KFMC100 Smooth CEO successions by Korn Ferry

The Korn/Ferry Market Cap 100 2012

Contents Page Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 The inside lane: AmerisourceBergen. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 The dark horse: Newell Rubbermaid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 The head start: MasterCard. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 The standout final lap: Marriott. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Conclusion: Winning a race with no finish line . . . . . . . . . . . . . . . . . . . . . . . 27 Appendix A: The KFMC100 companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Appendix B: The KFMC100 directors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Appendix C: The KFMC100 boards. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

K o r n / F e r r y I N t E r n at i o n a l

Introduction

T H E K ORN / F ERRY M AR K ET C A P 1 0 0

They were asked about their specific succession experience, in particular who on the board drove the process, how it varied depending on the scenario, and how they viewed the quality of the outcome—whether the company stayed inside, ultimately went outside, or, in one case, selected a director as the successor. Ten guiding principles for boards emerged from the interviews: •

Discuss and plan for CEO succession on an ongoing basis so that the board is prepared not only for orderly transitions but also for the unexpected.

•

Decide how involved the full board should be in the succession process and how the process should be led. Depending on the board’s composition, transition situation, and dynamics, some benefit from the involvement of all of the members and others from an effort primarily led by a committee.

To identify best practices, three vice chairmen at Korn/Ferry International with expertise in CEO succession—Dennis Carey, Stephen Mader, and Jane Stevenson—interviewed current and former top executives and directors at four companies that had changed chief executives in recent years: AmerisourceBergen Corporation, Marriott International Inc., MasterCard Worldwide, and Newell Rubbermaid Inc. Those interviewed were:

•

Be clear about the sitting CEO’s role in CEO succession. If a transition is underway, should the CEO lead a specific segment of the process, be cast as a key advisor, or have no part?

•

Ajay Banga, president and CEO, MasterCard

•

Michael Cowhig, non-executive chairman and chair of the search committee, Newell Rubbermaid

Twenty five of the Korn/Ferry Market Cap 100 companies did not specify in their proxy statement or principles of governance that they had any succession plan in place. The other 75 percent explicitly state that they maintain or review a succession plan.

•

Richard Haythornthwaite, non-executive chairman and chair of the nominating and governance/search committee, MasterCard

Two facts about CEO succession are unassailable. The first is that every chief executive now in office will, sooner or later, be replaced. The second is that many companies have either done little to prepare for a smooth transition or are using a process that is flawed. Yet some companies get it right. They recognize that CEO succession carries risks even as it offers new opportunities. Reducing those risks, by using best practices, is among a board’s most important tasks.

•

Michael B. Polk, president and CEO, Newell Rubbermaid

•

David A. Rodriguez, executive vice president and chief human resources officer, Marriott International

•

R. David Yost, former CEO, AmerisourceBergen

Figure 1

Succession plan disclosure

75% Company maintains or reviews a succession plan

25% Company does not disclose if it has a succession plan

K o r n / F e r r y I N t E r n at i o n a l

•

Commit to continual, open communication. Keep the entire board in the loop on problems and progress at all critical points.

•

Look for certain qualities in those directors leading the succession work. Are they strategically minded and highly disciplined? Do they possess a balance of judgment and intuition? Do they have CEO experience themselves?

•

Make sure that corporate strategy is the ultimate driver. Agreement is needed on where the company is going before someone can be chosen to take it there.

•

Recognize that internal candidates typically need three or more years of targeted development to step into the CEO role.

•

When the situation permits, lower the risks of choosing an outside candidate by bringing that person in early enough to be integrated into the company before being appointed as CEO, so that both the candidate and the board become comfortable with the fit.

•

Don’t rule out sitting directors as CEO candidates, but do tread carefully concerning the process and consequences of engagement. Make sure that a director isn’t an active candidate and a sitting director with accountability for the CEO decision process at the same time.

•

Use a mix of incentives to robustly fill the succession pipeline. In addition to making talent development a factor in annual bonuses for a sitting CEO, consider providing future financial upside through equity or incentive payments, based on the successful transition of the new CEO.

Ultimately, each of the four companies wound up with a CEO transition that was tailored to its own needs and realities. A smooth and sure succession shouldn’t be difficult to pull off. Companies that understand the right process, and apply it effectively, generally come out with a good choice.

Dennis Carey Vice Chairman

Stephen P. Mader Vice Chairman

Jane Stevenson Vice Chairman

T H E K ORN / F ERRY M AR K ET C A P 1 0 0

The inside lane: AmerisourceBergen It was CEO R. David Yost who set the timetable for the search that replaced him at AmerisourceBergen. “I was sixty-two when I stepped forward and said to the board, ‘Hey, guys, I just want you to know that I don’t see myself doing this for the rest of my life. I mean, sixty-four or sixty-five is probably going to be it for me.’ ” It was 2009 and Yost had been chief executive for a dozen years, first at AmeriSource Health Corporation and then, after its merger with Bergen Brunswig Corporation in 2001, at AmerisourceBergen. As a result, he had been the new company’s only CEO—making the choice of a successor that much more significant. Based in Valley Forge, Pennsylvania, AmerisourceBergen is a health care supply chain services company serving the United States, Canada, and selected international markets. It has 10,000 employees and annual revenues of $79 billion. In Yost’s view, the key to being ready for a CEO succession is for the whole board to see the process as a continual effort. His board spent time on succession planning at every meeting. “When you have [succession responsibility] only in the governance committee or the compensation committee, you run the risk of having too limited a focus,” Yost said. “You also want to be careful not to alienate the board—the succession process is best served by having the full board involved.” The leader of the succession effort, Yost said, must be able to keep everyone focused on answering one central question: what do we need the next CEO to do? That task involves looking at strategic plans and asking where

K o r n / F e r r y I N t E r n at i o n a l

the company is going to be three to five years down the road and beyond. What are the skill sets that are needed to take the company there—skills that may be substantially different from those of the incumbent? At the same time, the board should be considering internal candidates who might be ready in two or three years—and what is required to develop their skills to meet those anticipated needs. It’s also prudent to bring in independent consultants, Yost said, both to keep the board focused and to offer objective insights. At AmerisourceBergen, any abstract thinking became very concrete once Yost announced his retirement plans in 2009. As for the division of labor, the board worked primarily on defining the strategic needs. “I probably had the most influence in assessing the leadership skills,” Yost said, “because as CEO I was working with the internal candidates on a day-to-day basis.” He and the board decided not to look at external candidates until the pool of internal ones could be thoroughly assessed. With the help of their outside consultant, they identified three or four areas for development in the leading contenders. Some board members participated directly in that effort, meeting with the candidates to offer their views on how each was doing.

Figure 2

Succession oversight in the KFMC100 CEO succession planning responsibilities are often divided among individuals, committees, and the full board. Nearly half of the companies on this year’s Korn/Ferry Market Cap 100 list indicated in their proxy statements and principles of governance that the full board was involved with succession planning. Charged with oversight of succession

Full board

49%

Governance committee

39%

CEO 30% Compensation committee

22%

Development/human resources committee

22%

Chairman 3%

T H E K ORN / F ERRY M AR K ET C A P 1 0 0

At the same time, Yost kept an eye on external talent. AmerisourceBergen had made a number of key hires from the outside over the years, including its head of human resources and chief information officer. “I kept very wired to who was out there and who was looking around,” Yost said. After about a year, Yost said, “it became apparent who the successor was going to be”—Steven H. Collis, who was then executive vice president and also president of AmerisourceBergen Drug Corporation, the company’s largest subsidiary, with more “ The CEO needs to be than $60 billion in annual revenues. ready to go, and to That halted any external search beunderstand that he will fore it really started. “Now that’s a little bit of a risky run by not testing be judged by how well the marketplace, because you don’t his successor does.” know who is going to stand up,” Yost —R. David Yost confided. “But we decided that it was not too big of a risk—it was highly remote that we would find someone better.” That vote of confidence in Collis was well earned. He had made a name for himself by founding and running one of the company’s four main operating units, the specialty group. When Collis first emerged as a CEO candidate, he was moved from that unit to run the drug subsidiary so that he would get more operational experience. The move was controversial, Yost recalled, because Collis had been doing such a great job at the specialty unit. He was then promoted to chief operating officer in November 2010 to run all of the company’s businesses—a shift that was understood by the board, but not outsiders, as a sign that he had been tapped as the heir apparent. The grooming process touched other areas as well. Collis got more exposure to Wall Street—for instance, by attending investor conferences with the chief financial officer. And he got some mentoring from experienced CEOs about the complex relationship that he would have to forge with the board. Yost felt confident about passing the baton on July 1, 2011, his sixtyfourth birthday just days away. Yost had thought the succession might

K o r n / F e r r y I N t E r n at i o n a l

not come until he turned sixty-five, but he could see that Collis was ready and should step in at that point, fully engaged and fresh for the task—and that any delay could well be counterproductive. Problems arise when the CEO “wants to be remembered as the greatest deal that ever was,” Yost said. “That’s not the proper role—which is to make sure that your company goes on in perpetuity without you.” To that end, Yost suggested that part of a CEO’s bonus—and that of other senior managers—should be tied to executive development. But to further incentivize the CEO, a post-succession bonus, say two years down the road, would also be a good idea, he added. “The CEO needs to be ready to go, and to understand that he will be judged by how well his successor does,” Yost said. In other words, the CEO is just one in a never-ending line of company stewards, each responsible for putting the firm’s interests ahead of his or her own. That includes not only identifying the best successor, but also recognizing the time is right for the company. “You need to keep your ego in check and realize that you are not hiring your clone, but rather someone with leadership skills for the future,” Yost said last year, shortly before stepping down. At AmerisourceBergen, the stars aligned perfectly. “My successor was ready,” Yost said, “the board was ready, I was ready.”

