Let s talk: governance - Trends in independent …

1 Let's talk: governance EY Center for board Matters Trends in independent board leadership structures October 2014. Issue 9. board leadership structures have evolved dramatically specific role the lead director plays in the leadership of over the past decade or so, with more companies the Both investors and proxy advisory firms separating the positions of chair and CEO, and use this disclosure to evaluate the company's chosen appointing independent board leaders. Today around structure . 90% of S&P 1500 companies have some form of Using the EY Center for board Matters' proprietary independent leadership compared to only 10% in 2000. corporate governance database, this report These leadership positions vary among companies reviews evolving Trends around independent board and include independent chairs and lead and presiding leadership structures, examines the key roles and the directors. The responsibilities assigned to these responsibilities most commonly assigned to these positions vary among companies as well.

2 Roles, and highlights investor initiatives There is no consensus view on best practice. Directors in this area. have different thoughts on which leadership structure is most effective and thoughts on what works best independent board leadership may change based on company-specific circumstances. Views among investors differ too. For some investors, landscape there is no substitute for an independent board chair, The trend is clear: having an independent board while others find lead or presiding directors to be leader has become standard practice. Most common sufficient provided the responsibilities are clearly are independent board chairs or lead directors with defined and robust. position responsibilities such as setting board meeting Current Securities and Exchange Commission rules agendas and controlling the flow of information to require companies to disclose in the proxy statement the board . Fewer companies have presiding directors, whether and why they have chosen to combine or likely because they are often viewed as having a more separate the CEO and board chair positions and why passive role.

3 Larger companies are more likely to have this leadership structure is the most appropriate. independent lead directors, while independent board Companies with a combined CEO/chair and a separate chairs are more common among smaller companies. lead director are also required to disclose the 1. Boards may view a Evolving independent board leadership practices at S&P 1500 companies2. time of transition as an 7% 3%. opportunity to reconsider 2000 10% independent board chair the appropriate board 30% 45% 11%. Lead director leadership structure given 2013 86%. Presiding director the company's specific 35% 47% 9%. 2014 89%. circumstances. independent board leadership structures independent vs. non- independent chair Form of independent board Type of chair independent leadership Separate Index board Index Not Lead Presiding chair/CEO independent leadership Chair independent director director Fortune 100 93% 27% 53% 14% Fortune 100 41% 27% 73%. S&P 500 94% 27% 54% 13% S&P 500 46% 27% 73%.

4 S&P MidCap 400 89% 37% 47% 8% S&P MidCap 400 59% 37% 63%. S&P SmallCap 600 85% 41% 41% 6% S&P SmallCap 600 60% 41% 59%. S&P Composite 1500 89% 35% 47% 9% S&P Composite 1500 55% 35% 65%. A small number of companies have both independent chairs and lead or presiding directors. Title matters: key responsibilities of chairs, lead and presiding directors The roles of independent chairs and lead and presiding directors at Fortune 100 companies are differentiated based on the responsibilities and levels of authority commonly assigned to them. The degree to which independent board leadership roles are explicitly defined and robust varies widely by company. Fortune 100 company independent board leadership responsibilities*. independent Shaded cells indicate that at least independent independent presiding 50% of the companies with such board chair lead director director position specifically assigned the responsibility; all other checked Authority to call shareholder meetings cells reflect where between 25%.

5 Chair shareholder meetings** and 50% of companies with such position assigned the responsibility. Chair board meetings** . Authority to call meetings of all directors *Table is based on the most recent Authority to call meetings of the independent directors proxy statements, corporate governance guidelines and bylaws Chair meetings of the independent directors of 88 Fortune 100 companies. Of Serve as liaison between management and independent directors these, 22 have independent board chairs, 48 have independent lead Approve board meeting agendas and schedules directors, and 13 have independent Approve information sent to the board presiding directors, and 5 do not have an independent board leader Be available, when appropriate, for consultation and direct . communication with shareholders in place. Lead CEO performance evaluation (often in coordination with **Reflects primary responsibility compensation committee) for chairing board and shareholder meetings. Most lead and presiding Lead annual board performance evaluation (often in coordination directors have responsibility for with nominating/ governance committee).

