NACD Private Company Governance Survey

Transcription

1 This document was prepared for respondents to the NACD Private Company Governance Survey PUBLISHED BY National Association of Corporate Directors SPONSORED BY The NACD Center for Board Leadership

2 This document was prepared for respondents to the NACD Private Company Governance Survey

3 This document was prepared for respondents to the Table of Contents Foreword... 3 About Our Survey... 4 Changes From Methodology... 4 Highlights of the Survey Report... 5 Survey Participant Demographics... 6 Leading Issues... 8 Board Leadership and Structure Board and Committee Structure Director Competency and Evaluations Board Service Evaluations Board Meetings and Processes Executive Oversight CEO Succession Planning Integrity, Ethics, and Responsibility Attention to Information, Strategy, and Risk Enterprise Risk Management Programs External Communications Director Selection Boardroom Composition Director Compensation The Copyright 2013 National Association of Corporate Directors All rights reserved. part of the contents hereof may be reproduced in any form without the prior written consent of the National Association of Corporate Directors. Managing Director, Peter R. Gleason Chief Knowledge Officer, Alexandra R. Lajoux Senior Manager, Research, Kurt Groeninger Research Manager, Katherine Iannelli Research Analyst, Adam Lee Assistant Editor, Cheryl Soltis Martel Publications Editor, Carolyn Fischer Design by LetterSpace Creative ISBN: National Association of Corporate Directors

4 This document was prepared for respondents to the Foreword On behalf of the National Association of Corporate Directors (NACD), I am pleased to present the. This survey provides the most current and relevant data on governance trends and practices at U.S. private companies. As public companies respond to Dodd-Frank regulations, private companies continue to adapt to other sets of issues, including the struggling global economy and shifting U.S. policies. Boardroom intelligence will be more important than ever in preparing the director community for the challenges ahead. This year s report includes information collected from more than 500 individuals from private company boardrooms. Reports such as this one provide the latest statistics to help you steer your board in the right direction. I strongly encourage you to use the most up-todate data to inform your boards. Although this report contains some of our leading governance data, NACD offers a number of resources to help boards answer the challenge to improve performance. Our Blue Ribbon Commission reports, customized benchmarking reports, NACD Directorship, and NACD Directors Daily all enhance a director s value in the boardroom. Additionally, NACD s ExpresSource service offers a quick and reliable source for all questions on corporate governance. I invite you to use this report to advance exemplary board service, wherever you may serve. Kenneth Daly President and CEO National Association of Corporate Directors December 2012 National Association of Corporate Directors 3

5 This document was prepared for respondents to the About Our Survey The NACD Private Company Governance Survey, which ran from May 2012 through June 2012, is our 14th governance survey in 21 years. Survey respondents were able to select their answers regarding their experiences on either public, private, or nonprofit boards. This survey report details 557 private company responses only; the public and nonprofit surveys are published separately. Changes From 2011 In order to keep up with changing trends and the growing information requests from our members, we continuously refine and improve our survey instrument. While a majority of the survey questions remain the same from year to year, we introduced a few new questions and revised several others. These improvements provide greater survey quality and clarity. Methodology NACD sent out approximately 30,000 invitations asking directors and others who serve on boards to participate in our annual governance survey. Respondents opted to answer a public, private, or nonprofit survey. Those who serve on multiple boards were encouraged to fill out surveys reflecting their experiences on each. In analyzing the data, we calculated response percentages based on the total number of responses specific to each question. For example, if a question received only 400 out of 557 total responses, and 200 respondents answered yes and 200 answered no, then the result was reported as 50 percent affirmative. In many cases, survey responses totaling less than 5 percent are not represented in graphs. 4 National Association of Corporate Directors

