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How Corporate Boards

(Should) Work
Perspectives on the 2004 Corporate
Governance Effectiveness Survey

Worldwide financial scandals, legislative backlash, shareholder revolt: Everyone wants to improve
the way corporate boards work. The attention usually focuses on compliance and documentation.
The Sarbanes-Oxley and NYSE requirements along with new surveys and checklists offer to help
boards by increasing their paperwork. No doubt financial reporting and auditing will be improved.
But is that enough?
Institutional investors want to go further. Even as many directors urge a pause in reforms so the
results of new regulations can take hold, institutional shareholders continue to apply pressure.
Rather than merely selling their shares, they are withholding proxy votes, pushing for more SEC
reforms (especially to gain nominees on the ballot), filing lawsuits and using media attention to their
advantage. These highly visible efforts have drawn much attention from boards and management
but the results so far have been mixed.
Proxy and rating organizations have sprung up to push boards as well. Capitalizing on information
technology, these organizations set standards of good governance, then monitor, evaluate and rate
corporate boards against them. Fund managers consult these ratings and, despite dissent over how
well they correspond to real performance, share prices go up or down as a result. Boards had better
pay attention.
Courts, too, want more. Recent rulings have also shifted accountability in governance, allowing
shareholder lawsuits against boards and individual directors. No more immunity for directors
poor business decisions, and no more shelter under the Business Judgment Rule for nonexistent
or ineffective board processes. Boards are under pressure, and because the regulations, ratings and
litigation all focus on documentation, they are also buried under paperwork.
But whats really happening in those boardrooms? Are the new compliance initiatives working?
Are they worthwhile? Are boards more independent of management than they were in the past?
Are companies better run?
This is an important time for corporate boards. Much paperwork (for Sarbanes-Oxley, NYSE) has
been completed. Many proxy votes on investor challenges have been counted. Expectations placed
on directors have moved beyond selecting the CEO; they must now wrestle with the larger issues of
redefining the boards role, culture and operationsof preserving and increasing value on behalf of
the companys stakeholders. This paper examines how.

How Corporate Boards (Should) Work

Independence: More than its cracked up to be?

Are boards becoming as independent as shareholder activists and some ratings organizations
want? Proposals have included separating the
roles of CEO and chairman of the board and
changing board membership to ensure independent perspectives.

Although more boards have separated the

CEO and chair roles since our 2002 study, the
change is smaller than expected. In 2002, 14
percent of the boards represented had already
separated the roles and another 16 percent were
planning to separate them. In 2004, 23 percent
have separated the roles (see figure 1). While this
is nearly twice as many as two years ago, it is still
less than the combined total (30 percent) of
actual and planned in 2002.
Some directors consider the option but see
greater advantages to having the role combined,
and decide that a presiding director or lead
director could create the balance needed. More
boards have gone this route, with 61 percent
reporting an independent lead director. Of
these, 43 percent were established in the past
12 months (see figure 2). One S&P 500 director
describes a board decision: We thought through
the advantages of going each way and decided
that based on our industry and the alignment

Figure 1: Should the roles of

CEO and chairman be separate?

Figure 2: Has your board established

an independent lead director?

This report presents the results of A.T. Kearneys
2004 Corporate Governance Effectiveness
survey of S&P 500 independent directors. It
examines changes boards have made either in
the past 12 months or since our 2002 survey
and, in some cases, changes boards have not
made despite external pressures.
Although we begin by summarizing the major
study findings, this papers focus is broader, offering an analytical take on what the findings mean
to U.S.-based companies. We also discuss how
corporate boards can work better and smarter.









