7
What's in a Name? The Lead Director Role at U.S. Public Companies

Richard Fields

Counsel and Director of Corporate Stakeholder Engagement at King & Spalding

Anthony Goodman

Consultant in the Board and CEO Advisory Partners of Russell Reynolds Associates

Introduction1

In February 1992, General Motors announced that it had lost $4.5 billion the prior year, then the worst ever annual loss for an American corporation.2 In the short-term, things didn't get better. Losses the following year totaled $23.5 billion.3

In the middle of this bleak period, GM's board took decisive steps. The company's chairman and CEO Robert Stempel resigned under intense pressure. The board replaced him with two men: John Smith became the company's CEO, and board member John Smale its chairman.4

GM's appointment of a nonexecutive chair gave traction to a burgeoning movement to separate the chairman and CEO roles in U.S. public companies.5 In January 1993, three other major companies—American Express, IBM, and Westinghouse—also installed nonexecutive chairs.6

You might be tempted to assume this story ends with the widespread bifurcation of the CEO and chairman roles. It does not. Indeed, the separation of titles at GM lasted only a few years before the board bestowed the chairman title on CEO John Smith, despite shareholder resistance.7 At the time of Mr. Smith's promotion, Mr. Smale, the former nonexecutive chairman, became the company's “lead director” responsible for coordinating management oversight, helping to set the board's agenda, and chairing the three yearly meetings of GM's outside directors.8

Schematic illustration of Board Leadership among the S and P 1500 According to Data from ISS Analytics, the Data Intelligence Arm of Institutional Shareholder Services.

FIGURE 7.1 Board Leadership Among the S&P 1500 According to Data from ISS Analytics, the Data Intelligence Arm of Institutional Shareholder Services

At the time, governance experts expected GM's reversion to a combined CEO and chairman role would curb corporate appetite to appoint nonexecutive chairs. They were partially right. Today, there are many approaches to independent board leadership. (See Figure 7.1.)

There are far more lead directors than existed in the early 1990s, but despite this growth, there is no universally accepted definition of the role. This chapter offers both history and context about the lead director role in the United States and is organized around five key questions:

  • Part I: Where did the lead director role come from?
  • Part II: Who are today's lead directors?
  • Part III: What responsibilities do lead directors have?
  • Part IV: What challenging issues demand the most attention from lead directors?
  • Part V: What behaviors and key relationships set the most successful board leaders apart?

Part I: Where Did the Lead Director Role Come From?

Observers often credit 1932's The Modern Corporation and Private Property9 by Adolf Berle and Gardiner Means with bringing widespread attention to the potential divergence of interests between a company's managers and owners, but a focus on the effective oversight of powerful interests has likely existed as long as there have been powerful interests.10

This is the principle that has led to such great attention on the empowerment and independence of boards, which in turn led some to focus on the empowerment of an independent board leader. Many have called for an independent chairman, noting the inherent conflict of having the company's CEO oversee him or herself.11 Separating the roles of CEO and chair was one of the ways that Jay Lorsch and Elizabeth MacIver suggested board members could act less like pawns and more like potentates.12

In some other countries that adopted corporate governance codes to guide companies on key issues this was the era in which independent board chairmanship became common. In 1993, the London Stock Exchange required listed companies to either comply with the so-called “Cadbury Report”—a report issued by “The Committee on the Financial Aspects of Corporate Governance” chaired by Sir Adrian Cadbury—that demanded the chair not be the CEO or explain their noncompliance.13 By 1994, only 25 percent of the largest 1,000 UK companies had CEOs who also served as chair.14 Similarly, there was a dramatic shift toward nonexecutive chairs in Canada. In 2003, eight years after 1995 Toronto Stock Exchange guidance recommending a nonexecutive chair or alternative board leadership structure, about two-thirds of the largest 300 Canadian companies had nonexecutive chairs, a figure that rose to 72 percent of Canadian companies with over 5 billion Canadian dollars in assets.15

What is driving American exceptionalism in board leadership arrangements? Skeptical investors might argue that status-conscious CEOs are simply demanding the board chair title (or refusing to relinquish it) in order to keep up with their perceived peer group. Others would argue that the U.S. public companies and their investors have developed a variety of board leadership roles appropriate to the complexity and diversity of the corporate governance of the United States, with state-driven legal frameworks, little federal direction on corporate governance, lowest-common-denominator listing requirements from the stock exchanges, and a business culture in which one-size-rarely-fits-all.