T H E K ORN / F ERRY M AR K ET C A P 1 0 0

The dark horse: Newell Rubbermaid The decision by Newell Rubbermaid Inc. to pick Michael B. Polk—one of the company’s directors—last year as its new CEO is rich in ironies. If Polk, then a No. 2 at consumer products giant Unilever, had expressed interest in joining the board with the CEO’s chair in mind, Newell Rubbermaid would have been unlikely to nominate him to the board in the first place. And if the company had tried to recruit him as a director with the CEO succession in mind, Polk would have said no. He was excited by the challenges where he was and didn’t know enough about Newell Rubbermaid to see why such a move would make sense. “I was not looking for anything other than a board role and I told the search committee that,” Polk recalled. But eighteen months later, with CEO succession work fully underway for a transition the following year, Polk and Newell Rubbermaid began to fall for each other—even though neither party was acknowledging it. Newell’s directors saw the breadth of his global experience and were impressed by his impact as a strategist and operational manager. They became convinced Polk had what it would take to run Newell, a global marketer of diversified consumer and commercial products. With $6 billion a year in revenues, the company was full of complex challenges, selling multiple brands and products in multiple markets through multiple B-to-B and B-to-C channels. At the same time, Polk’s seat on the board afforded him a firsthand view of the steady progress the company had been making and the opportunities that existed in its future. He also felt a strong connection to not only his fellow directors but also Newell’s senior management team.

K o r n / F e r r y I N t E r n at i o n a l

There were several major obstacles, however. The first: both Polk and the board valued his directorship, and neither party wanted to sacrifice that relationship in order to put him into the potential CEO pool. Second, there were a number of personal and professional hurdles to clear. Polk wasn’t able to relocate to Newell’s headquarters in Atlanta, and he had an attractive long-term financial package that he would forfeit upon his departure from Unilever. Even if those could be surmounted, choosing a director to be a CEO is simply not the preferred course of action at most companies. And suddenly focusing on a director in the middle of a search brings its own issues. AmerisourceBergen’s Yost is one skeptic. “If you are hiring a guy to be Several months into the CEO, he needs to learn about the searching for their next business,” he said. “Let him be the CEO ... it became COO or something else. Having some- increasingly clear that the body go from the board to being the ideal candidate sat right CEO would make me feel uncomfortbeside them. able.” And yet, several months into searching for their next CEO—reviewing both internal contenders and a slate of highly qualified external candidates—it became increasingly clear that the ideal candidate sat right beside them. Polk had caught their eye, and the search committee members decided to seize the opportunity and deal with the dangers. Newell’s search had begun normally enough in 2010, when President and CEO Mark D. Ketchum told the board that he wanted to retire sometime in 2011. The company decided to use its executive committee as the search committee. Besides Non-Executive Chairman Michael Cowhig, the small group included the chairs of the audit, compensation, and nominating/ governance committees—and notably not Polk. The final selection, though, would be a full board decision. Cowhig had a number of reasons for placing the search responsibility in the hands of a smaller group. For one thing, outside candidates tend to worry about confidentiality if too many people are aware of their job

T H E K ORN / F ERRY M AR K ET C A P 1 0 0

discussions. For another, a small group enabled expeditious decision making. (Accordingly, the committee alone interviewed outside candidates. Internal candidates were interviewed by Cowhig and the chairman of the nominating/governance committee.) A third reason was the heavy demands of the search; not all directors would be able to dedicate so much extra time and effort. Finally, Cowhig also wanted true consensus around the next CEO. If the full board, or even a larger group, was involved in the nitty-gritty of the search, directors who argued for a selection other than the winning candidate would feel compromised. Cowhig preferred the promise of crisp alignment. Indeed, before embarking on the actual search, the board agreed to review the company’s key strategic assumptions about its future course since those assumptions would determine the criteria for choosing the new CEO. Cowhig wanted a dialogue liberated of “ownership” issues or sacred cows. The board utilized a search firm to facilitate private interviews with each director followed by a full-board discussion that included input from Ketchum. Finally, an executive session was held, without Ketchum, during which the consensus on strategic assumptions was baked into the profile specification for the next CEO. In this way, the directors shook hands on the shape of the selection in a manner that would prevent a dispute later on. Although Ketchum, as outgoing CEO, did not drive the process, neither was he isolated from it. He was not involved in the external interviews, for instance, but was consulted about assessing the internal candidates, whom he knew more deeply than the other directors did. The committee also sought his guidance on how its decisions might affect the company and key executives. Ketchum was treated as a director with special knowledge, and he was updated more frequently by the committee than were other directors. Again with the help of an outside search firm, Newell’s internal candidates were interviewed and external candidates were identified and also interviewed. It was near the finish line of that extensive process, however, that the search committee began to suspect that Polk might make a superior candidate.

K o r n / F e r r y I N t E r n at i o n a l

As it happened, in another unlikely twist, Ketchum had himself been plucked from the board, albeit in the middle of an urgency. He was named the interim CEO in 2005 when Joseph Galli resigned. But even with that transition as precedent, the search committee realized that it was on new ground here. It was one thing to temporarily elevate a director as interim CEO and then determine to make that appointment permanent; it was an entirely different matter to pick someone from the board during an orderly succession process.

It was one thing to temporarily elevate a director as interim CEO and then determine to The key to managing Polk’s candida- make that appointment cy without disrupting his ongoing di- permanent; it was an rectorship was to treat him outside of entirely different matter to the rest of the succession process. By pick someone from the the time he was engaged, Polk was board during an orderly not competing with alternative candidates nor did the committee mem- succession process. So when Polk came into focus, Cowhig and the other committee members came up with novel ways to handle the situation.

bers feel that Newell Rubbermaid was competing with Polk’s role at Unilever. They had rightly calculated that their discussion would be about whether a responsible set of terms could be established that set Polk up to succeed. If not, both parties could step away on that premise alone, and Polk could continue as an effective director. Because of the decision to use a small search committee, Polk also hadn’t been involved in any of the succession interviews. That enabled the committee to keep him insulated and separate from the final CEO candidates. The members also kept preliminary negotiations with him to themselves; if the contours of a viable deal could be reached, only then would the committee bring Polk forward to the board as its first choice. After eighteen months as a director, Polk had a grasp of Newell’s future possibilities and a sense of how well he could shape them. For their part, the members of the search committee had come to know and value Polk to an extent that would not have been possible had he simply popped up

T H E K ORN / F ERRY M AR K ET C A P 1 0 0

as a strong outside candidate. By virtue of their time with him, they were confident enough in his abilities to take not just the next step, but also to go the extra mile. They would see whether they could meet the requirements of his candidacy for CEO that they otherwise may have viewed as far too risky for a smooth and cost-effective transition. When the committee was ready, it briefed the organizational development and compensation committee and Cowhig met individually with the remaining board members, covering the pre-negotiated conditions to gauge whether the board would approve them. When that was clear, the search committee pursued Polk as a finalist, but with the freedom to turn to any of the other candidates if it or Polk reconsidered. He didn’t. Polk became president and CEO on July 18, 2011. The board also took full advantage of Ketchum’s availability to overlap with Polk’s initiation for continuity’s sake. He remained as a director for three additional board meetings. The successful outcome of Newell’s novel succession underscores the value of trusting in the search. For all the best-laid plans, in the end the search committee and the board were open to finding the right person no matter where that person happened to be: inside, outside … or even in the next chair.

K o r n / F e r r y I N t E r n at i o n a l

The head start: MasterCard There are many times, of course, when there is no “right” internal candidate—or director—and the search for a new CEO leads to someone from outside. This is a riskier proposition, in theory, if only because of the unknowns: What is this candidate really like? How well does he or she understand our needs? Can the new person mesh well with our culture? One way to reduce those risks is to recruit a prospective successor before the baton is expected to pass. That way the individual can become a known quantity. In the late summer of 2009, MasterCard brought in Ajay Banga, a senior executive at Citigroup, to be its president and chief operating officer. Less than a year later, he was named to succeed Robert W. Selander, MasterCard’s CEO since 1997. “This was a succession that could be planned a long way in advance because we knew Bob’s retirement date,” recalled Richard Haythornthwaite, MasterCard’s non-executive chairman, who led the search. That retirement date was the end of 2010. The succession process started in mid-2008. Plenty of time, indeed. There were only three problems. First, MasterCard had become a public company through a public stock offering in 2006 and the full board had been in place for only a couple of years; the directors felt as if they were parachuting into the succession situation. Second, the board was uncertain about the prospects for an internal finalist. And, third, the financial crisis that was roaring in full force in 2008 put a cloud over the field of outside possibilities.

