Realigning the Compensation Committee

A new Korn Ferry discussion paper hopes to encourage an important transition of the Compensation Committee to a newly proposed Leadership and Talent Committee.

We can all agree that a board’s purpose is to ensure a company maximizes long-term shareholder value. We also agree that—aspirationally—all boards want to be true strategic assets of a company and a source of competitive advantage.

But according to Robert Hallagan, vice chairman and co-leader of Korn Ferry’s Board practice, boards with that purpose in mind should focus a higher percentage of their agenda and engaged discussion on the key drivers and characteristics of what “high-performing companies” must to do to drive shareholder value. “The questions are, do they? Or is there a disconnect between what drives shareholder value and where boards spend their quality time?” he asks.

Research from McKinsey & Company has identified that exceptional CEO leadership, world-class talent management, and highly ethical performance cultures were among the top three success drivers of companies that consistently outperformed. Surveys done by the National Association of Corporate Directors reveal boards still spend a majority of their time on corporate performance, strategic planning, internal oversight, and financial oversight. New surveys will show boards are changing—but not fast enough, says Hallagan.

In a discussion document he hopes will accelerate change—called “Repurposing the Compensation Committee: Time to Push the Reset Button”—Hallagan suggests officially elevating the agenda of the existing Compensation Committee to the Leadership & Talent Committee. “Certainly, we’re not saying the alignment of compensation to shareholder value is not important, but frankly, only a component of the new Committee’s charter,” he says.

The idea isn’t all that radical—governance historians will recall the evolution of the Nomination Committee to the now more prevalent “Governance & Nomination Committee,” and the charter expanded from just nominating directors to ensuring the board is operating effectively with nominations of directors as a subset.

Indeed, the document says in reality, there is nothing preventing boards from establishing and implementing a new committee focused around leadership and talent, simply renaming the Compensation Committee and enhancing its mission and charter would be enough to kickstart the new focus—or, at the very least, kickstart discussions in corporate boardrooms around the world about how to align the way directors spend their time more with the way shareholders want them to focus. Hallagan says his “proposal” is not prescriptive but a draft and a hope over the next year, through discussions with board leaders, CEOs and top human resources execs, it will be enhanced and evolve into a new “best practice” for high-performing boards.

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