By Dennis Carey, Vice Chairman, Co-Leader, Board Services Practice, Korn Ferry, and Robert Hallagan, Vice Chairman, Co-Leader, Board Services Practice, Korn Ferry
It’s a position that has only been around since 2003, mandated by a New York Stock Exchange decision requiring boards on public companies to meet at least once a year without a single executive director present—but much has changed in the role, and value, of the lead director.
Historically, since most chairpeople were either the CEOs or other executives, and companies needed someone independent to run non-executive sessions, the role of the lead director was created. But today, externally, lead directors now play a greater investor-facing role, often equal to that of a chairman, and, internally, they increasingly have direct access to upper management and all committees within the board.
Which leads to an obvious question: how best to attract and retain a role now central to high-performance boards. The answer involves four words: identify, compensate, evaluate and plan.
First, boards should recognize that the increased responsibility and level of integration into the leadership team mean this new breed of lead director is likely to remain longer than a traditional lead director. This longer tenure makes selecting the best candidate even more important. Ideally, boards should identify potential candidates early, enabling leadership to groom a member of the board for this leadership position. The process has to be handled carefully, especially when inappropriate candidates put themselves forward.
Boards should also recognize the additional workload of a lead director in this new, expanded role. Once the best lead director has been identified and elevated to the role, he or she must be compensated accordingly. Lead directors generally tend to receive a higher retainer than other directors, though the additional compensation tends to be minimal. As companies plan to expand the role of the lead director, we believe an additional retainer beyond the standard board compensation is appropriate to support the additional responsibilities.
While most boards are now aware that they should have a robust evaluation process to both optimize function and identify potential board leaders, this process should be extended to separately assess the performance of the lead director. The lead director, as the ranking independent member of the board, is in the best position to lead a constructive and meaningful board evaluation process, particularly as more lead directors serve as ex officio members of all committees. This is a trend we have been seeing, and it provides the lead director with a unique, overarching perspective to drive this process. However, since one of the most important positions to evaluate is, in fact, the lead director, the process should include a mechanism for an objective and thorough review—for example, an anonymous survey. While boards should be evaluated at least annually due to member turnover, boards might consider evaluating the lead director every two years because of their longer tenure.
Boards with an enhanced lead director role must have a succession process in place, just as they have to ensure smooth succession for the chairman and CEO roles. Given that many of the characteristics that make a strong lead director develop over the course of a long, successful corporate career, lead directors tend to be older than their non-leadership counterparts (on average 68 versus 63, respectively, according to our Korn Ferry Market Cap100 2015 board report), so retirement in the not-too-distant future is an important consideration in succession planning for this role.
Strong, independent board leadership transcends the precise leadership structure at particular companies, which can vary significantly by practice and culture. As boards increasingly elevate and expand the role of the lead director, these individuals should be better positioned to deliver on their promise to investors.