T H E K ORN / F ERRY M AR K ET C A P 1 0 0

What’s more, the succession effort needed clear leadership because of the highly diverse nature of MasterCard’s board. Its directors had richly varied governance experiences and, although very aligned on the longterm objectives of the company, held a robust range of views on shorterterm priorities. Logically, the person at the helm of a CEO succession would be the nonexecutive chair/lead director or the chairman of the nominations committee, according to Haythornthwaite. But he hastened to add that the board title doesn’t matter so long as the individual has the right qualities. The leader needs to be strategically minded and disciplined to run the process tightly. A good balance of judgment and intuition is also necessary. And CEO experience helps. The chief executive’s role is “enormous in terms of accountability, and people who have not been in that position can never quite understand that,” he said. A close relationship with the incumbent CEO is also essential. “Things come out of the woodwork—for example, the CEO’s view of the role that he or she should be playing in the succession process,” Haythornthwaite said. Some CEOs, for instance, subconsciously enter the process thinking it’s their job to find the successor. “That’s quite difficult—sometimes some pretty tough conversations have to be held saying, ‘No, that’s not the way it is. It’s actually the board that makes the decision—and you’re just one member. And it’s the board that must live with the decision, not you.’ ” In MasterCard’s board structure, a human resources/compensation committee had been working on a continuing basis with Selander on leadership development and succession planning. In theory, it was the nominating and corporate governance committee, which Haythornthwaite headed, that was responsible for the actual selection of the next CEO. In practice, the chairman of the HR/compensation committee, David Carlucci, was co-opted in and a de facto search committee formed. When the search committee members reviewed Selander’s list of top internal candidates, “we came at it with an open mind” but recommended to the full board that it pursue an external search, Haythornthwaite said. That recommendation was accepted, and then the task became get-

K o r n / F e r r y I N t E r n at i o n a l

ting Selander to agree that the next CEO would come from outside the company. “That’s why it is important to have a good working relationship with the outgoing CEO,” the chairman said. “That’s not an easy conversation to have.” Not only was Selander gracious and understanding of the board’s view, he remained fully involved in the process of finding that outsider. “We cannot imagine a world where we would move forward with someone that you didn’t think was an appropriate candidate,” Haythornthwaite recalled telling Selander, “not least because there is going to be a transition here.” Although the final recommendation would come from the search committee, he added, “it had to be a consensual decision.” So, even though Selander wasn’t an official member of the board’s search committee, as chairman, Haythornthwaite made sure that he was invited to every key discussion and spent time with short-listed candidates before they completed the interview process.

“ You have to come in with a strategy before you come in with people. The people need to be a fit to the strategy.” — Richard Haythornthwaite

When the search got underway with the support of an external consultant, the search committee found that candidates fell into two categories. One group had the strategic vision, ideas, and wherewithal to make big changes—and could ensure that the company could respond to the significant systemic challenges that it faced. The other group, the chairman said, was less creative and more buttoned-down, but would have been better suited to lead the company through a short-term period of market weakness. Different directors favored different candidates depending on their expectations of the external world. A number of candidates were considered, some seriously, but no one completely clicked—until a board member suggested Banga, then chairman and CEO of Citibank’s international global consumer group. “I looked into Ajay and met him at my home,” the chairman said. “And he was the first person who really straddled the two groups. From the moment I met him, I just felt this is the individual we’d been looking for.”

T H E K ORN / F ERRY M AR K ET C A P 1 0 0

Banga not only had the nuts and bolts of the business down cold, he had big ideas. Indian-born and educated, he had worked at Nestlé and Pepsi before joining Citi and put in tours of duty in the United States, Europe, the Middle East, Africa, and, of course, India. He was almost as international as MasterCard itself. (Based in Purchase, New York, MasterCard operates in more than 210 countries and territories and has annual revenues of $6.7 billion.) Meetings with the search committee were hastily arranged and all came to the same conclusion. As did the board. “It was unanimous,” the chairman said. “We closed the deal pretty rapidly.” Looking back, it was clear that the board, new as it was to the post-IPO MasterCard, was pulling its strategic vision into focus in real time, even as it was searching for a successor. Had the company chosen one of the earlier contenders, it might have misstepped. Though capable, those candidates likely would have been the wrong fit for the strategy that finally fell into place. “You have to come in with a strategy before you come in with people. The people need to be a fit to the strategy,” Haythornthwaite said. Circumstances were such for MasterCard that these issues were being necessarily addressed concurrently rather than sequentially. Banga joined MasterCard on Aug. 31, 2009, as president and COO. The following April he was named CEO, formally replacing Selander on July 1, 2010. Selander, who had been CEO for thirteen years, stayed on as executive vice chairman and a director until he retired at the end of 2010. “Coming from the outside to become the CEO is not an easy thing to do,” Banga said. “Having this little transition period gave me a chance to learn the company, get to know the people, and have someone to sound out ideas with. It was very helpful.” It also gave him time to get to know the analyst community, the media, regulators, and, of course, clients— all before facing the daily pressure of producing results as the CEO. When determining the length of this sort of transition, the board has to be extremely careful, Haythornthwaite added. “It’s always better to make it quite short, with the option to lengthen it. It’s a lot tougher to have it long and try to shorten it.”

K o r n / F e r r y I N t E r n at i o n a l

T H E K ORN / F ERRY M AR K ET C A P 1 0 0

In office now a little more than two years, Banga spends much of his time developing talent within the company and introducing up-andcoming leaders to the board in an ongoing effort to prepare for his own succession, whether the need arrives suddenly or far down the road.

appreciate the capabilities that the new CEO must possess to meet those challenges. The leader also needs to have had experience managing an organization to understand the politics and logistics of settling into a new company.

“Developing a good pipeline—not just potential CEO candidates for the near term, but also for the second and third levels of leadership further out—is 50 percent of what a CEO should be doing,” he said.

By contrast, those committee members with ongoing oversight of the talent pipeline are in it for the long haul. Though they don’t need to have had CEO experience themselves, they do need senior management experience and longevity—and they must be very process-driven. How do you build a pipeline two or three levels down from the CEO? How do you identify and develop missing skills in those people? How do you pick jobs that they should move into? “The results may take years to play out and there is a lot of ambiguity involved,” Banga said. “But some people are only interested in the end conclusion—they want to see the last page first—and they shouldn’t be involved.”

When it comes to succession, Banga and others we interviewed made an important distinction between the development of a talent pipeline of future leaders and the actual search for and selection of a new CEO. The nonexecutive chairman or independent lead director should head the latter effort, including any external search. But the identification and development of future leaders should be driven by the chief executive and overseen by a board committee.

“ Developing a good pipeline—not just potential CEO candidates for the near term, but also for the second and third levels of leadership further out—is 50 percent of what a CEO should be doing.” — Ajay Banga

Likewise, Banga sees different skills at work. The individual managing the event of a CEO change needs to be inclusive and draw in a wide group of board members. That leader needs some longevity to understand the company (the thought of a new chairman looking for a new CEO is “scary,” he says), have a grasp of the challenges it is facing, and

Banga takes a hands-on approach to developing his executive team. He uses each board meeting to introduce to the directors some of the eighty or so rising talents in the company. And each year he leads a “people conversation” with the board, explaining how he’s developing layers of leaders who in future years will move up to the thirty-five-person operating committee, and later the eight-person executive committee. When he saw gaps in key skill areas early this year, he took action. The solution: “Let’s go hire four or five people, some relatively senior. We briefed a search company and by May 1 had them all in.” Ideally, someone should be ready to take over tomorrow morning, at

Figure 4

Emergency succession

Figure 3

Leading succession on the board Only 37 percent of the companies in the Korn/Ferry Market Cap 100 indicated in their proxy statement or principles of governance that the existing chairman of the committee overseeing succession planning either was or is a CEO of a public company.

Only 17 percent of the Korn/Ferry Market Cap 100 companies specified in their proxy and governance statements that they had a plan or person at the ready in the event of a sudden CEO departure. Stated plan for interim CEO

Currently a CEO

14%

Written procedures in place

Former CEO

23%

List of potential successors

K o r n / F e r r y I N t E r n at i o n a l

least on an interim basis, with a permanent replacement ready in a year or two and other internal candidates being groomed for the five-year horizon. “You just hope that by the time we get to the point of succession, we’ve got three or four good internal candidates,” Haythornthwaite said. “It’s always a challenging process because the end time is generally not as precise as it was with Bob. And so there’s a hedging process that goes on with the development.”