6 This document was prepared for respondents to the Highlights of the Survey Report The top-three governance issues this year are strategic planning and oversight, corporate performance and valuation, and executive talent management and leadership development. Over 44 percent of private companies separate the positions of CEO and chairman. Just over 36 percent combine the two roles. This year, the average board size fell to 7.3; down from 8.9 in While the overwhelming majority of private boards use audit and compensation committees, a formal nominating and governance committee is used by less than half (49.2%) of the survey population. Fifty-seven percent of the respondents received continuing director education in the past 12 months. Private boards averaged five in-person meetings in the past year. Each meeting lasted about 5.7 hours. Fifty-five percent of the respondent pool has an informal CEO succession plan. Only 22.4 percent have formal plans. Regardless of formality, most companies succession plans include development of internal candidates and plans to replace the CEO in an emergency. Similar to their public company counterparts, private company boards are increasing the use of risk committees. In 2012, risk committees were used by 8.9 percent of the survey population, up from 6.3 percent in 2011, and 4.8 percent in Despite the rise in risk committee use, the majority of risk oversight work is still being done by the full board. Since 2008, directors at private companies have increasingly purchased additional directors and officers (D&O) insurance. In 2008 and 2009, over 15 percent of private company directors obtained the extra coverage. w, more than half (50.4%) of directors have opted for the insurance. The majority of private companies (57.3%) are using informal methods to oversee risks while only 28.2 percent have a formal program such as the Committee of Sponsoring Organizations enterprise risk management (COSO ERM) framework. Surprisingly, 12.6 percent of private companies have no practices in place at all. When selecting new directors, most boards (75.8%) still rely on personal networking or word of mouth; this is an increase from 65.3 percent in Search firms are used only at 15.8 percent of private companies; public companies, on the other hand, use them at least half of the time (51.1%). Over 38 percent of private companies reported having no female directors on board in Also, fewer companies reported having one female director this year (29.7% in 2012, down from 33% in 2011). However, 19 percent of boards had two female directors this year, while 17.6% had the same in Those respondents reporting no minority directors on their board increased to 70.3 percent, up from 63.2 percent in Those with one or more minority directors fell since National Association of Corporate Directors 5

7 This document was prepared for respondents to the Survey Participant Demographics The results of the 2012 survey represent the responses of those serving a variety of private company boards. 1 Outside directors constituted the largest portion (47%) of the 557 survey respondents while inside directors represented 28 percent. 2 n-voting attendees or others such as corporate secretaries and general counsels comprised the remaining quarter of the survey population. Respondents to this year s survey represent companies with headquarters throughout the United States. On average, they sit on 0.6 public boards, 1.9 private boards, and 1.4 nonprofit boards. 3 Organized by size, companies with revenues of less than $25 million represent almost one-third of the respondent pool (29%). By sector, financial companies (22%) comprise the largest portion. Over half of the companies represented are either investor or family owned. Please Indicate Your Status on the Board Outside director 46.8% Inside director Other (e.g., corporate secretary) n-voting attendee 3.5% 22.2% 27.5% In Which Geographical Location Is Your Company Headquartered? rtheast Southeast 17.3% 19.7% Midwest 25.7% Southwest 21.7% rthwest 15.6% 1 Participants voluntarily responded to the survey invitation. NACD does not claim that these respondents represent the entire population of private company officers and directors because the respondents were not randomly selected. 2 The total number of respondents is calculated by taking the sum of respondents who answered at least one survey question. Seventy-six percent of the survey respondents completed the entire survey. 3 This year, results to questions specific to an individual s board service are based on the answers from only respondents who self-identify as inside or outside directors. 6 National Association of Corporate Directors

8 This document was prepared for respondents to the What Is the Company s Primary Industry? 22.3% Financial sector Industrials sector 14.5% Information technology sector 9.1% Consumer discretionary sector 9.0% Health care sector 8.6% Consumer staples sector 5.9% Materials 4.3% Energy 3.8% Telecommunication services 1.4% Utilities 1.3% 19.9% Other industry Company Revenue Larger: $1 billion 10.8% Large: $250 million to < $1 billion 20.6% Medium: $100 million to < $250 million 15.3% Small: $50 million to < $100 million 14.4% Smaller: $25 million to < $50 million 9.5% Smallest: < $25 million 29.4% The Company Is: Investor owned 34.1% Family owned 31.2% 13.4% Mutually owned 9.6% Employee owned 11.8% Other If the Company Is Family Owned, It Is: Managed by family members 52.2% Managed by non-family members I don't know 46.4% 1.4% National Association of Corporate Directors 7

9 This document was prepared for respondents to the Leading Issues While the nation is three years removed from the recession, the past several years have been tumultuous, economically, politically, and geopolitically. In response, private boards have chosen to operate in a scaled-back fashion, with fewer members, committees, and formal processes. This can allow greater flexibility and even adaptability to the operating environment. For example, only 28.2 percent of private boards have a formal risk management program, such as a COSO ERM framework, compared to 62.9 percent of public companies. Though many respondents are more satisfied with their formal programs, private boards continue to progress with informal practices. Despite this response to environmental uncertainty, the top-three governance priorities remain constant. Boards are still primarily concerned with strategic planning and oversight, corporate performance and valuation, and executive talent management and leadership development. The steady focus on these issues demonstrates the boardroom s constant attention on the long-term performance of their organizations. Of note, risk oversight increased in importance this year moving into the fourth position. However, this year s survey offered respondents slightly different choices. In previous years, risk and crisis oversight were the same option. In 2012, these options were split to risk oversight and crisis oversight. Risk oversight ranked higher but crisis oversight fell in importance with only 2.9 percent of respondents selecting it as one of their top choices. 8 National Association of Corporate Directors

