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USC/Mercer Delta Study Finds Only One-Third of Directors Believe New Governance Standards Will Improve Boards

Published 01-12-04

Submitted by Mercer Delta Consulting, LLC

NEW YORK - Mercer Delta Consulting, in conjunction with The Center for Effective Organizations at the University of Southern California's Marshall School of Business, today released results of a study that found that only 31% of Directors believe that new governance practices will greatly improve the operation of Boards, 35% think that they will assure Boards will detect unethical behavior, and 38% feel that they will better protect shareholders.

The findings of the study are based on responses from 249 Directors(1) of Fortune 1000 companies in the US, representing over 200 corporate Boards. Surveys, composed predominantly of multiple choice questions, were mailed to Directors between April and November, 2003.

Despite an overall lack of confidence in recently introduced governance standards, the study found that 91% of Directors surveyed are positive overall on the effectiveness of their Boards, but when asked more probing questions relating to the Board's role, structure, processes and composition, responses were less positive. Moreover, almost half (44%) of the Directors surveyed reported that their Board does not currently conduct any type of formal performance evaluation.

"We are not surprised to see such a large number of Directors indicating a lack of confidence in the ability of the new regulatory environment to improve governance among US corporations," said Dr. David Nadler, chairman, Mercer Delta Consulting, a global management consulting firm that works with CEOs, senior leaders and Boards of Directors on corporate governance and large scale organizational change. "Our experience tells us that you cannot legislate behavior, and regulations and adherence to best practices, while necessary, do not sufficiently influence the dynamics in the Boardroom, which are the true drivers of Board effectiveness.

"What is surprising, however, is that such a large number of Directors are so positive about themselves and their Boards, despite the fact that only half conduct formal Board evaluations to provide a comprehensive assessment of their true performance and overall contribution to the governance of their corporations, including key areas such as their role in shaping long-term corporate strategies, succession planning, influence over meeting agendas and access to independent channels of information."

Impact of Changes

When asked which changes are likely to have the most positive impact on the effectiveness of Boards in general, 59% of respondents cited the requirement that a majority of Directors be independent. This was followed by having an audit committee of independent Directors (40%), audit committee control of auditors (24%), Board evaluations (23%) and tighter rules for independence (23%)

About half of the Directors surveyed said that the new governance practices would be effective or very effective in: motivating Boards to perform well (51%), improving the power of Boards (48%) and ensuring that Boards have the information they need (46%). Forty-one percent(41%) of the Directors responded that the new governance practices would be effective or very effective in improving the overall performance of Boards.

"We question whether relying on Boards made up of independent Directors is the best solution," said Edward Lawler, professor and director of The Center for Effective Organizations at the University of Southern California. "Having Boards that are made up almost entirely of independent Directors can certainly contribute to the power of Boards, but it may not be as important as having someone in a Board leadership position who is independent of management."

Time Spent On Board Matters

When asked to compare the time spent on Board matters in the last year with the previous year, 60% said that they were spending more time, 39% said it is about the same, and 1% said that it is less. Fifty-seven percent (57%) of the Directors indicated that the amount of time their Boards devote to discussing company strategy is optimal.

When asked how the amount of time spent by the Board has changed in the past year in key Board practice areas, the respondents indicated that their Boards spent more time monitoring the company's accounting practices (85%), assessing corporate governance practices (83%), and monitoring the company's financial performance (51%). Only 23% of respondents indicated that their Boards have spent more time on succession planning, 28% have spent more time on education and training for existing and new Directors, and 35% have spent more time evaluating the Board's performance.

"One of the key hidden dangers of governance reform is misdirected management effort," said Dr. Nadler. "In some quarters, governance reform has come to be seen as a valuable end in itself, with less time spent adding value to the CEO and management team. That can easily lead to a massive waste of time, energy, and focus."

Strategic Oversight, Process and Dynamics

When asked to rate the effectiveness of the Board in shaping long-term strategy, 55% of Directors responded favorably, and 66% considered their Board effective or very effective in reviewing progress on the company's strategic goals.