T H E K ORN / F ERRY M AR K ET C A P 1 0 0

The standout final lap: Marriott

But when it comes time to make a change at the top of MasterCard, Banga said he will be ready to hand the final decision over to the board. A sitting CEO “should not have an equal say in succession decisions,” Banga added. “Once the board and its committee are comfortable and they’ve got it down to the one or two people they really like, they can ask me for my opinion, but finally they should be making every call. My opinion as CEO should, at best, just be interesting to have.”

At first blush, the most striking thing about the new CEO of Marriott International, Inc. is that his last name is not Marriott. In late March, Arne Sorenson became the first person from outside the family to run the global hotel company. He succeeded Bill Marriott Jr., who had served as CEO for forty years after taking over from his father, the company’s founder, who had led it for the previous forty-five years. Sorenson had been with the Bethesda, Maryland-headquartered company for twenty years before being named CEO, starting out as a promising outsider who over time turned into a highly trusted insider. But Sorenson was still rigorously tested before being handed the CEO’s mantle. To be sure, Sorenson’s route to the top was shaped in part by the company’s family history and dynamics. A public company, Marriott is still more than 20 percent owned by Marriott family members. But those circumstances aside, the succession was guided by the same broad principles that were employed by AmerisourceBergen, MasterCard, and Newell Rubbermaid. “Succession should be a process, not an event,” said David A. Rodriguez, Marriott’s executive vice president and chief human resources officer. “It has to be continuous, comprehensive, and rooted in both today’s and tomorrow’s business.” Succession planning is not a job for “casual board members,” he noted. Those involved in a CEO search need to have a firm grasp on the strategy. They have to “immerse themselves in today’s pressures and issues while also gaining insight into how the industry is changing. You don’t

K o r n / F e r r y I N t E r n at i o n a l

want to choose a CEO for a model that is tied to yesterday’s business— you need to choose someone with the right attributes and characteristics to push the company to where it needs to be five and ten years down the road,” he noted. In Marriott’s case, Rodriguez said, one of the key drivers of change is a looming generational shift in customers from baby boomers to their children, the millennials. Marriott has 3,700 lodging properties in seventy-four countries and territories and annual revenues of more than $12 billion, and baby boomers are still the company’s bread and butter. But soon profitability will be tied much more to the younger generation. That inevitable shift—what Rodriguez called a “liminal” moment—was just one of the themes that was shaping the future of the business and therefore succession. Another was the recognition that a successful transition isn’t about choosing just a CEO, but rather making sure that the right leadership team is in place or being developed. “You need to be looking at all the roles surrounding the CEO,” Rodriguez said. “Is this the right person to help that team keep growing with the business?” And then there was the family theme. Given the central role that Bill Marriott had played over six decades at the company—he turned what had been a restaurant business in his father’s day into a hotel giant—any change at the top was bound to be a “bit of a shock to the system,” Rodriguez said. It was essential that the search, which was conducted by the compensation committee, “be extremely thoughtful in assessing the

Figure 5

T H E K ORN / F ERRY M AR K ET C A P 1 0 0

candidates for their ability to deal with the subtleties and special elements of the situation.” Sorenson wasn’t the only candidate in the running to succeed Marriott. But the two had developed a special rapport over the years. And Sorenson had been tested and tested again as a senior manager. He caught the attention of Marriott while representing the company as its lead outside lawyer in what was arguably the most important transaction in Marriott’s history, the separation of its real estate assets from the hotel management business. Impressed with Sorenson’s work, Marriott brought him inside, starting him out in mergers and acquisitions. A few years later, when the CFO left, Sorenson was tapped for that job, “ You can’t have a lot of horses running neck and even though his background wasn’t in finance. neck close to the finish

line, and the best way to

“Mr. Marriott saw his talent,” Rodrinarrow the field is to put guez said, adding that Sorenson also their feet to the fire.” won the CEO’s trust. “A very impor— David A. Rodriguez tant piece to the succession puzzle was Bill’s level of trust with the candidates. I don’t think any family leadership thinks that it can’t wait to hand over the reins to a non-family member. But very early on, we had a sense Arne would be a good candidate.” As the succession process picked up speed, a winnowing of the candidates began. “You can’t have a lot of horses running neck and neck close to the finish line,” Rodriguez said, “and the best way to narrow the field is to put their feet to the fire.” In Sorenson’s case, that meant becoming president of the company’s European operations in addition to being CFO. “It was important to see him accountable for a full business, with all the different roles that are implied,” Rodriguez said. “We had a long look at him in that venue.”

Depth of succession plans Only 57 percent of the companies in the Korn/Ferry Market Cap 100 reported that their boards oversaw succession plans that extended below the CEO level. Succession plan encompasses

All key corporate officers

11%

All senior managers

46%

Not specified

43%

Others were put through the same rigorous paces. “They were stars too, and no one failed,” Rodriguez said. “It was just that every time Arne got a new assignment, he got better. By the last couple of years, the choice

K o r n / F e r r y I N t E r n at i o n a l

T H E K ORN / F ERRY M AR K ET C A P 1 0 0

wasn’t cloudy at all—it was very clear that he was the top candidate and he had the tools to be CEO.” On March 31, just days after he turned eighty, Marriott passed the reins to Sorenson and took up a new role as the company’s very active executive chairman.

Conclusion: Winning a race with no finish line

For Rodriguez, who was “charged with thinking about succession from Day 1” when he joined the company fifteen years ago, it was the end of a long process. But he didn’t get much downtime before starting up again. “Three days before the transfer, Arne and I shared a great laugh,” Rodriguez recalled. “He looked at me and said, ‘Oh, by the way, we need to figure out what we are going to say to the board at the next meeting about picking my successor.’ ”

CEO succession may not be rocket science, but it is not a cookie-cutter process, either. The guiding principles for getting it right not only have to be understood, but also adapted to a company’s particular situation. “It never ceases to amaze me how simultaneously simple and complex succession stories are,” said Korn/Ferry’s Stevenson. “There are underpinning guidelines that point the way to the right process, yet the application of that process is so widely diverse, depending as it does on the board, the CEO, the business strategy, and the type of challenges that are unique to each company.” Indeed, the successions described above differed in many ways. Yost played a central role in picking his successor at AmerisourceBergen, for instance, while Ketchum, his counterpart at Newell, was a crucial advisor without driving the project. Nor did every company get everything right—as with MasterCard having to play catch-up in aligning its strategy with its CEO profile. The common denominator, though, was a commitment to continuing the succession process until the company hit pay dirt. In one telling similarity, those in charge of the succession process at each company knew with real conviction when the winner had been found. “In the end, you’ve got to wait for the right candidate to come along,” MasterCard’s Haythornthwaite said. “You have to make expedient decisions as you go—and you have to have a bit of luck thrown in.” As the four case studies in this report reflect, details always vary. But ten guiding principles stood out as a bold outline of an effective succes-

K o r n / F e r r y I N t E r n at i o n a l

T H E K ORN / F ERRY M AR K ET C A P 1 0 0

sion. We hope these are helpful as boards continue to exercise their succession responsibilities with more efficiency, effectiveness, and confidence.

committee. This is essential both to keep the directors informed and to detect and address issues as they surface. Also, directors often give access to useful information out in the market.

Never stop planning. CEO succession is an ongoing process that begins anew the day after a CEO is chosen. “It is important that you not only have a long-term plan in place but also a ‘train wreck’ scenario, should the CEO become incapacitated,” said Yost. Yet the majority of companies may not be prepared to name a new CEO should the need suddenly arise, according to proxy and governance statements filed by firms that are on this year’s list of the Korn/Ferry Market Cap 100. Only 17 percent indicated that they had identified an interim replacement, annually reviewed a list of candidates, or had written procedures in place. What’s more, 25 percent did not indicate that they had any succession plan, short or long term.

Agree on the strategy first. The board must reach consensus on the future business environment and the strategy to address it. Then, and only then, is it ready to define the attributes that the new CEO must have to pursue that strategy. The process used to win alignment on strategy can vary. The one employed by Newell Rubbermaid stands out for its thoroughness: use an outside party to interview each director and the outgoing CEO, then have a full group discussion, and reach final alignment at the executive committee level.