In the United States, the movement for more empowered independent board leaders came in the wake of corporate failures and on the edges of broader corporate governance reforms. In 2002, in the wake of the Enron and WorldCom scandals, The Conference Board convened a Commission on Public Trust and Private Enterprise that issued a report and recommendations on corporate governance matters. The Commission identified three potential approaches that could effectively balance board and CEO functions: (1) an independent nonexecutive chairman, (2) a CEO/chair coupled with an empowered lead director, and (3) a chairman who is not independent coupled with an independent director with incremental leadership responsibilities.16 The Commission's recommendations were not binding, but it was clear other organizations were thinking along similar lines. Soon after, New York Stock Exchange–listed companies needed to comply with a new listing requirement that boards meet in executive session—chaired by an independent director—with the explicit goal that this would empower “non-management directors to serve as a more effective check on management.”17 This was also an era of several high-profile splits of the chair and CEO roles and meaningful support for shareholder proposals to appoint independent chairs.18

The pace of change accelerated when the Securities and Exchange Commission (SEC) amended an important rule in 2009, requiring public companies to disclose information about the company's board leadership structure, including “whether and why it has chosen to combine or separate the principal executive officer and board chairman positions, and the reasons why the company believes that this board leadership structure is the most appropriate structure for the company at the time of the filing.”19 If the CEO and chair are the same person, the company must disclose “whether and why the company has a lead independent director, as well as the specific role the lead independent director plays in the leadership of the company.”20

That amendment to Item 407 of Regulation S-K spurred companies and their stakeholders to focus on the essential characteristics of an empowered and effective independent board leader, not simply that person's title.

Part II: Who Are Today's Lead Directors?

According to our own research, the average lead director of a company in the S&P 500 index is a 68-year-old man who has been on the board about 13 years. On average, they have been in their role as lead director for just over five years. The route to the role typically goes through board committee chairmanship, with 60 percent of lead directors having chaired at least one board committee at the company before taking on the role: Just under half (47%) of these lead directors have chaired the nominating and governance committee, 44 percent the compensation committee, and 31 percent the audit committee.

Despite the fact that 25 percent of board directors in the S&P 500 are women, and these women hold 22 percent of all the board committee chair roles, there is a much wider gender gap when it comes to board leadership. Nine out of ten lead directors (92%) are men. In the case of board chairs only 5 percent of the roles are held by women. The numbers are slightly better for S&P 1500 companies. EY reported in 2018 that 49 percent of S&P 1500 companies have lead directors. Of those, only 11 percent are women. Of the 40 percent of the S&P 1500 with independent chairs, 6 percent are women.24 The female lead directors also had to wait almost two more years on average to attain the role than their male counterparts. This suggests that there may be a glass ceiling for women directors, and even as boards have become more gender diverse, they have not yet become truly inclusive.

The fact that lead directors will be on the board on average eight years before they become lead director also highlights an issue around tenure limits. Institutional Shareholder Services (ISS) identifies U.S. directors with more than nine years on the board as having “excessive tenure.” Yet, that yardstick would apply to most lead directors who are only just taking up the role in year nine.

In terms of overboarding, a key governance issue for investors, we discovered that 28 board leaders (either board chairs or lead directors) have that role in more than one S&P 500 company, 26 of the men and 2 of the women. Four of the men have board leadership roles in three S&P 500 companies concurrently. Directors who take on board leadership roles in different companies at the same time may be reducing opportunities for others while creating workload issues for themselves, given the demands being placed upon lead directors, which we will address in the next section.