10 This document was prepared for respondents to the Which Three Governance Issues Are the Highest Priorities for Your Board in 2012? Strategic planning and oversight 58.6% Corporate performance and valuation 44.3% Executive talent management and leadership development Risk oversight CEO succession Financial oversight/internal controls Board effectiveness Relations with stakeholders/owners Board culture (openness, mutual respect, action orientation, CEO relations) Board and director evaluation CEO evaluation Board leadership Director recruitment/succession Board meeting processes (agenda, committees, etc.) CEO compensation Information management (ensuring directors receive the right amount, type, and format of information) Crisis oversight Disclosure (ensuring transparency of financial and other information such as outcomes/results) Director education and development Director compensation Corporate social responsibility 24.5% 24.1% 20.4% 18.9% 15.4% 9.4% 8.9% 8.7% 8.7% 7.9% 7.9% 7.5% 6.9% 3.5% 2.9% 2.9% 2.7% 2.5% 1.0% National Association of Corporate Directors 9

11 This document was prepared for respondents to the Board Leadership and Structure After several years of increasing use, the practice of separating the chairman and CEO position slowed in This year saw the continuation of this shift, as 36.3 percent of companies combined the chairman and CEO roles, an increase from 33.6 percent in The increased use of combined board leadership at private company boards follows public companies, where the majority combines the chair/ceo position. However, unlike the vast majority of public companies who employ a lead director in conjunction with the combined chair/ceo position, just 29.1 percent a decrease from 38 percent in 2011 of private companies do so. However, of the companies that do use a lead director, over 90 percent believe the position enhances the board s effectiveness. What Is Your Board s Leadership Structure? CEO and separate non-executive chair 44.2% Combined chairman/ceo 36.3% CEO and separate executive chair 14.2% Other 5.4% Does Your Board Have a Designated Lead Director? 70.9% 29.1% Does the Lead Director Enhance the Board s Effectiveness? 41.0%, to a great extent 49.2% 9.8% Do You Believe the Lead Director Structure Is More Effective Than That of a n-executive Chairman? 36.2% Same effectiveness 25.9% I don't know 10 National Association of Corporate Directors 22.4% 15.5%

12 This document was prepared for respondents to the Does the Lead Director Have a Specified Term? 62.5% 37.5% If the Lead Director Has a Specified Term, How Long Is It? 1 year 43.5% 2 years 8.7% 3 years 4 years 30.4% 4.3% 5 years 8.7% 6 or more 4.3% How Long Is the Independent Chairman s Term? 1 year 18.8% 2 years 7.5% 3 years 4 years 5 years 6 years or more specified term 17.9% 0.8% 2.1% 4.2% 48.8% National Association of Corporate Directors 11

13 This document was prepared for respondents to the Board and Committee Structure This year, average board size dropped to 7.3 members, a significant decrease from 8.9 in Although this decline registered at boards of every size, the most significant decreases were at the ends of the spectrum: larger and smallest companies by revenues. The three key committees (audit, compensation, and nominating/governance) continue as the most prevalent among private company boards, although the use of these three key committees is not mandated. Since 2009, the use of the nominating/governance committee has continuously declined, however. This year, less than half (49.2%) of respondents indicated their company had a formal nominating/governance committee. Nearly 60 percent of private companies never rotate committee membership or do so more than every four years. Just 5.3 percent of private boards have a policy limiting the number of audit committees on which a director may serve, a policy in place at 40.9 percent of public boards. More than 20 percent of private companies retain advisory boards, a practice seen at only 9.8 percent of public companies. Average Board Size Total Members Total Members Smallest: < $25 million Smaller: $25 million to < $50 million Small: $50 million to < $100 million Medium: $100 million to < $250 million Large: $250 million to < $1 billion Larger: $1 billion National Association of Corporate Directors

14 This document was prepared for respondents to the Most Prevalent Committees on Boards 80.4% Audit Compensation 76.8% 49.2% minating/governance 30.9% Executive Finance 18.1% Strategic planning 17.2% Investment Risk 13.9% 9.7% Employee benefits/retirement plan 7.9% Ethics/Compliance 7.3% Mergers & Acquisitions 5.3% HR/Labor relations/management development 3.5% Technology 3.3% Public affairs/policy/social responsibility 2.0% Environmental policy 0.7% Other standing committee 12.1% How Often Do You Rotate Committee Membership? Every year Every other year 10.4% 8.6% 18.5% Every 3 years Every 4 years More than every 4 years 3.3% 15.7% 43.5% Never Does Your Board Have a Policy Limiting the Number of Additional Audit Committees on Which a Director May Also Serve? 88.1% 5.3% 6.6% I don t know National Association of Corporate Directors 13