Pick your succession leader with care. Whether it’s the lead director, board chairman, or a committee chair, whoever leads a CEO selection process must have a solid sense of the company’s strategy and future outlook. He or she needs to be: highly disciplined, able to devote significant extra time to the task, intuitive about people, and trustworthy in the eyes of the board. CEO experience is also highly recommended so that the search leader knows firsthand what the role will demand of a candidate. Define the board’s role. The search for a new CEO can be run boardwide or delegated to a committee. Pick the structure that plays to your board’s strengths and dynamics, recognizing that there are tradeoffs in each approach. Involving every director may require more time to make decisions and pose confidentiality issues. A narrow approach may limit the process’ focus and make final consensus harder. Define the sitting CEO’s role. The CEOs in some circumstances lead and manage the succession process. In others, the CEO is cast as an important advisor. The key is to make a conscious decision and reach a clear agreement with the CEO on his or her participation. Keep talking. Recognize the central importance of communication to the full board, particularly if the search process has been delegated to a

Develop and test internal candidates. Preparing viable internal candidates for future succession is a long-term process that typically requires at least three years of focused effort with high board participation. The identification and development of future leaders encompass filling seats “ The idea is to go outside in advance with a runway in the second and third tiers of management as well as at the top of the to make sure that the house. Banga, MasterCard’s CEO, is a flight path to the CEO’s great example. He showcases seventyoffice is going to work.” five to eighty rising stars to his board —Stephen P. Mader on an ongoing basis. Give a prospective CEO a head start. When possible, lower the risks of choosing an outsider by strategically bringing the person into the company with enough time to learn its culture and how its current leadership operates. This way, by the time the succession is finalized, the new CEO and the board should be deeply familiar with each other and comfortable with the fit. “The idea is to go outside in advance with a runway to make sure that the flight path to the CEO’s office is going to work,” said Korn/Ferry’s Mader. Don’t rule out directors ... but never appoint one with the anticipation of CEO succession. If a strong candidate happens to be on the board when a successor is needed, the director’s title needn’t be an insurmountable barrier. There are two choices when considering a sitting director: bring the candidate into the process with the understanding that

K o r n / F e r r y I N t E r n at i o n a l

his or her director status will terminate regardless of the outcome, or keep the candidate out of the main search process and proceed along a separate discreet path so that the candidacy is “reversible” and the directorship viable should either party not want to go further. Use a mix of incentives to prime the pipeline. Part of a CEO’s annual bonus should be tied to executive development. Some companies go one step further: providing for a bonus after the CEO has left if the successor he or she helped to select was, in fact, a winner.

T H E K ORN / F ERRY M AR K ET C A P 1 0 0

About the 2012 Korn/Ferry Market Cap 100 The Korn/Ferry Market Cap 100 (KFMC100) are the U.S. companies that had the largest market capitalization as of the close of markets on May 1, 2012, after the end of most firms’ 2011 fiscal year. Companies were removed from the list if they were not traded primarily on the NYSE or Nasdaq, or were public investment firms.

Appendix A: The KFMC100 companies There were eight companies that joined the ranks of the KFMC100 in FY 2011: Biogen Idec Inc. Celgene Corp. Exelon Corp. Kimberly-Clark Corp.

priceline.com Inc. Starbucks Corp. The TJX Companies, Inc. Yum! Brands, Inc.

T H E K ORN / F ERRY M AR K ET C A P 1 0 0

K o r n / F e r r y I N t E r n at i o n a l

Figure 6

Figure 8

KFMC100 by market capitalization

The Korn/Ferry Market Cap 100

The KFMC100 companies had a median market capitalization of $57.2 billion on May 1, 2012, after the close of most companies’ fiscal year. Exactly 24 percent of companies were valued at $100 billion or more.

The KFMC100 ranked in order of market capitalization as of the close of markets on May 1, 2012.

Market Cap

Number

Market cap in billions on May 1, 2012

Rank

Co.

$40 billion – $59.99 billion

Apple Inc. (NasdaqGS: AAPL)

$546.1

$60 billion – $79.99 billion

Exxon Mobil Corp. (NYSE: XOM)

$406.0

Integrated oil and gas

$80 billion – $99.99 billion

Microsoft Corp. (NasdaqGS: MSFT)

$267.0

Systems software

$100 billion – $149.99 billion

International Business Machines Corp. (NYSE: IBM)

$238.9

IT consulting and other services

$150 billion – $199.99 billion

Chevron Corp. (NYSE: CVX)

$210.2

Integrated oil and gas

$200 billion and over

General Electric Co. (NYSE: GE)

$207.1

Industrial conglomerates

Wal-Mart Stores Inc. (NYSE: WMT)

$200.3

Hypermarkets and super centers

Google Inc. (NasdaqGS: GOOG)

$197.2

Internet software and services

AT&T, Inc. (NYSE: T)

$193.3

Integrated telecommunication services

Johnson & Johnson (NYSE: JNJ)

$178.7

Pharmaceuticals

Wells Fargo & Co. (NYSE: WFC)

$177.1

Diversified banks

Procter & Gamble Co. (NYSE: PG)

$174.4

Household products

Pfizer Inc. (NYSE: PFE)

$172.6

Pharmaceuticals

The Coca-Cola Co. (NYSE: KO)

$172.3

Soft drinks

JPMorgan Chase & Co. (NYSE: JPM)

$162.1

Other diversified financial services

Conglomerates 3

Philip Morris International, Inc. (NYSE: PM)

$153.5

Tobacco

Consumer goods

Oracle Corp. (NasdaqGS: ORCL)

$146.3

Systems software

Financial 11

Intel Corp. (NasdaqGS: INTC)

$142.2

Semiconductors

Health care

Merck & Co. Inc. (NYSE: MRK)

$119.4

Pharmaceuticals

Verizon Communications Inc. (NYSE: VZ)

$114.7

Integrated telecommunication services

Technology 14

QUALCOMM Inc. (NasdaqGS: QCOM)

$109.4

Communications equipment

Utilities 2

Cisco Systems, Inc. (NasdaqGS: CSCO)

$108.6

Communications equipment

Amazon.com Inc. (NasdaqGS: AMZN)

$104.5

Insternet retail

Pepsico, Inc. (NYSE: PEP)

$103.2

Soft drinks

McDonald’s Corp. (NYSE: MCD)

$99.0

Restaurants

Schlumberger Limited (NYSE: SLB)

$98.9

Oil and gas equipment and services

Abbott Laboratories (NYSE: ABT)

$97.6

Pharmaceuticals

Citigroup, Inc. (NYSE: C)

$96.8

Other diversified financial services

$30 billion – $39.99 billion

Figure 7

Industry sectors represented Services was the most represented sector among the KFMC100 with twenty-two companies. The KFMC100 included fifteen basic materials companies, but that was a significant drop from 2011, when that sector comprised twenty companies. Consumer goods, on the other hand, added three companies to the list, for thirteen. Sector Count

Basic materials

Industrial goods

Services 22

Industry

Computer hardware

Market cap in billions on May 1, 2012

T H E K ORN / F ERRY M AR K ET C A P 1 0 0

K o r n / F e r r y I N t E r n at i o n a l

Market cap in billions on May 1, 2012

Industry

Rank

Co.

Integrated oil and gas

Eli Lilly & Co. (NYSE: LLY)

$46.2

Pharmaceuticals

$87.4

Other diversified financial services

Enterprise Products Partners LP (NYSE: EPD)

$45.4

$82.7

Data processing and outsourced services

Oil and gas storage and transportation

Express Scripts Inc. (NasdaqGS: ESRX)

$44.9

Health care services

Comcast Corp. (NasdaqGS: CMCSA)

$81.5

Cable and satellite

Starbucks Corp. (NasdaqGS: SBUX)

$43.2

Restaurants

The Home Depot, Inc. (NYSE: HD)

$79.0

Home improvement retail

Ford Motor Co. (NYSE: F)

$42.9

Automobile manufacturers

Walt Disney Co. (NYSE: DIS)

$77.3

Movies and entertainment

Las Vegas Sands Corp. (NYSE: LVS)

$42.2

Casinos and gaming

United Parcel Service, Inc. (NYSE: UPS)

$74.9

Air freight and logistics

Monsanto Co. (NYSE: MON)

$40.6

Fertilizers and agricultural chemicals

United Technologies Corp. (NYSE: UTX)

$74.3

Aerospace and defense

The Dow Chemical Co. (NYSE: DOW)

$40.4

Diversified chemicals

Occidental Petroleum Corp. (NYSE: OXY)

$74.0

Integrated oil and gas

Southern Co. (NYSE: SO)

$39.9

Electric utilities

Kraft Foods Inc. (NYSE: KFT)

$70.7

Packaged foods and meats

Medtronic, Inc. (NYSE: MDT)

$39.8

Health care equipment

American Express Co. (NYSE: AXP)

$70.3

Consumer finance

Gilead Sciences Inc. (NasdaqGS: GILD)

$39.4

Biotechnology

Caterpillar Inc. (NYSE: CAT)

$67.1

Construction and farm machinery and heavy trucks

Target Corp. (NYSE: TGT)

$38.7

General merchandise stores

Altria Group Inc. (NYSE: MO)

$65.6

Tobacco

Emerson Electric Co. (NYSE: EMR)

$38.6

Electrical components and equipment

3M Co. (NYSE: MMM)

$62.0

Industrial conglomerates

Costco Wholesale Corp. (NasdaqGS: COST)

$38.3

Hypermarkets and super centers

U.S. Bancorp (NYSE: USB)

$61.5

Diversified banks

MetLife, Inc. (NYSE: MET)

$38.2

Life and health insurance

American International Group, Inc. (NYSE: AIG)

$61.0

Multi-line insurance

priceline.com Inc. (NasdaqGS: PCLN)