Source: A.T. Kearney

Added in past year




Source: A.T. Kearney



How Corporate Boards (Should) Work

needed the combined role might fill expectations better but to balance the power, we also
initiated the presiding director.
External pressures continue to push for this
separation. More boards may follow the path
recently taken by McDonalds, implementing
separate roles when selecting a new CEO.
Regardless of the separation of roles, a shift in
control is evident by who selects committee chairpersons. In 2002, 50 percent were selected by the
chairman of the board who was almost always the
CEO. In 2004, this dropped to 24 percent.
Time is a commodity,
not a competitive weapon
In 2002, 87 percent of the directors thought
their time demands would change. They were
right. This year, directors are reporting a significant increase in demands upon their time and

responsibilities. Although the average number of

board meetings did not change significantly from
2002 (6.1 meetings per year), 84 percent of the
directors report spending more time in board
meetings in the past 12 months. One-fourth
say the time increased more than 25 percent
(see figure 3).
In addition, most board members are spending more time outside of meetings on boardrelated work, with nearly 80 percent averaging
10 or more hours per month in the past year.
With the increased time requirements, it is
not surprising to find that slightly more than
one in four board members expects to resign
a board position in the next year. Similar to our
findings in 2002, the directors who serve on
a larger number of boards are those who either
anticipate resigning a board position in the next
year or did so in the past year.

Figure 3: The number and length of meetings increase










Source: A.T. Kearney







While rating systems and checklists

may be useful as a warning system
or for insight into the practices of
a board and company, compliance or
high ratings should not be viewed as
a failsafe protective measure.

How Corporate Boards (Should) Work

Still 11 chairs at the table

Despite the increasing demands on boards, their
size has not changed significantly in the past
two years, with the average number of directors
on a board barely inching down from 11.6 in
2002 to 11.3 today.
As for who sits on the board, 97 percent of
respondents are U.S. citizens, and nearly 20
percent are women. Almost one-half (47 percent) of the directors surveyed report their
company has an executive in charge of diversity initiatives. More than one-third (34 percent)
say that the diversity of their board should
be increased.
One in five boards added committees in
the past 12 months, with governance by far
the most popular. Other newly formed committees include finance, risk management and
public affairs.
Most board members are satisfied with
both the board structure and the committee
structure, although about one-third offered
suggestions to improve the quality of the board
membership. Their recommendations focus on
including more qualified, diverse and independent directors.
How old is too old?
Annual elections of the entire board take place
at 38 percent of the boards represented. For the
rest, on average one-third of the board membership is reelected each year. Only one in five of
the boards report tenure limits, most of which
are eight to 15 years. However, four in five have
limits based on age (with an average limit of
71 years) and one-half limit terms if there are
changes in principal occupation or role. One
in four has a limit based on commitments to
additional directorships.

Show me the money

Compensation has been increasing for many
board members, although it is not commensurate
with the greater time commitment (see figure 4
on page 6). About one-half report increases in
compensation of 10 percent or more during the
past year.
Three-fourths of the directors report that
they are required to be stockholders in the
company, with 16 percent indicating that stock
ownership requirements increased in the past
year. Three-fourths also indicate that part of
their compensation comes in the form of stock
options, varying from 10 to 100 percent of their
compensation package.
As widely reported, director and officer
premiums continue to skyrocket. Two-thirds of
directors cite increases exceeding 50 percent in
the past 12 months. Almost half (42 percent)
predict premiums will further increase by 50
percent or more in the year ahead. One director
noted a 500 percent increase in the four years
since the previous renewal.

Despite directors efforts to meet demands of
corporate governance, investing more time has
not yet translated to confidence in board effectiveness in some critical areas, particularly where
future value is at stake. Although 97 percent of
directors say their boards are more actively
involved in guiding and shaping company
performance, three-fourths think their boards
still need to do more.
Get back to the real job
Nearly all the directors report they have been
involved in compliance with regulations such as


How Corporate Boards (Should) Work

Sarbanes-Oxley or SEC governance requirements,

with three-fourths being very involved in the
past 12 months (see figure 5).
New requirements have been costly, not
only in consuming board time and focus but in
direct costs to their companies. CFO Magazine
estimates that 48 percent of both public and
private companies will spend at least US$500,000
to meet these new requirements and for some
companies this number will stretch into the
millions.1 At the same time, many question the
worth of this investment, with nearly 40 percent
believing there will be very little or no effect on
their internal control processes.
There are clear concerns that the attention on
compliance may have detracted the boards focus.
One director told us, Things are out of whack.