15 This document was prepared for respondents to the Are All the Members of Your Audit Committee Considered to Be Financial Experts? 35.8% 57.7% 6.5% I don t know Does Your Company Have an Advisory Board in Addition to the Statutory Board? 21.8% 78.2% 14 National Association of Corporate Directors

16 This document was prepared for respondents to the Director Competency and Evaluations Boards recruit directors for the experience and skill sets that will support their companies long-term strategic objectives. In order to achieve effective oversight, directors need not only existing knowledge, but also awareness of leading practices and the most recent governance developments. As the business and economic climates rapidly change, directors often choose to keep current via continuing education. Over half of private company respondents received continuing director education in the past 12 months. This is significantly less than public company directors, of whom over 80 percent received such education. However, approximately 95 percent of both public and private company directors agree that director education enhances their boards effectiveness. Despite the acknowledged benefits, just over half of private boards reimburse their members for director education. Does Director Education Enhance Your Board s Effectiveness? 61.7% 33.8%, to a great degree Have You or Your Board Received Continuing Director Education in the Past 12 Months? 57.0% 37.5% 5.5% I don t know Does Your Board Reimburse You for Director Education? 54.5% 43.6% I don t know What Is Your Board s Primary Motivation for Receiving Director Education? For general board improvement 63.4% 29.0% To follow best practices Acknowledgment by stakeholders 2.3% Required by corporate bylaws 1.1% Other 4.2% National Association of Corporate Directors 15

17 This document was prepared for respondents to the Board Service More than half of the private boards surveyed (59.8%) did not replace any directors within the past year. This increase from percent of respondents did not replace a single director most likely represents the desire for boards to maintain their current composition in face of uncertainty. This figure is also similar to the 58.6 percent of public boards that did not replace any directors in Does Your Board Have a Policy Limiting the Number of Public or Private Boards on Which You Can Serve? 6.3% 93.7% If Your Board Has a Policy Limiting the Number of Boards on Which You Can Serve, on How Many Additional Public or Private Boards May You Serve? 26.8% % % 3 9.8% % % How Many Directors Have You Replaced in the Last Year (Since June 2011)? % % or more 16 National Association of Corporate Directors 12.9% 3.8% 0.9%

18 This document was prepared for respondents to the Evaluations Periodic assessments are a critical tool in ensuring the current board composition and performance is supporting the company s long-term strategic objectives. Although the majority (76.2%) of boards conduct full board evaluations, fewer conduct individual (49%) or committee (37.2%) evaluations. While prevalence of full board and individual director evaluations has remained unchanged over the past few years, the number of committee evaluations dropped significantly, from 49 percent in 2011 to 37.2 percent in This trend differs from public companies, at which the majority conduct full board or committee evaluations, but less than half perform individual evaluations. Thirteen percent of respondents indicated their companies incorporate management evaluations of board members as part of 360-degree reviews. This practice is seen at slightly fewer (11.7%) public companies. Which Types of Evaluations Does Your Board Conduct? Full board 76.2% 49.0% Individual director 37.2% Committee If Your Board Conducts Individual Director Evaluations, How Is This Done? Self-evaluation 61.3% Peer evaluation 53.0% Evaluation by governance committee Evaluation by outside consultant Other 19.9% 9.4% 8.3% Does Management Evaluate Board Members as Part of a 360-Degree Review? 13.3% 86.7% Does Your Board Use an Outside Consultant for Board Evaluations? 15.5% 84.5% National Association of Corporate Directors 17

19 This document was prepared for respondents to the Board Meetings and Processes The average number of full board meetings has held constant for the last three years. This year, the average private company board held five full board meetings compared to 5.2 in 2011 and 5.3 in However, respondents indicated they are spending slightly more time on in-person meetings, 5.7 hours compared to 5.1 in In addition to physical meetings, directors meet via telephone (or other electronic method) on average 3.6 times per year. Just over half (57.2%) indicate they do not receive compensation for these meetings. Average director time commitment has fluctuated between and hours for the past four years. This year s average of hours falls in the middle of this range. Survey respondents indicated they spent nearly five hours less per year traveling to board meetings, but slightly more time reviewing reports and other materials. More than half (51.5%) of private company directors make on-site company visits more than once a year. This is significantly more than public companies, where 38.7 percent of directors make similar visits more than once a year. Over one-third (39.5%) of private company directors make on-site visits to their company s foreign offices or factories. Average Number of Board Meetings Number of Hours per Number of In-Person Meetings In-Person Telephone Meetings per Year Meeting (or Other Electronic Means) Full Board Executive Session Audit Committee Compensation Committee minating/governance Committee Do You Compensate Directors for Telephonic Meetings? 40.0% 57.2% I don t know 18 National Association of Corporate Directors