$37.9

Internet retail

EMC Corp. (NYSE: EMC)

$59.2

Computer storage and peripherals

Loweâ&#x20AC;&#x2122;s Companies Inc. (NYSE: LOW)

$37.7

Home improvement retail

The Goldman Sachs Group, Inc. (NYSE: GS)

$58.7

Investment banking and brokerage

Danaher Corp. (NYSE: DHR)

$37.7

Industrial machinery

UnitedHealth Group, Inc. (NYSE: UNH)

$58.5

Managed health care

Apache Corp. (NYSE: APA)

$36.9

Oil and gas exploration and production

CVS Caremark Corp. (NYSE: CVS)

$58.1

Drug retail

Anadarko Petroleum Corp. (NYSE: APC)

$36.6

The Boeing Co. (NYSE: BA)

$57.5

Aerospace and defense

Oil and gas exploration and production

MasterCard Incorporated (NYSE: MA)

$57.2

Data processing and outsourced services

Texas Instruments Inc. (NYSE: TXN)

$36.5

Semiconductors

Freeport-McMoRan Copper & Gold Inc. (NYSE: FCX) $36.4

Diversified metals and mining

Bristol-Myers Squibb Co. (NYSE: BMY)

$56.4

Pharmaceuticals

Time Warner Inc. (NYSE: TWX)

$36.2

Movies and entertainment

Amgen Inc. (NasdaqGS: AMGN)

$55.5

Biotechnology

General Motors Co. (NYSE: GM)

$36.0

Automobile manufacturers

Union Pacific Corp. (NYSE: UNP)

$53.5

Railroads

PNC Financial Services Group Inc. (NYSE: PNC)

$35.0

Regional banks

eBay Inc. (NasdaqGS: EBAY)

$53.0

Internet software and services

Praxair Inc. (NYSE: PX)

$34.6

Industrial gases

Morgan Stanley (NYSE: MS)

$34.2

Investment banking and brokerage

Rank

Co.

ConocoPhillips (NYSE: COP)

$91.7

Bank of America Corp. (NYSE: BAC)

Visa, Inc. (NYSE: V)

Industry

Nike Inc. (NYSE: NKE)

$51.3

Footwear

E.I. du Pont de Nemours & Co. (NYSE: DD)

$50.1

Diversified chemicals

Yum! Brands, Inc. (NYSE: YUM)

$33.5

Restaurants

DIRECTV (NasdaqGS: DTV)

$33.3

Cable and satellite

Hewlett-Packard Co. (NYSE: HPQ)

$49.0

Computer hardware

News Corp. (NasdaqGS: NWSA)

$47.8

Movies and entertainment

Exelon Corp. (NYSE: EXC)

$33.2

Electric utilities

VMware, Inc. (NYSE: VMW)

$47.7

Systems software

Deere & Co. (NYSE: DE)

$33.1

Honeywell International Inc. (NYSE: HON)

$47.3

Aerospace and defense

Construction and farm machinery and heavy trucks

Colgate-Palmolive Co. (NYSE: CL)

$47.2

Household products

National Oilwell Varco, Inc. (NYSE: NOV)

$32.3

Oil and gas equipment and services

K o r n / F e r r y I N t E r n at i o n a l

Market cap in billions on May 1, 2012

Appendix B: The KFMC100 directors

Rank

Co.

Biogen Idec Inc. (NasdaqGS: BIIB)

$32.1

Biotechnology

Celgene Corp. (NasdaqGS: CELG)

$32.0

Biotechnology

Halliburton Co. (NYSE: HAL)

$31.6

Oil and gas equipment and services

The TJX Companies, Inc. (NYSE: TJX)

$30.9

Apparel retail

Baxter International Inc. (NYSE: BAX)

$30.8

Health care equipment

Kimberly-Clark Corp. (NYSE: KMB)

$30.7

Household products

$30.2

Drug retail

100 Walgreen Co. (NYSE: WAG)

T H E K ORN / F ERRY M AR K ET C A P 1 0 0

Industry

Turnover on KFMC100 boards remained remarkably low in fiscal year 2011. There were only ninety total appointments—including seven new CEOs—to this group of 1,190 directors, a turnover rate of only 7.6 percent. The following list includes all directors who joined a KFMC100 board in fiscal year 2011. Those new directors who are also CEO of that company are marked with an asterisk (*). Mukesh D. Ambani

James W. Breyer

New board

Profile

Bank of America Corp. Chairman and Managing Director, Reliance Industries Limited Other board

Reliance Industries Limited Kate Baicker New board

Eli Lilly & Co. Profile

Professor of Health Economics at the Harvard University School of Public Health Shumeet Banerji New board

Hewlett-Packard Co. Profile

Chief Executive Officer, Booz & Co. James Bell New board

News Corp. Managing Partner, Accel Partners Other boards

Wal-Mart Stores Inc.; Dell Inc. J. Frank Brown New board

The Home Depot, Inc. Profile

Former Dean, INSEAD M. Michele Burns New board

The Goldman Sachs Group, Inc. Profile

Executive Director and CEO, Retirement Policy Center sponsored by Marsh & McLennan Companies Inc. Other boards

Cisco Systems, Inc.; Wal-Mart Stores Inc.

JPMorgan Chase & Co.

David L. Calhoun

Profile

New board

Retired Executive Vice President, The Boeing Co. Other board

The Dow Chemical Co. Sally E. Blount

Caterpillar Inc. Profile

CEO, Nielsen; Former Vice Chairman, General Electric Co. Other boards

New board

Nielsen Holdings NV; The Boeing Co.; Medtronic, Inc.

Profile

Larry Casey

Abbott Laboratories Dean of the J.L. Kellogg Graduate School of Management at Northwestern University Robert Bradway New board

Amgen Inc. Profile

President and COO, Amgen Inc. Other board

Norfolk Southern Corp.

New board

Enterprise Products Partners LP Profile

Private Investor; Senior Director, Duncan Energy Partners LP

K o r n / F e r r y I N t E r n at i o n a l

T H E K ORN / F ERRY M AR K ET C A P 1 0 0

Elaine Chao

David B. Dillon

Jesse J. Greene Jr.

Scott D. Josey

New board

Profile

Other boards

Other board

Wells Fargo & Co. Former U.S. Secretary of Labor Protective Life Corporation; Dole Food Co. Inc. Kevin P. Chilton New board

Anadarko Petroleum Corp. Profile

Retired Commander, United States Strategic Command, Offutt Air Force Base Other boards

DIRECTV Chairman and CEO, The Kroger Co. The Kroger Co. Dixon Doll New board

DIRECTV Profile

Co-Founder and General Partner, DCM Other board

Network Equipment Technologies, Inc.

Orbital Sciences Corporation; Level 3 Communications Inc.

Anne M. Finucane

Elizabeth J. Comstock

Profile

New board

Nike Inc. Profile

New board

CVS Caremark Corp. Global Strategy and Marketing Officer, Bank of America Corp.

Senior Vice President and Chief Marketing Officer, General Electric Co.

John H. Fitzpatrick

Timothy Cook*

Profile

New board

American International Group, Inc.

New board

Chairman, Oak Street Management Co.

Profile

Kenneth C. Frazier*

Other board

Merck & Co. Inc.

Apple Inc. Chief Executive Officer, Apple Inc.

New board

Nike Inc.

Profile

W. Don Cornwell

Other board

New board

American International Group, Inc.

President and CEO, Merck & Co. Inc. Exxon Mobil Corp. Michael A. Friedman

Caterpillar Inc. Former Vice President of Financial Management, Chief Financial Risk Officer, Vice President, and Treasurer, International Business Machines Corp. Judd Gregg New board

Honeywell International Inc. Profile

Former U.S. Senator from New Hampshire; Former Governor of New Hampshire Other board

Ford Motor Co.

Other boards

Candace Kendle

Dean, Leonard N. Stern School of Business, New York University

New board

Helen Hobbs

Co-Founder and Former Chairman and CEO, Kendle International Inc.

New board

Pfizer Inc. Profile

Profile

Evan G. Greenberg

Profile

New board

President, CEO, and Principal Executive Officer, Sysco Corp. Other board

Sysco Corp.

The Coca-Cola Co.

Apple Inc.

Profile

Other board

HJ Heinz Co. Paal Kibsgaard* New board

Schlumberger Limited Profile

CEO, Schlumberger Limited Joel Klein New board

News Corp. Profile

Walt Disney Co. Omar Ishrak*

Charles A. Koppelman

Other board

New board

Profile

Other board

Chairman and CEO, Medtronic, Inc.

ACE Limited

United Parcel Service, Inc.

Executive Vice President, Education Division, News Corp.; Former Chancellor of the New York City Department of Education

President and CEO, Walt Disney Co.

Medtronic, Inc.

Chairman, President, and CEO, ACE Limited

President, Emerald Creek Group; Former Chairman and CEO, Continental Airlines

Profile

Express Scripts Inc.

The Boeing Co.

Chubb Corp.; Marriott International, Inc.