Part III: What Responsibilities Do Lead Directors Have?

As explained earlier, any two lead directors may not have the same responsibilities. While investors are increasingly pressing for the existence of strong lead directors, how they define that role varies significantly from investor to investor.

The Investor Stewardship Group (ISG), a coalition of more than 60 institutional investors with combined assets of more than $31 trillion in the U.S. equities markets, published six broad corporate governance principles, including that “boards should have strong, independent leadership structure.”25 In explaining that principle, ISG notes, “The role of the independent board leader should be clearly defined and sufficiently robust to ensure effective and constructive leadership. The responsibilities of the independent board leader and the executive chairperson (if present) should be agreed upon by the board, clearly established in writing and disclosed to shareholders. Further, boards should periodically review the structure and explain how, in their view, the division of responsibilities between the two roles is intended to maintain the integrity of the oversight function of the board.”26

BlackRock, the world's largest asset manager and a signatory to the ISG principles, identifies only three requirements for it to view a lead director as empowered: (1) provide formal input into board meeting agendas, (2) call meetings of the independent directors, and (3) preside at meetings of the independent directors.27

While ISG and BlackRock are restrained in their guidance, many other investors and investor organizations go much further.

In 2016, State Street Global Advisors, another signatory to the ISG, worked with Russell Reynolds Associates to publish a paper setting out key functions and responsibilities for independent board leadership (Figure 7.2).28

The Council of Institutional Investors (CII), a nonprofit association of asset owners, asset managers, and other service providers whose voting members represent roughly $4 trillion in assets,29 expresses a preference that the board chair be an independent director. CII's governance principle identifies a number of particular responsibilities a lead director should have:

The board should be chaired by an independent director. The CEO and chair roles should only be combined in very limited circumstances; in these situations, the board should provide a written statement in the proxy materials discussing why the combined role is in the best interests of shareowners, and it should name a lead independent director who should have approval over information flow to the board, meeting agendas and meeting schedules to ensure a structure that provides an appropriate balance between the powers of the CEO and those of the independent directors. Other roles of the lead independent director should include chairing meetings of non-management directors and of independent directors, presiding over board meetings in the absence of the chair, serving as the principle liaison between the independent directors and the chair and leading the board/director evaluation process. Given these additional responsibilities, the lead independent director should expect to devote a greater amount of time to board service than the other directors.30

Schematic illustration of the key functions and responsibilities of independent board leaders According to State Street Global Advisors, Developed in Collaboration with Russell Reynolds Associates.

FIGURE 7.2 Key Functions and Responsibilities of Independent Board Leaders According to State Street Global Advisors, Developed in Collaboration with Russell Reynolds Associates

The California Public Employees' Retirement System (CalPERS) defines its expectation for independent board leadership in its Governance and Sustainability Principles. CalPERS policy is notable for its firmness of expectation that the board have an independent chair and that regardless of title, the lead director should chair board meetings, not just meetings of the nonmanagement directors:31

The board should be chaired by an independent director. The chair is responsible for leadership of the board and ensuring its effectiveness. The chair should ensure a culture of openness and constructive debate that allows a range of views to be expressed. The CEO and chair roles should only be combined in very limited circumstances; in these situations, the board should provide a written statement in the proxy materials discussing why the combined role is in the best interest of shareowners, and it should name a lead independent director to fulfill the following duties:

  1. Coordinate the scheduling of board meetings and preparation of agenda material for board meetings and executive sessions of the board's independent or nonmanagement directors.
  2. Lead board meetings in addition to executive sessions of the board's independent or nonmanagement directors.
  3. When selecting a new CEO, boards should reexamine the traditional combination of the “chief executive” and “chair” positions.
  4. Define the scope, quality, quantity and timeliness of the flow of information between company management and the board that is necessary for the board to effectively and responsibly perform their duties.
  5. Oversee the process of hiring, firing, evaluating, and compensating the CEO.
  6. Approve the retention of consultants who report directly to the board.
  7. Advise the independent board committee chairs in fulfilling their designated roles and responsibilities to the board.
  8. Interview, along with the chair of the nominating committee, all board candidates, and make recommendations to the nominating committee and the board.
  9. Assist the board and company officers in assuring compliance with and implementation of the company's Governance Principles.
  10. Act as principal liaison between the independent directors and the CEO on sensitive issues.
  11. Coordinate performance evaluations of the CEO, the board, and individual directors.
  12. Recommend to the full board the membership of the various board committees, as well as selection of the committee chairs.
  13. Be available for communication with shareowners.32

