NACD Blue Ribbon Commission on The Effective Lead Director

The importance of the lead director is obvious from the name—a director who leads fellow board members who, in turn, comprise the corporation’s highest decision-making authority. Just as a chief executive leads a corporation, the lead director leads the work of the independent directors.

Recognizing this importance nearly a decade ago, NACD formed a Blue Ribbon Commission on Board Leadership in 2004 to examine how board structure and independent leadership contribute to a company’s value.

Since publication of that report, the lead director role has grown in prevalence. Now, two-thirds of respondents to the 2011 NACD Public Company Governance Survey report the use of a lead director—the highest level since NACD began surveying the director community on this question in 1995. Furthermore, the 2011 survey shows that 88 percent of respondents reporting the use of a lead director role agree that this position enhances their board’s effectiveness.

This Commission was not formed to debate one leadership structure versus another, but to examine the lead director role in order to increase the efficiency and effectiveness of the person in the position. The following chapters aim to provide useful, up-to-date guidance on the appropriate content of the lead director role.

The role of lead director has undergone many changes since its inception and further clarification is necessary due to the growing importance and prevalence of the role. Our recommendations to enhance the lead director position constitute the balance of this report and address the following:

• The current expectations of a lead director. What fundamental duties does the lead director perform?
• Selecting, evaluating, and compensating the lead director. What particular attributes should a lead director possess? How should the lead director be elected and evaluated? Is a term certain desirable?
• Key relationships and communication. How should the role of the lead director relate to the chairman/CEO, fellow directors, and various committees? Does the lead director have a particular role in advising the chairman/CEO? What about communications with shareholders/stakeholders?
• Enhancing the role. In the future, what new duties might be appropriate—and under what circumstances might they apply? How can the lead director be most effective?

The practices described in this report may or may not be appropriate for your company, but they should serve as catalysts for board discussions. Ultimately, boards need to consider these issues and establish their own practices or procedures to maintain effective leadership in good times and bad.

One main point emerges from this report: The lead director role involves leading leaders—a challenging but rewarding task which, when done properly, enables exceptional governance and board effectiveness.

Hon. Barbara Hackman Franklin

Irv Hockaday

September 2011

Chapter 1: Current Status of the Lead Director

Over the past thirty years, the structure, influence, and visibility of boards have been shaped through significant events. In response to increased shareholder activity, public corporate failures, and government intervention, corporate boards have evolved dramatically. America’s boardrooms and their leadership structures have had to keep pace in order to remain effective overseers of sustainable corporate performance and the creation of shareholder value.

Between 1970 and the turn of the last millennium, corporate boards began to voluntarily move toward independent leadership. Leading companies recognized the need to position the board to formulate an objective, independent view of management’s performance in order for oversight to be meaningful. Institutional shareholders also held the view that some form of independent leadership was necessary and promoted it among their portfolio of companies.

During this period of change, an increasing number of boards adopted an idea introduced by attorney Martin Lipton and Harvard professor Jay Lorsch in 1992. In a widely circulated article, Lipton and Lorsch urged boards to designate an official “lead director” in companies that had an executive chairman or combined the chairman and CEO roles. Two years later, this position was included in the General Motors Corporate Governance Guidelines with advice by attorney Ira M. Millstein, whose writings had also advocated independent board leadership. Soon afterwards, institutional investors seized the idea and promoted it to other companies. (To see a comparison between the lead director role and that of the non-executive independent chair, please see Appendix A.)

The push towards greater board independence continued with the enactment of the Sarbanes Oxley Act of 2002 (SOX). SOX rules placed a spotlight on audit committee independence, and encouraged the major listing exchanges to broaden their listing rules in this regard. The listing exchanges followed with rules requiring that independent directors meet in executive sessions outside the purview of management and other insiders. The new rules also required companies to disclose the name of the director presiding over executive sessions if a particular individual was chosen to perform this task. In late 2009, in time for the 2010 spring proxy season, the Securities and Exchange Commission issued rules requiring a series of “enhanced” proxy disclosures, including disclosure of the board’s leadership structure. The new proxy disclosure requirements were further enhanced as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Under Dodd-Frank, public companies must discuss the merits of their decisions with regard to separate or combined board chair and CEO roles, and comment on the use of an independent lead director in the case of a combined chair/CEO position.