Kraft Foods Inc.

Profile

New board

Lawrence W. Kellner

New board

Bill DeLaney

Profile

Peter B. Henry

Robert Iger

Chief Operating Officer of Global Innovation and Growth, Colgate-Palmolive Co.

New board

Profile

Zipcar, Inc.

New board

Kimberly-Clark Corp.

Steven A. Kandarian*

Other board

Fabian Tito Garcia

Former Mayor of Chicago; Managing Principal, Tur Partners LLC

Senior Advisor, Warburg Pincus LLC

New board

General Partner, Greylock Partners

New board

The Coca-Cola Co.

Profile

Richard Daley

Other board

Apache Corp.

CEO, MetLife, Inc.

New board

MannKind Corp.

Profile

New board

William W. Helman IV

Pfizer Inc.; Avon Products Inc.

Other boards

Celgene Corp.

Chansoo Joung

MetLife, Inc.

President and CEO, City of Hope

Former CEO and Chairman, Granite Broadcasting Corporation

New board

Former CEO and Chairman, Mariner Energy, Inc.; CEO, Sequitur Energy Management LLC

IntercontinentalExchange Inc.

Investigator, Howard Hughes Medical Institute; Professor of Internal Medicine and Molecular Genetics and Director of the McDermott Center for Human Growth and Development, University of Texas Southwestern Medical Center

Profile

Apache Corp.

Las Vegas Sands Corp. Chairman and CEO, CAK Entertainment, Inc. Other board

Six Flags Entertainment Corp.

K o r n / F e r r y I N t E r n at i o n a l

T H E K ORN / F ERRY M AR K ET C A P 1 0 0

Blake G. Krikorian

Nancy McKinstry

Lorrie Norrington

Gary M. Reiner

New board

Profile

Amazon.com Inc. Founder, id8 Group Productions Inc. Ellen J. Kullman New board

Abbott Laboratories Chairman and CEO, Wolters Kluwer N.V. Other boards

Sanoma Oyj; Ericsson; Wolters Kluwer N.V.

United Technologies Corp.

Kathryn McQuade

Profile

New board

Chairwoman and CEO, E.l. DuPont de Nemours & Co.

Altria Group Inc. Profile

E.l. DuPont de Nemours & Co.

Executive Vice President and Chief Financial Officer, Canadian Pacific Railway Limited

Rodger A. Lawson

Eduardo G. Mestre

New board

Profile

Other board

UnitedHealth Group, Inc. Retired President and CEO, Fidelity Investments Financial Services Mike O. Leavitt New board

Medtronic, Inc. Profile

Former Governor of Utah; Former U.S. Secretary of Health and Human Services; Chairman, Leavitt Partners Inc. Teri List-Stoll New board

Danaher Corp. Profile

Former Vice President of Finance, Procter & Gamble Co. Ann M. Livermore

Mohd H. Marican

Schlumberger Limited Profile

Deputy Chairwoman and CEO, Olayan Financing Co. Other boards

Avis Budget Group Inc. Katie Mitic New board

eBay Inc. Profile

Former Director of Marketing, Facebook Inc. Jon Moeller New board

Monsanto Co. Profile

Chief Financial Officer, Procter & Gamble Co. William C. Montgomery New board Profile

Kalpana Morparia New board

Philip Morris International, Inc. Profile

Dr. Reddyâ&#x20AC;&#x2122;s Laboratories Limited

Other board

Dennis A. Muilenburg

Morgan Stanley Profile

Retired Chairman and CEO, Caterpillar Inc. Other boards

International Business Machines Corp.; Alcoa Inc. Federico Pena New board

Wells Fargo & Co. Profile

Senior Advisor, Vestar Capital Partners; Former U.S. Secretary of Energy; Former U.S. Secretary of Transportation Other board

Nike Inc.; Procter & Gamble Co.

Philip Morris International, Inc. Profile

Chairman, Safilo Group S.p.A.; Former CEO and President, Gucci Group NV

Hewlett-Packard Co. Former CEO and Director, Alcatel-Lucent; Former Vice Chair of the National Security Telecommunications Advisory Committee Other boards

Merck & Co. Inc; KKR & Co. L.P.; General Motors Co.; Alcoa Inc. Robert E. Sanchez New board

Texas Instruments Inc. Profile

President of Global Fleet Management Solutions, Ryder System, Inc. Ronald L. Sargent New board Profile

Other boards

The Kroger Co.; Staples, Inc. Tom Schoewe New board

Other boards

General Motors Co.

Rima Qureshi

Former Executive Vice President and Chief Financial Officer, Wal-Mart Stores Inc.

New board

Other boards

Safilo Group S.p.A.; Reed Elsevier NV

MasterCard, Inc. Profile

Lowell C. McAdam*

Executive Vice President, The Boeing Co.; President and CEO, Boeing Defense

Joshua Ramo

Caterpillar Inc.

New board

Chief Executive Officer, Staples, Inc.

New board

Profile

Chairman, President, and CEO, Verizon Communications Inc.

Other boards

Robert B. Polet

Senior Vice President and Business Unit Head, CDMA Mobile Systems, Ericsson

Profile

President and CEO, TV One, LLC

The Home Depot, Inc.

New board

Verizon Communications Inc.

Profile

Sonic Corp.

Sembcorp Marine LTD; SembCorp Industries New board

Comcast Corp.

Profile

Other boards

New board

CEO, J.P. Morgan India Private Limited

Former President and CEO, PETRONAS

New board

Johnathan A. Rodgers

Other board

New board

ConocoPhillips

Lubna S. Olayan

Genpact Limited

James W. Owens

Profile

United Parcel Service, Inc.

Autodesk Inc.

Other board

Vice Chairman, Evercore Partners Inc.

Managing Director, Quantum Energy Partners

Other board

Special Advisor, General Atlantic

Patricia F. Russo

New board

Executive Vice President, Technology Solutions Group, Hewlett-Packard Co.

Former President, eBay Marketplaces at eBay

Hewlett-Packard Co.

WPP PLC; Chelsfield Partners LLP; Saudi Hollandi Bank

Comcast Corp.

Apache Corp.

Hewlett-Packard Co.

DIRECTV

Profile

Northrop Grumman Corp.; KKR & Co. L.P.; PulteGroup, Inc.; Centex Corp. Dominique Senequier New board

Hewlett-Packard Co.

New board

Profile

Other boards

Starbucks Corp. Vice Chairman, Kissinger Associates Other board

FedEx Corp.

Chairman and CEO, AXA Private Equity Cir-Compagnie Industriali Riunite S.p.A.; Schneider Electric SA

K o r n / F e r r y I N t E r n at i o n a l

T H E K ORN / F ERRY M AR K ET C A P 1 0 0

Clara Shih

Lee Thomas

Ralph Whitworth

New board

Profile

Starbucks Corp. CEO and Director, Hearsay Labs Inc. Elliott Sigal

E.I. DuPont de Nemours & Co. Former Chairman and CEO, Rayonier Inc. Other boards

Hewlett-Packard Co. Principal, Relational Investors LLC

Rayonier Inc.; Georgia-Pacific Group; Hercules Inc.

Ronald A. Williams

New board Profile

Donald Thompson

Profile

Bristol-Myers Squibb Co. Executive Vice President, Chief Scientific Officer, and President, R&D, Bristol-Myers Squibb Co. Other board

Mead Johnson Nutrition Co. Sherry Smith

New board

McDonald’s Corp. Profile

President and Chief Operating Officer, McDonald’s Corp. Other board

New board

Johnson & Johnson Former Chairman and CEO, Aetna Inc. Other boards

The Boeing Co.; American Express Co. Eric Wiseman New board

Exelon Corp.

Lowe’s Companies Inc.

Deere & Co.

Robert D. Walter

Chairman, President, and CEO, VF Corp.

Profile

New board

Executive Vice President and Chief Financial Officer, Supervalu Inc. Richard Snell New board

Enterprise Products Partners LP Profile

Senior Counsel, Thompson & Knight LLP Deborah L. Spar New board

The Goldman Sachs Group, Inc. Profile

President, Barnard College

American Express Co. Profile

Founder and Former Chairman and CEO, Cardinal Health, Inc. Other boards

Nordstrom Inc.; Yum! Brands, Inc. Alberto Weisser New board

Pepsico, Inc. Profile

Chairman and CEO, Bunge Limited Other board

Bunge Limited

Roy Tamakoshi

Miles D. White

New board

Morgan Stanley Profile

Senior Advisor, The Bank of TokyoMitsubishi UFJ, Limited Other board

The Kansai Electric Power Co. Inc. Masaaki Tanaka New board

Morgan Stanley Profile

Resident Managing Officer for the United States, Mitsubishi UFJ Financial Group Inc. Marc Tessier-Lavigne New board

Pfizer Inc. Profile

President, The Rockefeller University Other board

Regeneron Pharmaceuticals Inc.