Many boards have overreacted to Sarbanes-Oxley

requirements and are too focused on filling out
forms. They arent spending enough time on the
issues, for example, on strategy.
Pay attention, please
While directors in our 2004 survey are confident that their boards can pinpoint problems,
identify concerns and monitor financials, they
are less sure about creating or securing future
value for stakeholders. Less than one in four
thinks their boards are very effective at developing leadership and succession planning or overseeing strategy. Even fewerless than one in
fivethink their boards are very effective at
monitoring risks or identifying early warning
alerts in monitoring performance (see figure 6).

Figure 4: Changes in compensation and time committed in past year



Time in meetings
Time outside meetings








Source: A.T. Kearney



5% 5%

How Corporate Boards (Should) Work

Figure 5: Board involvement and activity increases


more active







More active


more active



No increase



Source: A.T. Kearney

Figure 6: Board effectiveness in critical business issues

Examining problems
and concerns


Monitoring financials


Developing leadership and

succession planning


Guiding strategy
Monitoring risks
Performance warnings

Source: A.T. Kearney


How Corporate Boards (Should) Work

Although accounting scandals have grabbed

headlines in recent years, some of the bigger
failures have resulted primarily from flawed
strategy or mistaken implementation. Adecco,
Ahold and Parmalat all used takeovers to expand
rapidly, particularly in the United States; they also
provided significant incentives to management
via options programs to become larger, but not
necessarily more profitable. Their boards were
also dominated by family or non-independent
shareholders (which has since changed). At Kmart,
Vivendi, SwissAir and others, strategies failed
to deliver promised results and management
resorted to the wrong solutions. Challenges to
these companies strategies, risk assessments and

performance should have been made earlier

well before any accounting questions might have
been appropriate.
Roughly one in five companies included
in todays S&P 500 has experienced a drop
in equity value of 50 percent or more over
a year-to-year period within the past five years.
The total loss associated with these drops is more
than US$2.7 trillion. The crisis is not just in
accounting, but in growing a profitable business and activists will keep up the pressure
until boards take appropriate action. In other
words, boards must extend their focus beyond
regulatory compliance to the broader set of business issues that influence shareholder value.

Figure 7: Relationship between total shareholder return and governance


Top GMI scores (8.510.0)


Johnson Controls






Johnson & Johnson

Bottom GMI scores (1.03.5)



Sara Lee



Freddie Mac









Sources: A.T. Kearney and Governance Metrics International (GMI) analysis, March 2004





How Corporate Boards (Should) Work

Good value for good governance

Various studies reveal a connection between governance practices and business performance (and
thus shareholder value). Although their definitions
of good governance differ slightly, all examine
factors that define board independence, experience, decision-making practices and culture.2
We evaluated total shareholder returns over
a five-year period for selected companies rated
by Governance Metrics International. The results,
shown in figure 7, concur with broader studies:
Attentive governance is much more likely to
create value for shareholders.
Dont count on your ratings
In our survey, 59 percent of the directors say their
companies follow reporting procedures driven by
a rating agency such as The Corporate Library,
Standard & Poors, Institutional Shareholder
Services and Governance Metrics International.
While rating systems and checklists may be useful as a warning system or for insight into the
practices of a board and company, compliance
or high ratings should not be viewed as a failsafe protective measure. Florencio Lopez-deSilanes, from Yale School of Managements
International Institute of Corporate Governance,
notes, Corporate governance is a system of
checks and balances. There is no one measure
that ensures a corporation is well governed.3
Gordon Nixon, CEO of Royal Bank of
Canada, provides a management perspective,
As a CEO, I cant stress enough that there is
more to good governance than ticking off boxes
in a ratings survey to meet the requirements of
Sarbanes-Oxleythe SEC, and various stock
exchanges. He adds that, Good governance
comes from having a strong-willed board that
has done its homework and is prepared to speak