20 This document was prepared for respondents to the Average Annual Director Time Commitment Average Hours Spent per Year Attending meetings 54.2 Traveling to/from board events 25.3 Reviewing reports and other materials 52.0 Director education 15.8 Representing the company at public events 17.7 Other 15.6 Total* *Averages are non-additive. How Often Do Board Members Make On-Site Visits to Offices or Operations as Part of the Study of the Company? More than once a year 51.5% Once a year 24.7% Every other year Every three years or more Never 4.7% 7.3% 11.8% Have Board Members Had On-Site Visits to Foreign Offices or Factories? 39.5% 60.5% National Association of Corporate Directors 19

21 This document was prepared for respondents to the Executive Oversight Evaluation and oversight of the chief executive s performance is foremost on a board s list of responsibilities. The use of metrics, both financial and non-financial, is the primary means of facilitating these duties. In the majority of cases, the board and management team jointly establish metrics for corporate performance. Similarly, the development of an executive talent management program and a corporation s long-term strategy are also the product of the board and management in most cases. Respondents believe the established compensation packages a perennial topic of public interest are appropriately linking pay to performance. In nearly 74 percent of cases, the directors believe that the pay levels match performance, and in 17.5 percent of cases, pay is actually below performance. These results are nearly identical to those at public companies. Evaluations of the CEOs at private companies typically occur on an annual basis (70.8%). These companies likely perform evaluations as necessary. Nearly 10 percent of boards do not perform any evaluation of the chief executive. Only 1.3 percent of public companies do not evaluate CEOs. Who Performs the Following Actions? Establish financial metrics for the CEO Establish non-financial metrics for the CEO 23.5% 26.7% 9.8% 66.7% 9.3% 64.0% Develop an executive talent management program Develop long-term corporate strategy 41.4% 54.6% 11.9% 83.3% Board only Management only Management and board When Linking Pay to Long-Term Corporate Financial Performance, How Do Your Pay Plans Define Long Term? 3 years or less 62.4% 4 years 8.6% 5 years 21.1% 6 years 7 years or more 1.0% 6.9% 20 National Association of Corporate Directors

22 This document was prepared for respondents to the When Linking Pay to Long-Term Corporate Performance, How Do Your Pay Plans Define Corporate Performance? Profits 70.7% Sales (revenue) 48.6% Cash flow 34.1% Hybrid measure such as EVA or CFROI Assets Ratios such as EPS Other 16.5% 14.0% 11.5% 19.5% Which n-financial Corporate Measures Do You Analyze for the Purposes of Senior Executive Compensation? Customer satisfaction 59.5% Employee morale Product quality 38.9% 44.2% Maintaining good standing with regulators Workplace safety Employee turnover n-financial measures are not used for executive compensation Workplace diversity 6.6% 29.5% 25.3% 23.4% 18.7% Other 12.4% Do You Believe the Compensation for Your Company s CEO Is Commensurate With the CEO s Performance? Pay exceeds performance 8.8% Pay matches performance 73.7% Pay is below performance 17.5% National Association of Corporate Directors 21

23 This document was prepared for respondents to the How Often Does Your Board Conduct Performance Evaluations of the CEO? Annually t at a regular interval Never/My board does not evaluate the CEO t annually, but at a regular interval Other 70.8% 10.7% 9.8% 5.6% 3.0% Does Your Board Have a Policy Restricting the Number of Boards on Which Your CEO Can Serve? 12.2% 87.8% If Your Board Does t Have a Policy Restricting the Number of Boards on Which Your CEO Can Serve, Should It? 49.7% 22 National Association of Corporate Directors 50.3%

24 This document was prepared for respondents to the CEO Succession Planning Despite CEO succession planning s indicated importance (ranked fifth on page 9), many private companies are somewhat casual about the issue. Fifty-five percent of those surveyed have informal succession plans, meaning that the board has had general discussions but formal plans have not been put in place. Twenty-three percent of boards do not have succession plans in place, formal or informal. A lack of planning is contrary to NACD s leading practices, which recommend that the full board is involved in discussions regarding succession planning three to five years before a CEO transition is expected. Regardless of the formality of CEO succession plans, they tend to have similar features. The development of internal candidates is most often included, in addition to plans to replace the CEO in an emergency. How Would You Classify Your Company s CEO Succession Plans? Formal (plans set forth in corporate documents) 22.5% Informal (general discussion but no formal plans) 55.0% succession plans 22.5% Regardless of Formality, What Does Your CEO Succession Plan Include? Development of internal candidates Plans to replace the CEO in an emergency 59.0% 63.5% Long-term succession planning (e.g., 3-5 years) Identification of interim CEO 38.0% 45.2% Use of executive search firm ne of the above 15.8% 20.5% Other 2.0% Does Your Company Have a Policy Prohibiting a CEO From Staying On as a Board Member After Retirement? 9.8% 90.2% National Association of Corporate Directors 23