Caterpillar Inc. Profile

Chairman and CEO, Abbott Laboratories Other boards

Abbott Laboratories; McDonald’s Corp. Tony L. White New board

CVS Caremark Corp. Profile

Former Chairman, President, and CEO, Applied Biosystems, Inc. Other boards

Ingersoll-Rand plc; Bard Inc. Margaret C. Whitman* New boards

Procter & Gamble Co., Hewlett-Packard Co. Profile

President and CEO, Hewlett-Packard Co.; Former President and CEO, eBay Inc. Other board

Zipcar, Inc.

Profile

Other boards

VF Corp.; Cigna Corp.

K o r n / F e r r y I N t E r n at i o n a l

T H E K ORN / F ERRY M AR K ET C A P 1 0 0

Figure 12

Figure 9

Number of boards served among new KFMC100 directors

Age of directors

Among the KFMC100 class of 2011, a large majority of the directors (in this case including CEOs) were on only one or two boards. In FY 2010, about 13 percent of directors served on four or more boards; in FY 2011, that rate dropped to less than 5 percent.

Excluding CEOs, there are 1,130 individual directors in the KFMC100, the bulk of whom are in their fifties and sixties. Only 5 percent are under age fifty or over seventy-five. The average age of directors, again excluding CEOs, is 62.9.

Number of boards served

5% 75 and over

14% 70 to 74

5% 49 or younger 10% 50 to 54

16% 55 to 59

28% 65 to 69

2 22% 60 to 64

0 50 Number of directors

Figure 13

Figure 10

CEOs on KFMC100 boards

Gender balance of KFMC100 directors

CEOs past and present remain highly desirable as directors, but that experience appears to be harder to come by as companies limit CEO availability for outside board service.

Although nearly all—96 percent—of boards have at least one female director, women make up only 20 percent of all KFMC100 directors. However, of the eighty-three directors added to these boards in FY 2011, 28 percent were women. The average number of women on a board, excluding CEOs, is 2.25.

Past or present CEO experience with a public company

Seats newly filled in FY 2011

35%

Incumbents’ seats

43% 19% Female

Figure 11

Governance experience KFMC100 boards primarily, but not exclusively, added directors with previous board experience with a public company. New directorships by governance experience

81% Male (n= 83)

First time directors

Experienced directors

H E K ORN / F ERRY M AR K ET C A P 1 0 0

K o r n / F e r r y I N t E r n at i o n a l

Appendix C: The KFMC100 boards

Figure 14

Demographics of new KFMC100 directors Boards in the KFMC100 made incremental progress on diversity among directors: American minorities were appointed to 16 percent of new directorships vs. 11 percent of the incumbent directorships. Note that ethnicity information was unavailable for 114 of the incumbent directors.

Seats newly filled in FY 2011 (n=83)

Incumbents’ seats (n=1,100)

10.0%

African-American

6.0%

Asian-American

4.8% 1.8%

Hispanic-American

2.4%

Figure 17

Board size The median size for a board was 11.9 directors and 85 percent of boards had between ten and fifteen directors. 4% 16 to 17 directors

11% 7 to 9 directors

2.6% 32% 13 to 15 directors 53% 10 to 12 directors

Figure 15

Nationality of KFMC100 directors After a jump to 21.4 percent in FY 2010, the percentage of foreign director appointments to KFMC100 boards fell back to 13 percent in FY 2011. Nationality data was unavailable for sixty-six of the 1,190 incumbents.

American Non-American

Seats newly filled in FY 2011

87%

13%

Incumbents’ seats

86%

14%

Figure 18

Board independence In the KFMC100, 81 percent of boards had one or two executive directors. The rest were independent directors. 12% 3 executive directors 7% 4 to 7 executive directors

Figure 16

Global experience of KFMC100 directors

26% 2 executive directors

In addition to nationality, other indicators of global experience stayed steady in FY 2011, with little variation between the incoming class of ninety directors (including CEOs) and the 1,100 incumbents.

55% 1 executive director

International work experience

Seats newly filled in FY 2011

29%

Incumbents’ seats

27%

Born and or educated abroad

Seats newly filled in FY 2011

16%

Incumbents’ seats

17%

K o r n / F e r r y I N t E r n at i o n a l

H E K ORN / F ERRY M AR K ET C A P 1 0 0

Figure 19

Figure 21

Who is the chairman?

Board meetings

At two-thirds of companies, the CEO is also the chairman of the board. Thirty-four companies have a non-CEO chairman.

Just over half of the KFMC100 boards met seven or fewer times in FY 2011. The average number of board meetings was 8.4, down slightly from an average of 8.7 in FY 2010.

11% Non-executive chairmen

17% 4 to 5 meetings

23% Chairman or executive chairmen

13% 13 to 22 meetings 34% 6 to 7 meetings

66% CEO is also chairman of the board 21% 10 to 12 meetings

15% 8 to 9 meetings

Figure 22

Figure 20

Cash retainers for directors

BRIC experience on KFMC100 boards

The median cash retainer for directors in the KFMC100, excluding meeting attendance bonuses, is $100,000, an increase of $20,000 from 2011. At 81 percent of boards, the cash retainer is between $50,001 and $125,000. Only two companies, Amazon.com Inc. and Yum! Brands, Inc., offer no cash retainers.

Although 88 percent of KFMC100 boards include directors who held a significant work assignment outside the United States, only a third of those had members with experience in the fast growing BRIC nations—Brazil, Russia, India, or China.

>$150,001 $125,001 – $150,000

10%

28%

Figure 23

$75,001 – $100,000

40%

$50,001 – $75,000

31%

$25,001 – $50,000

11% 4%

0% 50%

88%

One or more directors with work experience specifically in BRIC countries

$100,001 – $125,000

$0 – $25,000

One or more directors with work experience anywhere outside the U.S.

KFMC100 retirement age policies Seventy-nine of the KFMC100 companies have an established retirement age for directors, though twenty of those have granted exceptions. Additionally, companies with no retirement age actually have a lower average age among directors, suggesting that such policies are having little if any effect. Retirement policies Number

Exceptions granted

Average director age

62.8

Have a mandatory retirement age policy

Have retirement policy that explicitly allows exceptions

62.8

No retirement policy

62.6

K o r n / F e r r y I N t E r n at i o n a l

T H E K ORN / F ERRY M AR K ET C A P 1 0 0

About Korn/Ferryâ&#x20AC;&#x2122;s Board & CEO Services Practice Figure 24

Duration of directorships in the KFMC100 Directors in the KFMC tend to serve a long time on boards. Though the average tenure overall is 7.8 years, among the eighty-seven directors who left in FY 2011, the average tenure was 11.1 years. The average age of a departing director was 67. 100

69% Directorships held for 9 or fewer years

Korn/Ferry International has recruited CEOs and board directors for more than 40 years. Our dedicated Board & CEO Services practice is committed to improving governance practices worldwide. Our approach includes Board Director and CEO Search and Selection, CEO Succession Planning and Assessment, Board Effectiveness, and Director/Executive Compensation Consulting. Visit www.kornferry.com/BoardCEOServices for more information.

31% Directorships held for 10 years or more

Key contacts

Figure 25

Individual director review policy in the KFMC100 Board renewal and improvement are sometimes approached by a vigorous annual review of each individual director. In the KFMC100, fewer than half of boards currently have that as a stated policy in their annual proxy statement.

Dennis Carey Vice Chairman Korn/Ferry International +1 215 656 5348

Stephen P. Mader Vice Chairman Korn/Ferry International +1 617 790 5700

Jane Stevenson Vice Chairman Korn/Ferry International +1 404 222 4022

53 Boards with no stated individual review policy 47 Boards that perform individual reviews of directors

ÂŠ 2012 Korn/Ferry International

About Korn/Ferry International Korn/Ferry International (NYSE:KFY), with a presence throughout the Americas, Asia Pacific, Europe, the Middle East and Africa, is a premier global provider of talent management solutions. Based in Los Angeles, the firm delivers an array of solutions that help clients to attract, deploy, develop and reward their talent. Visit www.kornferry.com for more information on the Korn/Ferry International family of companies, and www.kornferryinstitute.com for thought leadership, intellectual property and research.

Our Locations Worldwide The Americas Atlanta Bogota Boston Buenos Aires Calgary Caracas Chicago Dallas Durango Houston Irvine Lima Los Angeles Medellin Mexico City Miami Minneapolis Monterrey Montreal New York Northern Virginia Philadelphia Princeton Quito Rio de Janeiro San Francisco Santiago Sao Paulo Stamford Toronto Vancouver Washington DC

Auckland Bangalore Beijing Brisbane Guangzhou Hong Kong Jakarta Kuala Lumpur Melbourne Mumbai New Delhi Seoul Shanghai Singapore Sydney Taipei Tokyo Wellington

Europe, Middle East & Africa Amsterdam Athens Barcelona Brussels Budapest Casablanca Copenhagen Dubai Frankfurt Geneva Helsinki Istanbul Kiev London Lyon Madrid Milan Moscow Oslo Paris Rome Stockholm Vienna Warsaw Zurich

2012KFMC