up and constructively challenge management

on its basic strategy and on vitally important
and sensitive issues.4
Whats ahead how can boards
be more effective?
The recent attention to governance and new
regulatory requirements has generated plenty of
opinions about what boards need to do to
improve their effectiveness. We asked directors
about impediments to monitoring business performance and what actions would be most effective in removing them. Their responses suggest
that the focus of many rating agencies and
shareholder groupsseparation of roles, independence of directors, and more structural
ruleswill not have the strongest impact.
The role of the corporate board in the 21st
century is being redefined. Going forward, the
board will be a more engaged part of the company management team, bringing different and
challenging perspectives to support key decisions
in strategy and risk identification, as well as
validating the ability of the companys leadership to achieve results for stakeholders.

Boards need to take action in five critical areas
to improve their effectiveness as shareholder
representatives, overseeing the company:
1. Challenge the status quo: redefine board
role and culture
A board culture that is more active in controlling
agendas and analyzing information tops the list of
ways to improve effectiveness. It also outweighs
the more structural actions that have been the
focus of much recent attention (see figure 8 on
page 10).


8: What
can improve
Boards board


More active board culture





inquisitive management
board culture support for

to evaluate

caliber of

CEO and

lead director

Source: A.T. Kearney

Figure 9: Impediments to monitoring business performance

Lack of tools and processes
providing early warning signs


Inadequate amount and type

of company information


Ineffective board culture

Insufficient discussions
with management


Not enough time

Directors unwilling
to challenge the CEO
Lack of capabilities within
board of directors


Source: A.T. Kearney

* Directors were asked to list the top 3 impediments


How Corporate Boards (Should) Work

In comparing governance practices at

Fortunes most admired and least admired
companies, Yale management professor Jeffrey
Sonnenfeld found little difference in percentage
of independent directors, financial literacy of
audit committee members or amounts of stockbased compensation. He suggests that what
makes great boards great is not the structure in
which they operate, but the culture.5
One S&P 500 director describes the ideal
board culture as one that invites different opinions. It needs to have constructive disagreement
and not just a stamp of approval. Effective
boards challenge company management and
each other as they assess the workings and plans
of the company. In addition to constructive
dissent, other characteristics of effective board
cultures include trust, candor, open communications within the board and with a broader set
of company leaders beyond the CXO level,
individual accountability, and an appetite for
self-evaluation and improvement.
Another aspect of improving board culture
involves taking advantage of new technologies
and resources to communicate company performance or engage effectively in strategic oversight.
Passively listening to the traditional stream of
presentations from the management team is no
longer enough to fulfill board responsibilities.
When we asked directors to rank impediments to monitoring business performance, for
example, the need for tools and processes that
provide early warning signals for performance
issues significantly outranks other factors (see
figure 9). The amount and type of information
also rank relatively high as an impediment, a
surprise in todays age of information. Many
directors told us they were frustrated with large
packages of information that were time con-

suming to review and frequently didnt answer

their most important questions.
Improved information access will be
essential to boards ability to be more effective.
Some companies have already provided boards
with access to digital dashboards or web-based
reporting. A few board members we spoke with
engage external services, use customer surveys to
gauge satisfaction, or visit sites and employees
directly to collect information from sources
other than the traditional management funnels.
Some directors are speaking up to guide management teams to provide the board with needed
Despite these concerns, nearly 90 percent of
directors admit they rely largely on managements formal reports or informal discussions
to monitor performance drivers (see figure 10
on page 12). Only 13 percent of the directors
in our 2004 survey say they use analyst and
industry reports, customer surveys, company
visits, benchmarking or third-party sources.
Only 6 percent of the directors report using
any type of electronic dashboard or software to
access company data. A few directors told us
they make independent walk around visits
to company facilities several times a year and
learn a lot about how strategies are being
implemented, operational concerns and even
the ethics and culture being driven throughout
the company.
This also connects to the importance of
having independent directors on the board to
bring relevant experience and different perspectives to create healthy debate. While the
board needs to trust the management team,
even the most trusting relationships involve
using independent sources of information to
validate performance.