6 Presiding over board meetings Lead CEO succession planning (often in coordination with in the chair's absence, and some compensation or nominating/ governance committee) lead directors have responsibility Recommend committee membership and/or chairs for presiding over shareholder meetings in the chair's absence. 2 Audit committee reporting to shareholders: 2014 proxy season update S&P 1500 board leadership structures, by industry Companies in the construction industry and the power and utilities industry are most likely to have independent board leadership , while companies in the media and entertainment industry and the telecommunications industry are least likely. independent board chairs are most common among companies in the construction and pharmaceuticals industries, while lead directors are most common among aerospace and defense companies. Number of Separate independent board Form of independent board leadership Industry companies chair/CEO leadership * Chair Lead director Presiding director Aerospace and defense 24 46% 96% 21% 71% 8%.

7 Airlines 9 56% 89% 33% 44% 11%. Asset management 15 53% 93% 40% 53% 0%. Automotive 37 49% 92% 27% 51% 14%. Banking and capital markets 122 52% 93% 37% 52% 5%. Biotechnology 33 48% 94% 27% 58% 12%. Chemicals 35 34% 89% 26% 57% 6%. Construction 15 60% 100% 53% 33% 13%. Consumer products 106 44% 86% 25% 47% 18%. Diversified industrial products 136 58% 91% 36% 50% 9%. Hospitality and leisure 36 53% 86% 33% 47% 11%. Insurance 61 51% 85% 34% 46% 5%. Media and entertainment 39 62% 72% 15% 41% 15%. Mining and metals 34 47% 94% 32% 59% 3%. Oil and gas 93 56% 90% 35% 52% 5%. Other transportation 28 50% 86% 11% 46% 29%. Pharmaceuticals 75 57% 91% 44% 41% 7%. Power and utilities 65 45% 97% 32% 51% 15%. Professional firms and services 72 61% 89% 43% 42% 7%. Provider care 27 52% 85% 41% 37% 11%. Real estate 92 64% 92% 34% 51% 10%. Retail and wholesale 117 62% 86% 38% 44% 7%. Technology 210 62% 87% 43% 39% 6%. Telecommunications 19 63% 79% 42% 37% 0%. *A small number of companies have both independent chairs and lead or presiding directors.

8 board leadership debate plays out via shareholder proposals Shareholder proposals seeking the appointment of an independent board chair, as well as company-investor engagement on this topic, are drivers of change in board leadership structures. The increase in independent board chair shareholder proposals from 2000 to 2013. mirrors the significant increase in the appointment of independent board leaders over the same time period. Despite record numbers of shareholder proposals, support levels have declined in recent years. This may represent the general lack of consensus over a preferred structure . independent board chair shareholder proposals, 2000-14. 80. 61 62. 60 55. 42. 36 # proposals voted 40 31 33 32 31. 38 % support 19. 25 28. 20. 2. 0. 2000 2005 2010 2011 2012 2013 2014. Audit committee reporting to shareholders: 2014 proxy season update 3. Endnotes EY | Assurance | Tax | Transactions | Advisory 1 SEC Proxy Disclosure Enhancements rule, release number 33-9089, 16 December 2009.

9 2 Year 2000 data based on board Practices/ board Pay 2002, Investor Responsibility Research Center, 2002. About EY. EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital Let's continue markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our the conversation. people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. Find out more at or contact one For more information about our organization, please of the following professionals: visit Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US.

10 About The EY Center for board Matters Allie Rutherford Effective corporate governance is an important element in building a better working world. The EY Center for Center for board Matters board Matters is committed to bringing together and Ernst & Young LLP engaging with boards, audit committee members and investors to exchange ideas and insights. Using +1 202 327 7026 our professional competencies, relationships and proprietary corporate governance database, we are able to identify Trends and emerging governance issues. This allows us to deliver timely and balanced insights, data-rich content and practical tools and analysis to boards, audit committees, institutional investors and Ruby Sharma others interested in governance topics. Center for board Matters 2014 Ernst & Young LLP. Ernst & Young LLP All Rights Reserved. SCORE no. CF0102. +1 212 773 0078 1409-1324273 NE. In line with EY's commitment to minimize its impact on the environment, this document has been printed on paper with a high recycled content.