Although not an investor itself, many investors acquaint themselves with ISS' governance analysis. In their Governance QualityScore Technical Notes for 2019, ISS notes that:

A lead independent director provides an important leadership function for a board with a combined CEO/chair structure. An effective lead director's functions generally include, but are not limited to, the following: presides at all meetings of the board at which the chair is not present, including executive sessions of the independent directors; serves as liaison between the chair and the independent directors; approves information sent to the board; approves meeting agendas for the board; approves meeting schedules to assure that there is sufficient time for discussion of all agenda Items; has the authority to call meetings of the independent directors; and if requested by major shareholders, ensures that he is available for consultation and direct communication.33

Lead Director Job Descriptions

A similar amount of diversity exists in company descriptions of their lead director's responsibilities. Some have relatively brief descriptions in their corporate governance guidelines or principles, such as this from IBM:

The Lead Director (i) presides at all meetings of the Board at which the Chairman is not present, including executive sessions of the independent directors, (ii) serves as liaison between the Chairman and the independent directors, (iii) approves information sent to the Board, (iv) approves meeting agendas for the Board, (v) approves meeting schedules to assure that there is sufficient time for discussion of all agenda items, (vi) has authority to call meetings of the independent directors, and (vii) if requested by major shareholders, ensures that he or she is available, as necessary after discussions with the Chairman and Chief Executive Officer, for consultation and direct communication.36

Others are broader and seem more responsive to the longform requests from organizations like CII and CalPERS, such as this from State Street:

The independent directors shall annually, at the first executive session following the annual meeting of shareholders, elect an independent director to be the Lead Director for the year. There shall be no limit on the number of terms that one individual may serve as Lead Director. The Lead Director shall:

  • serve as a liaison between (1) the Chairman and the CEO (if a separate individual from the Chairman) and (2) the independent directors;
  • preside at all meetings of the Board at which the Chairman is not present, including at executive sessions of non-management and independent directors;
  • communicate with the CEO (and the Chairman if individual is separate from the CEO) to provide feedback and implement the decisions and recommendations of the independent directors;
  • establish the agenda for the executive sessions;
  • consult with the Chairman and the CEO (if individual is separate from the Chairman) as to the agendas for Board meetings (and approve those agendas), as well as the information sent to the Board and the schedule of Board meetings to help assure that there is sufficient time for discussion of all agenda items;
  • conduct an annual process for reviewing the Chief Executive Officer's performance and report the results of the process to the other independent directors
  • receive communications from interested parties regarding concerns about State Street and otherwise be available, where appropriate, for direct communications with major shareholders; and
  • perform such other functions as may be designated from time to time by the independent directors.

The Lead Director is authorized to call meetings of the non-management or independent directors, and shall have the authority from time to time to designate an independent Board member to act on behalf of the Lead Director if absent from the meeting or otherwise unable to perform his or her responsibilities. The name of the then-current Lead Director will be disclosed in the annual proxy statement.