How Corporate Boards (Should) Work

2. Measure and monitor corporate

performance but not just the financials
Boards need to ensure that their corporate report
card measures where the company is going more
than where it has been. Many reports to boards
and shareholders are too inwardly focused
documenting past performance but offering
little insight into how the firm is likely to perform.
The focus needs to be rebalanced to include
forward-looking and non-financial indicators
that point to future performance. For example,
sales data might be monitored in both qualitative and quantitative terms to understand the
relative contribution of certain segments or
deals, shifts in repeat customers, or changes in
deal size and time-to-purchase rather than just
dollars. Unlike standard accounting measures,
the most important forward-looking indicators
vary from company to company. The types of

information typically considered include operating and sales data, external market drivers,
and brand and stakeholder concerns. External
market drivers might include technology tracking, demographic or firmographic changes, or
competitive trends.
Each category of information, however, is
dynamic. Boards will need to revisit the list of
indicators from time to time as the market and
industry changes; metrics that help reveal next
years trends may be irrelevant the year after.
Its equally important to track the changing
relationships the metrics have to each other.
3. Bet on the future: Validate and strengthen
business strategy
The role of the board is not to define or
construct strategy, but to serve an important
role in challenging and validating the strategy

Figure 10: Tools used by boards to monitor performance



Industry reports,
analysts, customers,
on-site visits, consultants
and investors


Management reports

Informal management

Source: A.T. Kearney



Third-party and
other sources

How Corporate Boards (Should) Work

developed by the management and company

teams. Doing so requires keen insight into the
businesses, markets and operating requirements
involved. Boards need to understand the quality
of assumptions made, where bets are being
placed and the logic behind those bets. New
frameworks may be needed to comprehend
todays global business environment and complex business structures and relationships.
Indeed, new business configurations such as
alliances, joint ventures and outsourcing provide
a unique challenge for corporate governance.
These strategic relationships affect corporations
at much lower business aggregation levels, at the
building blocks of the value chain. Outsourcing
manufacturing to China, using a distributor
in regions where a corporation does not have
a presence, investing with another company in
the development of a new process or product,
and extending a brand using another companys
products are all actions that affect the control
corporations have over their value chains. In addition, these new business configurations expose
companies to new competitive threats at levels
below their business units. As these opportunities and threats proliferate, existing corporate
governance practices can become strained.
Such strategic issues increase the boards
workload, even if only to make sure all significant
opportunities and threats for the firm are brought
to the boards attention. For example, when Philips
Electronics got together with Sara Lee to create
the Senseoa cup-by-cup electronic coffeemaker
featuring unique coffee pads it acquired
a contractual stake in the coffee market. In doing
so, it created the new corporate governance
challenge of assessing the associated strategic
risk. The board had to understand the dynamics
of the coffee market to determine how quickly

this proposition should be rolled out to other

countries. It also had to know how to defend the
coffee pads against copycats and price erosion.
This new source of profit for Philips
Electronics cannot be easily evaluated with the
usual tools and metrics. How should stakeholders value, for example, the contract the
domestic appliances division of Philips Electronics has with the coffee division of Sara Lee
in which Philips makes the coffeemaker and
Sara Lee makes and sells the matching coffee
pads from which Philips receives a percentage?
Recently, courts ruled that the patents on the
coffee pads couldnt stop copycats and privatelabel manufacturers from producing me-too
products. This decision not only affects Sara
Lees growth and profit, but also that of Philips.
In such alliances, board members will have
to gain a full strategic understanding of new
industries and players to assess the rewards and
risks. Corporations acquiring companies in other
industries face similar challenges.
Engaging the board earlier provides an opportunity to validate and strengthen the strategy
and the accompanying risk-management plans.
Scenario planning is a valuable tool for this. The
board members diverse perspectives and significant experience should be beneficial in discussing
potential scenarios, competitive concerns, execution requirements and risk-management plans.
Board members should engage in a constructive
debate about strategy, not an annual dog and
pony show reviewing highlights of an alreadyfinalized strategy.
4. Expect the unexpected: improve risk
identification, monitoring and mitigation
September 11, 2001, served as a wake-up call to
many senior executivesdemonstrating the need


Board members should engage in

a constructive debate about strategy,
not an annual dog and pony show
reviewing highlights of an alreadyfinalized strategy.