25 This document was prepared for respondents to the Integrity, Ethics, and Responsibility Increasingly, the general public, investors, and regulators call for demonstrated integrity and ethics from corporate leaders. Although not subject to regulatory or investor demands, private company leaders are not immune to this scrutiny. As such, more than half of respondents include ethical performance in the formal CEO evaluation process. This is done primarily through qualitative measurements, although 27.2 percent of respondents indicated that quantitative measures are used as well. While executive ethical performance is predominantly measured through qualitative means, discovering ethical breaches throughout the organization often requires hard data. At nearly half of the responding companies, management relies on a hotline or helpline to gather information on ethical risks. Additionally, slightly more than half (50.5%) use a whistleblower program. The majority (77.2%) view the resulting information from whistleblower programs to be satisfactory, and 19.5 percent view the information to be excellent. Do You Include Ethical Performance in the Formal CEO Evaluation Process? 58.4% 41.6% How Does Your Board Measure the Ethical Behavior of Your CEO? Quantitatively 2.8% Qualitatively 42.3% Both quantitatively and qualitatively Ethical performance is not measured 27.2% 27.7% 24 National Association of Corporate Directors

26 This document was prepared for respondents to the How Does Management Gather Information to Assess Ethical Risks for the Organization and Evaluate Responses to Them? Hotline/helpline 48.9% Statistics 27.5% (e.g., workplace satisfaction) Information is not gathered to assess ethical risks 24.2% Surveys 23.7% 16.8% Reports from ethics officer 14.8% Reports from ERM program Third-party consultants Focus groups Other 10.2% 6.1% 8.7% Does Your Company Have a Whistleblower Program? 50.5% 41.8% 7.8% I don t know How Would You Characterize Your Company s Whistleblower Program and Its Utility in Identifying Corporate Malfeasance? 19.5% Excellent 77.2% Satisfactory Below acceptable levels National Association of Corporate Directors 25

27 This document was prepared for respondents to the Attention to Information, Strategy, and Risk Similar to their public company counterparts, private company boards have increased their use of risk committees. In 2012, risk committees were used by 8.9 percent of the survey population, up from 6.3 percent in 2011, and 4.8 percent in This increase can be primarily attributed to the 22.9 percent of financial companies using a risk committee. Despite the rise in risk committee use, the majority of risk oversight work is still being done by the full board. Prior to 2010, survey participants typically selected the audit committee to handle risk oversight responsibilities. Since then, this responsibility has been relocated to the full board, a practice recommended in the Report of the NACD Blue Ribbon Commission on Risk Governance. Public companies, on the other hand, still predominantly use the audit committee to oversee risk. D&O liability insurance is another area that has shown significant growth in the last several years. Since 2008, directors at private companies have increasingly purchased additional insurance. In 2008 and 2009, over 15 percent of private company directors obtained additional coverage via a personal D&O liability policy. In 2010, this figure jumped to 43.7 percent, most likely the result of the economic downturn. Those with additional coverage continued to go up in 2011 (55.1%), but has now leveled off a bit in 2012 (50.4%). How Would You Quantify the Amount of Information Flowing to the Board From Management? 83.6% 10.2% Inadequate 6.2% Adequate/Appropriate Excessive Please Rate the Level of Satisfaction With the Information Your Board Receives in the Following Areas: Corporate performance Strategy Risk management 35.5% 49.9% 26.8% 17.4% Excellent 40.1% 37.1% Good 24.4% 33.6% Satisfactory Does Your Company Have a Chief Risk Officer? 20.6% 26 National Association of Corporate Directors 77.7% I don t know 11.5% 8.7% 12.0% Below acceptable levels

28 This document was prepared for respondents to the To Which Group Has the Board Assigned the Majority of Tasks Directly Related to the Oversight of Risk? Full Board 51.1% Audit Committee 32.2% Risk Committee minating/governance Committee 8.9% 0.2% 7.5% Other Which of the Following Groups Engage Their Own Independent Advisors, Consultants, or Outside Counsel to Provide Information? Full Board 60.9% 55.2% Audit Committee Compensation Committee 45.8% 14.8% minating/governance Committee 8.8% Other Does Your Board Have Approval Over the Risk Profile Inherent in Management s Strategy? 81.4% 18.6% How Would You Characterize Your Current Long-Term Strategy? 19.0% 61.0% 20.0% Aggressive (higher risk, higher rewards) Balanced (moderate risk, moderate rewards) Conservative (lower risk, lower rewards) Have You Obtained Additional D&O Liability Coverage via a Personal Liability Policy or an Independent Director Liability Policy? 50.4% 49.6% National Association of Corporate Directors 27