The Board believes that management speaks for the Company. Individual Board members may, from time to time, meet or otherwise communicate with various constituencies that are involved with the Company. In particular, as noted above, the Lead Director is available, where appropriate, for direct engagement with major shareholders. However, it is expected that the Lead Director or other Board members would do this, absent unusual circumstances or as contemplated by the committee charters, with the knowledge of management.37

Companies with an independent chair may choose to offer a detailed description of the role, as Delta does in its governance principles:

Since 2003 Delta has elected an independent, non-executive Chairman separate from the Chief Executive Officer. Delta believes the non-executive Chairman of the Board plays an important governance leadership role that enhances long-term stockholder value. The Chairman's responsibilities include:

  • chairing meetings of non-management directors (executive sessions)
  • presiding at the annual meeting of stockholders
  • briefing the Chief Executive Officer on issues raised in executive sessions
  • in collaboration with the Corporate Governance Committee, committee chairs and Chief Executive Officer, scheduling Board meetings, setting Board agendas and strategic discussions and providing a review of pre-meeting materials delivered to directors
  • overseeing Board, committee and senior management evaluations and succession planning
  • managing the Board's oversight of risks
  • recommending appropriate governance policies and practices
  • overseeing the avoidance of conflicts of interests
  • recommending Board committee and committee chair assignments
  • facilitating director discussions inside and outside the Board room, managing the relationship between the Chief Executive Officer and the Board, consulting with the Chief Executive Officer and serving as a counterweight as appropriate
  • overseeing the process for selecting new Board members
  • calling meetings of the Board and stockholders
  • chairing the Corporate Governance Committee
  • conducting/overseeing the annual evaluation of the committees and the Board
  • carrying out other duties requested by the Chief Executive Officer and the Board as a whole.38

While some elements of the lead director's job description are nearly universal—such as presiding over executive sessions—it is clear corporations define the role differently, and that investors will use different metrics to judge the effectiveness of the role as well.

Part IV: What Challenging Issues Demand the Most Attention from Lead Directors?

As we have demonstrated, there are meaningful distinctions between some descriptions of the lead director's responsibilities and other issues related to their appointment. But in our experience, two lead directors with the exact same remit at similar companies may still have very different jobs. Much of the variation in what a lead director can do and is expected to do will vary based on a company's unique context, including its shareholder base, its history, and the people holding executive and nonexecutive roles.

In addition to their current responsibilities with boards, the authors previously had the privilege of orchestrating the Lead Director Network, an invitation-only group of board chairs, lead directors, and presiding directors, for over a decade.39 The Network provided a forum where lead directors could discuss the challenges and experiences of their role with peers in a candid and confidential setting.

In one Network meeting, the assembled lead directors explicitly said that the lead director job descriptions fail to capture the richness or complexity of the job. As one said in 2011, “The definition [of the lead director role] in the proxies is so skinny; it doesn't capture the full extent of the role.”40 In the same meeting, another lead director observed, “The lead director, board, and CEO figure out what the role really means day-to-day and how it's going to work. It's only once those conversations have taken place that you have a true understanding of the role.”41

Companies face vexing recurring problems (such as oversight of strategy) and disruptive events (such as an activist intervention) that help demonstrate the full range of what being a lead director means.

CEO Evaluation and Succession

There are varying levels of lead director involvement in CEO evaluations. Some are “deeply involved in ongoing CEO evaluation, working directly with the compensation committee chair to define the CEO's annual goals, work with the CEO to develop a self-evaluation, and aggregate and share the board's feedback.”42 One lead director noted, “In our bylaws, the CEO evaluation is unequivocally the responsibility of the compensation committee. But when I came on as lead director, I changed that. I put a structured process in place so that the full board had an input into the CEO's evaluation. My responsibility as lead director is to make sure the board is working well, and part of that is ensuring that the full board has input into the CEO's evaluation.”43

Others only become involved when things take an irreconcilable turn. As one lead director noted, “You want to support the CEO and give him constructive actions to take, but at some point, if they've lost the support of the board, you begin to negotiate his departure, and that responsibility usually falls to the lead director.” 44

Lead directors often feel incremental responsibility to make sure the board moves at an appropriate pace with a potential succession event. This requires focus on succession planning and readiness, despite the reluctance many CEOs have to plan for their succession. One lead director reflected on this challenge, saying, “Boards in general move too slowly, and [yet] on CEO succession, they're often trying to move faster than the CEO.”45

Unplanned transitions raise other challenges, one that puts a premium on the quality of the relationship between the lead director, general counsel, and chief human resources officer, three individuals likely to have outsize roles throughout the transition.46

Given their role in providing feedback to the CEO, it is often the lead director's lot to be the person who has to convey to the CEO that their time in office is at an end. Ensuring that an experienced lead director is in place during a CEO transition is important. Ideally, the board does not want to change both of its leaders at the same time. Some boards have an unwritten rule that they will not change the lead director within a year or so of a new CEO transition as they expect the lead director to help position the new CEO for success.