How Corporate Boards (Should) Work

to improve how risk is identified, monitored and

managed. Companies are more vulnerable than
ever to economic crises, security threats, supply
chain disruption and consumer backlash.
Much of the risk is a result of popular and
successful business strategies global sourcing,
lean manufacturing, outsourcing, offshoring and
extended IT networks. While these strategies
increase efficiencies, they also create extremely
fragile networks built on the false assumption
that the world is a predictable and stable place.
In fact, the very innovations that have helped
improve business efficiency and profitability
increasingly are based on an integrated global
business environment that also brings with it
a series of interdependent risks.
The challenge to boards will be to devise
or tailor approaches that fit the particular circumstances their companies face, as well as to
anticipate the unexpected events that could
disrupt performance or negatively affect shareholder value. Boards need to consider risks as they
question the strategies, operational readiness,
performance and potential threats to the reputation of the company or its ability to execute.
Ensuring the company has flexible solutions
under a variety of circumstances has proven to be
the most effective strategy. Whether your key
supplier or your largest customer falters because
of a fire in a plant, an earthquake, a terrorist
attack or an economic crisis, your response plan
requires flexibility and redundant solutions
most of which can be considered by the board
beforehand to mitigate the risk, says Paul
Laudicina, managing director of A.T. Kearneys
Global Business Policy Council, which helps
chief executives and boards monitor and capitalize on worldwide macroeconomic, geopolitical,
regulatory, technological and social changes.6

Boards must develop a risk-management

framework that protects and enhances shareholder value. The management team is accountable for effective execution, but can rightfully
expect assistance from the board. Shareholders
expect the board to recognize risks that require
board assistance or intervention.
5. Whos who in the talent pool: assure broad
leadership and talent management
Hiring and, in some cases, firing a CEO is
a familiar task for boards of directors. Boards
regularly make succession decisions, some
planned and some not. The board of Vivendi
Universal removed Jean-Marie Messier from his
post as CEO when he proved to be more
a liability than an asset. Board members at
Vodafone scrambled to find a replacement for
Sir Chris Gent when he announced his decision to retire in a years time. Fiats board has
been exceptionally busy having hired five
chief executives in the past two years. Replacing
executives after a disaster was a lesson for ABB
and 11 other companies in 1996, after a plane
carrying a U.S. Commerce Department mission crashed in the Balkans. Amid the grief and
confusion of the accident, the companies had
to construct and implement effective succession plans. Such unpredictable events can be
a devastating blow to businesses of any size.
Having a plan in place can ease the resulting
business upheaval as McDonalds perfectly
illustrated in early 2004 after the unexpected
death of its CEO.
Companies are well advised to plan for leadership changes with succession strategies that,
if necessary, can be implemented at a moments
notice. With a succession plan in hand, the
board can act quickly and confidently in the


How Corporate Boards (Should) Work

event a decision is required. It is also a means

to promote shareholder value with a stronger
leadership team across the organization.7
Talent management must extend beyond
a defensive replacement plan and a list of highpotential employees. It requires developing a
deeper talent pool to serve the needs of the organization, and aligning the companys strategic
agenda and core processes with its leadership
competencies, assessment and development. It
is a systematic approach that includes board
reviews for senior management, and that leverages board perspectives to strengthen leadership
One of our clients recently implemented
a broad-scale talent-management program
aligned to develop the competencies the companys executives believed they needed in the

future, as well as the present. The ongoing

program integrates evaluation and calibration,
mentoring, individual development plans, crossfunctional training and learning programs that
identify, develop and deploy talent. The boards
role is clarified for certain levels, redefining board
involvement to both develop better leaders and
address the boards need for understanding the
quality of leaders.
Todays complex business organizations mean
board roles must expand beyond succession
planning for a CEO to broader talent management and leadership development. With business units often larger in size than some country
economies, and business complexity that requires
continuity to sustain and grow shareholder
value, more boards are making enterprisewide
succession plans.