The Directors responded favorably when asked to rate the extent to which: their Boards are independent of management (89%) and Board members act with courage and take appropriate actions as needed (83%). However, only 62% expressed positive views when asked to evaluate the extent to which Board members voice opinions that conflict with the CEO's view. Less than half (41%) of Directors surveyed indicated that their Boards greatly influence the meeting agenda.

While 91% of Directors rated their Board favorably on the extent to which their Boards are sufficiently informed to do their work, only 27%of the respondents expressed positive view on the extent to which their Boards have independent channels of information regarding company operations and management practices.

An overwhelming majority (90%) of the respondents indicated that their Boards have the appropriate mix of skills and experience to make a meaningful contribution. However, when asked to rate the capabilities of the Directors in the specific competency areas, the responses were not as positive. For example, only 59% felt their Boards had significant expertise on global business issues.

CEO Performance Management and Succession Planning

Almost half (48%) of the Directors surveyed considered their Board was effective in planning for CEO succession. However, more than one-third (40%) believe the Board's involvement in planning for the succession of the CEO is less than optimal. Only 21% rated their Boards favorably when asked to assess the extent to which they participates in the development of internal candidates for future senior management positions.

Seventy-eight percent (78%) of the respondents said that their Board has a formal process for evaluating the CEO's performance. Of those who do have a formal evaluation process, 86% indicated that CEO performance is measured against a set of targets that the Board and the CEO agreed at the start of the year, and 88% said that the evaluation includes a formal feedback session with the CEO. Moreover, of those who do have a formal CEO evaluation process in place, 82% said the process is effective.

Board and Director Evaluation

When asked if the Board's performance is formally evaluated on a regular basis, 44% of respondents said it is not, but 35% of the respondents said they have spent more time in the last year on evaluating the Board's performance. This is despite the recently introduced New York Stock Exchange governance standards that require annual Board assessments.

Among those who said they conduct an evaluation process, 64% said that their Board evaluation process is effective. However, only 25% of the Directors said that an action plan for addressing concerns is part of their Board evaluation process.

"Aside from being mandatory, Board assessment is one of the most powerful interventions available for turning a good Board into a great Board- one that is constructively and effectively engaged, that genuinely adds value for the CEO and the management team, and that provides strong corporate oversight," said Dr. Nadler. "But determining how the feedback will be handled is one of the most important components of the process. It is not enough to just raise sensitive issues; to be successful, it also has to be seen by Directors as a process that helps them resolve issues."

More than three quarters (74%) of Directors surveyed said that their Boards do not regularly evaluate individual Directors. Among Boards that do undertake individual Director evaluations, approximately three quarters utilize evaluation methods that include peer- (78%) and self-assessment (73%) and 60% indicated that individual Director evaluations are carried out by a Board committee.

Additional Survey Findings

In addition to the results highlighted above, the survey covered a number of other key areas including Board leadership, Board composition(including nomination and selection, term and age limits), Director compensation and recruiting challenges. A full copy of the report is available upon request.

About Mercer Delta Consulting

Mercer Delta Consulting, LLC is a global management consulting firm that advises CEOs and senior leaders on organizational change and board effectiveness. Since the firm's founding in 1980, it has consulted to over 200 CEOs of multinational corporations. Headquartered in New York, the firm has practices across the United States and in Europe and Canada. Mercer Delta is part of Mercer Inc., a major global provider of consulting services and an operating unit of Marsh & McLennan Companies, a global professional services firm.

About The Center for Effective Organizations, University of Southern California, Marshall School of Business

Founded in 1979, the Center for Effective Organizations (CEO) conducts research on a broad range of organizational effectiveness issues. It is the leading university-based, action-research center. From its inception it has conducted research that influences how organizations are managed and also makes important contributions to academic research and theory. The Center for Effective Organization's pioneering research in the areas of organizational design and effectiveness has earned it an international reputation for research that bridges the gap between academic theory and management practice.

(1)249 Directors composed of 22 CEOs/Chairmen, eight inside Directors, 200 outside Directors, and 19 unspecified.

Contacts

The Neibart Group
Kerstin Parkel, 718-875-2121
kparkel@neibartgroup.com
OR
Mercer Delta Consulting, LLC
Jessica Switzer, 212-403-7632
jessica.switzer@mercerdelta.com

Mercer Delta Consulting, LLC

Mercer Delta Consulting, LLC

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