It’s a boardroom role that doesn’t get the spotlight as the chairperson or even the head of the compensation committee would. But this under-the-radar director is becoming a key position for America’s biggest firms.
In the latest move to improve governance, more companies are elevating the lead director to serve on every board committee, according to a new Korn Ferry report. The new edition of the KFMC 100 says that 76 of the nation’s 100 largest publicly traded firms have installed lead directors. The report is a comprehensive review of the demographics and practices of the boards of directors for the country’s biggest corporations.
These lead directors are ex-officio — they aren’t individually appointed or elected to each committee; the committee memberships come with the title. It’s a strategy that can give one director (or a non-executive chairman, if a company has one) full access to all aspects of the company. The idea is that the lead director can be a well-rounded independent advisor to the CEO.
Corporate boards are under more scrutiny than ever before, whether that pressure is coming from investor group, demanding the firms become more efficient; governments, requiring more transparency; or issue groups, lobbying for firms to adopt new environmental or workplace practices. In the past, an executive chairperson often would serve on every board committee. Indeed, looking at prior years of board data, it appears — on the surface — that there were more lead directors in 2012 than there are now. However, analysts for Korn Ferry hypothesize that boards are moving away from the executive-chairperson-as-lead-director structure, making the lead director someone who doesn’t currently hold a management position within the company.
For example, Glenn Tilton, former CEO of United Airlines, serves as lead director of AbbVie and Phillips 66. At Phillips 66, he sits on the board’s human resources and compensation, public policy, and executive committees. However, as lead director, he also is an ex-officio member the audit and finance committee, and that allowed him to better review quarterly earnings information. “If you think about it, it’s practical,” Tilton says in the report. “I’m hard-pressed to think of a disadvantage.”
On average, the lead director gets more pay, earning nearly $346,000, while other directors earn about $332,000. “Companies are realizing the amount of work involved in being the lead director in the current governance environment, and slowly, without drawing too much attention to it, they’re increasing the lead director’s pay,” says Irv Becker, North America leader for executive pay and governance at Korn Ferry Hay Group.
A board needs to develop a thoughtful selection process and succession planning for the lead director spot, says Robert Hallagan, vice chairman and co-leader of Korn Ferry’s Board Practice. Ideally, boards should identify potential candidates early on, enabling leadership to groom a member of the board for this leadership position.
There needs to be an evaluation system for the lead director spot as well, something that not all firms with lead director positions have installed. Indeed, only 28 percent of the KFMC 100 have evaluation systems for individual board members, let alone lead directors. The report also suggests that an anonymous survey can be an effective evaluation tool for lead directors.