1 Sticker

Shock, CFO Magazine, 1 September 2003.

for example: Paul Gompers, Joy Ishii, and Andrew Metrick, Corporate Governance and Equity Prices, Quarterly Journal of
Economics, February 2003, pp. 107-155; Paul MacAvoy and Ira Millstein, The Recurrent Crisis in Corporate Governance,
(Palgrave Macmillan, 2004); Lawrence D. Brown and Marcus L. Caylor, The Correlation between Corporate Governance and
Company Performance, Georgia State University Research Study 2004; GMI Governance and Performance Analysis: March 2004,
Governance Metrics International, 2004; and The Best and Worst Boards, BusinessWeek, 7 October 2002.
3 Investors Fight Back, BusinessWeek (International Edition), 17 May 2004.
4 Gordon Nixon, in a speech delivered at the Institute of Corporate Directors 2004 Fellowship Awards Dinner, 18 May 2004.
5 How Go-Along Boards Jam Up Firms, BusinessWeek, 5 February 2002.
6 See also, Paul A. Laudicina, World Out of Balance: Navigating Global Risks to Seize Competitive Advantage, (McGraw-Hill, 2005).
7 For more on succession planning, see Filling the CEOs Chair, at
2 See,


The bottom-line objectives for good governance are simple. The role of the board is to protect and
grow shareholder wealth and ensure ethical and equitable corporate behavior for all stakeholders. The
board must trust, but verify, the management teams stewardship. Boards should reinvent their roles
and the protocols under which they operate to be effective in recognizing and acting when necessary.

Appendix: Study Methodology

A.T. Kearneys 2002 Corporate Governance Survey captured directors opinions during the upsurge
of activity around governance. Two years later, new regulatory requirements, increased shareholder
activism, and the media spotlight had resulted, we reasoned, in some changes. In particular, we
wanted to understand how directors perceive the effectiveness of their boards and what is hindering
or facilitating governance improvements.
S&P 500 directors participating in our 2004 Corporate Governance Effectiveness Survey represented
more than 400 companies ranging in size from less than US$1 billion to more than US$20 billion
and a cross-section of industries. Companies represented a balanced mix of national, multinational
and global operations. The financial state of the companies was largely healthy, but 16 percent were
either underperforming or in bankruptcy (see figures A.1 to A.3). All directors had at least one years
experience on their board. Nearly 40 percent of the directors had served on public corporate boards
for more than 10 years. More than 40 percent serve on three or more boards.

Figure A.1: Top 15 industries represented

Telecommunications and high tech


Banking and financial services



Health-care and pharmaceuticals



Manufacturing and aerospace


Medical and biotech



Chemicals, metal and mining


Professional services


Media and entertainment

Source: A.T. Kearney



Consumer goods


Oil and gas


Food industry


In addition to the survey, we talked with more than 40 directors in follow-up discussions. They
added context around the survey responses and helped us better understand the current climate and
the needs of directors, corporate leaders and shareholders.
While our 2002 survey provided a baseline for issues and questions, we made significant adjustments
to reflect the changing environment of the past two years. We surveyed the same group: all directors
of S&P 500 companies, including the 148 non-U.S. directors. Directors serving on multiple boards
were given the opportunity to respond for each board, and many did.
To encourage responses and open answers, the survey was completely confidential. The 180 responses
were returned by the end of January 2004.

Figure A.2: Size of companies represented




Figure A.3: Financial state of companies surveyed


Fast growth






Moderate but
performing well


Source: A.T. Kearney

Source: A.T. Kearney

A.T. Kearney is an innovative, corporate-focused management consulting firm

known for high quality, tangible results and its working-partner style. The firm was
established in 1926 to provide management advice concerning issues on the
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