29 This document was prepared for respondents to the Enterprise Risk Management Programs Although risk oversight ranks as one of the top governance issues for boards this year, the majority of private companies (57.3%) continue to rely on informal processes to identify and assess risks. Slightly less than one-third (28.2%) utilize a formal program such as the COSO ERM framework to oversee risk. However, those with formal risk management programs are generally more satisfied with the effectiveness of their programs. More than 45 percent of those with formal programs found their programs to be effective to a great extent, a sentiment felt at 23.9 percent of those with informal programs. How Would You Characterize Your Risk Management Program? Formal 28.2% (i.e., COSO ERM framework) Informal 57.3% (no structured frameworks are in place) 12.6% practices or policies in place I don't know 1.9% Regardless of Formality, Do Your Risk Management Practices Effectively Inform Management and the Board About the Organization s Risks? 26.9% 60.0%, to a great extent 13.1% External Communications Communications with stakeholders is still a vital operation of private company boards. More than 96 percent of respondents indicated that communication with stakeholders helps the effectiveness of the board; more than half strongly believe this. Indicate the Extent to Which You Agree With the Following: Communication With Stakeholders Helps the Effectiveness of the Board 56.5% Strongly Agree 28 National Association of Corporate Directors Agree 40.4% Disagree

30 This document was prepared for respondents to the Director Selection As noted on page 16, boards have seemingly chosen to maintain the current composition in response to the uncertain economic climate. When turnover occurs, individual director evaluations are the most prevalent method used. Used by 21.5 percent, age limits are far less common than at public companies, where over half (53%) employ this method to achieve director turnover. When age limits are used at private companies, 35.4 percent use 70 as the retirement age, 30.5 percent use 75 or above, and 19.5 percent use 72. However, 19 percent of private companies use term limits, a practice seen at just 6.5 percent of public companies. Private boards establish these limits at six (25%) or nine (20%) years. When selecting new directors, most boards (75.8%) rely on the informal methods of personal networking or word of mouth; an increase from 65.3 percent in Search firms used by more than half of public companies are used at just 15.8 percent of private companies. Private companies are generally pleased with the quality of searches, though: more than 62 percent find that the quality of service is commensurate with the fees paid. How Does Your Board Renew and Replace Its Membership? 45.3% Evaluation of individual director Resignation upon change of professional status 36.3% Standard procedure for removal of directors 28.0% 21.5% Age limits Term limits 19.0% If You Selected Age Limits, Please Specify the Retirement Age: 68 or below % 3.7% 35.4% % % % % 75 or above 30.5% National Association of Corporate Directors 29

31 This document was prepared for respondents to the Which Methods of Director Selection Does Your Board Typically Use? Personal networking/ word of mouth minee identification by a board committee Shareholder suggestion 36.2% 33.6% 75.8% Search firm 15.8% Director database (e.g., Directors Registry, The Directors Database) Other 3.4% 6.0% If Your Board Uses a Search Firm, Is the Quality of Service Commensurate With the Fees? 62.1% 37.9% Boardroom Composition Boards predominantly search for directors with experience in senior management positions a trend seen in both public and private companies. Leadership experience continues to be the most important attribute in director recruitment, followed by financial expertise and specific industry experience. Corporate governance was selected as the fourth most important experience; this was the first time this option was added to the survey. The 8 percent that selected other often identified family business experience or depth of company knowledge. The topic of the 2012 NACD Blue Ribbon Commission Report, which was diversity in the boardroom, has shown little improvement over the last year. A greater percentage of private companies (38.5%) in 2012 reported having no female directors on the board than in 2011 (32%). Also fewer companies reported having one female director this year (29.7% in 2012, a decrease from 33% in 2011). Boards with minority (based on race and nationality) directors also declined over the last year. Those reporting their board had zero minority directors increased to 70.3 percent, from 63.2 percent in National Association of Corporate Directors

32 This document was prepared for respondents to the Which Attributes and Experiences Are the Most Important When Recruiting Directors? 49.3% Leadership experience Financial expertise 41.6% Specific industry experience 41.1% Corporate governance 32.0% Strategy development 27.6% 10.0% Risk assessment International/Global experience Marketing Information technology 8.6% 6.8% 5.6% Medical/Scientific/ Technological expertise 3.5% Government experience 3.0% Human resources 3.0% Legal expertise Other 1.9% 7.7% How Many Female Directors Serve on Your Board? 38.5% % % 2 7.9% or more 3.2% 1.6% 0.0% How Many Minority Directors (Based on Race and Nationality) Serve on Your Board? 70.3% % 7.4% % 4 0.9% 5 0.5% 6 or more 0.7% National Association of Corporate Directors 31

