes
in the wake of notable failures of board oversight over the past year," said Charles King, head of
Korn/Ferry's Global Board Services Practice.
The directors surveyed expressed concern
about independence. More than three quarters (78.5 percent) of directors believe that the former
CEO should not sit on the board. Just under three quarter (72.9 percent) of directors want the
board to hold regular executive sessions without the CEO present. However, less than half (41.5
percent) of boards hold such sessions, according to the study.
"The study reveals that
boards are still CEO-centric, with the majority still not even holding regular sessions without the
CEO in attendance," said James McRitchie, editor of the corporate governance watchdog website CorpGov.Net. "Independence is key but the
recent reforms won't bring it." Mr. McRitchie has filed a rulemaking petition with the Securities
and Exchange Commission (SEC) to allow shareowners more complete access to the process of
nominating and electing board directors.
A significant majority of directors (72.3
percent) also feel strongly that the performance of individual directors should be evaluated on a
regular basis. This practice occurs at less than a quarter (20.9 percent) of boards currently, and
only 41.4 percent of directors on these boards feel that these evaluations are effective.
"Evaluation of individual directors clearly has not yet taken hold as a board practice," Mr.
King said. "Boards going forward can anticipate closer examination of how they measure the
performance and, ultimately, the effectiveness of directors on behalf of shareholders, as part of
the heightened concern over how well boards are executing their crucial oversight role."
One of the three most important factors
in good corporate governance is having a formal management succession process in place, according
to the surveyed directors. However, less than two-thirds (64.1 percent) of boards have a
management succession committee or process in place, and only about half (50.6) of the directors
surveyed felt the board is effective in the management succession process.
governance rule proposals adopted by the New York Stock Exchange Board of Directors in August say
that listed companies must adopt and disclose corporate governance guidelines on management
succession and other key processes," Mr. King said. "Such mandates could create issues for the
significant percentage of companies that, according to our survey, do not even have such guidelines
or processes at this time."
A majority of surveyed directors (58.3 percent) desire a more
diverse board through increased minority representation.
Korn/Ferry intends to post the
study's findings on its website next week. Corporate Board Member magazine, which helped conduct
the study, has already posted on its website results of a broader study based on 2,041