33 This document was prepared for respondents to the Director Compensation Director compensation reflects the continuing value that directors bring to their companies. The following figures show the nature of respondents compensation elements according to company size (based on revenues). Are the Board Directors Compensated? All 16.6% 83.4% Smallest Companies < $25 million 35.2% 64.8% Smaller Companies $25 million to < $50 million Small Companies $50 million to < $100 million Medium Companies $100 million to < $250 million Large Companies $250 million to < $1 billion Larger Companies > $1 billion 17.9% 13.4% 7.0% 6.0% 2.6% 82.1% 86.6% 93.0% 94.0% 97.4% 32 National Association of Corporate Directors

34 This document was prepared for respondents to the How Are Directors Compensated? Cash Equity-like vehicles Perquisites or benefits Other All 4.6% 4.3% 40.0% 90.0% Smallest Companies < $25 million 6.5% 3.9% 57.1% 68.8% Smaller Companies $25 million to < $50 million 0.0% 0.0% 42.5% 90.3% Small Companies $50 million to < $100 million 3.4% 3.4% 48.3% 94.8% Medium Companies $100 million to < $250 million 3.2% 6.3% 22.2% 95.2% Large Companies $250 million to < $1 billion 3.6% 2.4% 39.8% 100.0% Larger Companies > $1 billion 18.4% 10.5% 10.5% 94.7% *Averages are non-additive. National Association of Corporate Directors 33

35 This document was prepared for respondents to the If Directors Are Compensated With Equity, How Does the Company Grant the Equity to Directors? Fixed shares Fixed value Combination 51.8% All 34.3% 16.5% Smallest Companies < $25 million 20.0% 22.2% 62.2% Smaller Companies $25 million to < $50 million 8.3% 41.7% 50.0% Small Companies $50 million to < $100 million 23.1% 19.2% 61.5% 56.3% Medium Companies $100 million to < $250 million 12.5% 43.8% Large Companies $250 million to < $1 billion 16.1% 38.7% 45.2% Larger Companies > $1 billion 0.0% 22.2% 77.8% 34 National Association of Corporate Directors

36 This document was prepared for respondents to the If Your Board Uses the Following Cash Components for Director Compensation, Please Indicate the Amount Annual retainer (per year) Committee chair fee (per year) Board meeting fees (per meeting) Committee meeting fees (per meeting) All $6,926 $1,979 $1,132 $35,175 Smallest Companies < $25 million Smaller Companies $25 million to < $50 million $7,093 $1,555 $730 $4,611 $1,733 $608 $20,323 $17,436 Small Companies $50 million to < $100 million $5,280 $1,882 $1,042 $28,024 Medium Companies $100 million to < $250 million Large Companies $250 million to < $1 billion $5,946 $1,666 $935 $6,701 $2,542 $1,611 $35,540 $38,493 Larger Companies > $1 billion $1,880 $1,059 $11,977 $65,403 National Association of Corporate Directors 35

37 This document was prepared for respondents to the Does Your Director Compensation Program Include Any of the Following? Board chair fees Committee meeting fees or differentials Committee chair fees or differentials (i.e., higher fees are provided to certain committees) ne of the above All 39.2% 40.1% 33.6% 39.8% 23.5% Smallest Companies < $25 million 10.3% 20.6% 63.2% Smaller Companies $25 million to < $50 million 29.6% 25.9% 37.0% 48.1% Small Companies $50 million to < $100 million 29.6% 40.7% 42.6% 44.4% Medium Companies $100 million to < $250 million Large Companies $250 million to < $1 billion 36.7% 38.3% 30.0% 29.5% 48.3% 52.6% 50.0% 46.2% Larger Companies > $1 billion 21.6% 35.1% 48.6% 59.5% 36 National Association of Corporate Directors

38 This document was prepared for respondents to the If Your Company Provides Perquisites to Directors, Please Indicate Which Ones Gift matching/charitable gifts Life/health insurance Other Company products/services/discounts All 11.9% 32.8% 31.3% 44.8% Smallest Companies < $25 million 11.8% 29.4% 41.2% 52.9% Smaller Companies $25 million to < $50 million 0.0% 0.0% 0.0% 100.0% Small Companies $50 million to < $100 million 10.0% 10.0% 10.0% 70.0% Medium Companies $100 million to < $250 million 27.3% 36.4% 45.5% 18.2% Large Companies $250 million to < $1 billion 11.8% 11.8% 41.2% 41.2% Larger Companies > $1 billion 9.1% 36.4% 36.4% 54.5% National Association of Corporate Directors 37

39 This document was prepared for respondents to the National Association of Corporate Directors

40 This document was prepared for respondents to the National Association of Corporate Directors 39

41 This document was prepared for respondents to the National Association of Corporate Directors

42 This document was prepared for respondents to the National Association of Corporate Directors 2001 Pennsylvania Ave. NW Suite 500 Washington DC ISBN (202) PHONE (202) FAX