Major Transactions

Major transaction can have a dramatic effect on a company. The board's engagement in evaluating the strategic fit of a transaction and ensuring professional independence on deals where senior executives may be conflicted (sometimes quite subtly) is essential. Ensuring that the discussions about such transactions get sufficient time and attention and that the executive team faces appropriate challenges sets the best lead directors apart.

We have heard lead directors tell us that one of the most important roles the board can play is to say “no” to a deal in the face of management enthusiasm. At a Lead Director Network meeting, one member said, “The best deal I ever did is the one I didn't do. Management says, ‘I've got to have this; I've got to get this thing done.’ So sometimes you say, ‘You've got to stop.’” Another lead director agreed, “Sometimes the board's role is to say ‘no.’ Sometimes that's the biggest value-producing thing you can do.”47

The board and lead director role are especially important on deals coined “mergers of equals.” A merger of similarly sized companies often creates challenges for both boards to resolve, such as company name, headquarters location, and who will serve in which roles going forward.48

Shareholder Engagement

Direct engagement between shareholders and board members—most often the lead director49—is on the rise. According to EY, in 2018 “14 percent of S&P 500 companies disclosed that the board's independent leader was directly involved in engagement conversations with shareholders over the past year, up from 4 percent in 2015. More than a third (36%) of the lead directors, and almost half (47%) of the independent chairs involved in these engagement conversations also wrote letters to shareholders in the proxy statement.”50

Board leaders engaging with shareholders can have a dramatic effect on shareholder perceptions of a company's corporate governance. The power inherent in shareholder engagement is why companies need to carefully define what types of engagements are appropriate for board members.

  1. Reactive engagement. Reflecting on a lost say-on-pay vote, one lead director discussed their involvement in a shareholder outreach program: “The reaction was very different to the same thing management was saying when directors were saying it,” he said. “It's remarkable. Some of investment analysts are buying the stock because directors went out to see them.” He added that although investor engagement is usually management's job, “sometimes the directors have a role to play.”51
  2. Proactive engagement. Many boards find value in opening a dialogue with large shareholders in times of peace so that it is easier to deal with any issues that arise. As one lead director said, “You need to have ongoing communications. Don't wait until you're back on your heels.”52 Such engagement can pay dividends in many ways, especially if there is a future shareholder activist issue.53

Crisis Response

One of the themes of these issues is that when the going gets tough, the lead director's role becomes tougher. As one lead director shared, “Sometimes the lead director underestimates their role in a crisis. My experience is that it is really important to be the steady rock, to keep the calm among cats being herded. Everyone reacts differently—even on a board. It is important for the lead director to have a sense of whom they need to talk with, including directors, to get them through the crisis.”54

Crisis take many forms and there is no one-size-fits-all response. But in most cases the lead director will likely spend more time arranging meetings of the independent directors and serving as a conduit for communication between certain actors. In special cases the lead director may need to take an external-facing role, such as situations where the management team is implicated in the crisis. Preparing plans in advance is key to success.

Some lead directors have said their crisis response duties begin when selecting the CEO: “As a lead director, you will experience several successions of the CEO or other senior officers. When evaluating candidates for those roles, look hard at the crises or challenges they have faced personally and professionally. Dig into that—plenty of people can run things when things are good; it's not the same skill set when things are really bad. … There will come a time of crisis; will the CEO and subordinates rise to the challenge? You need to determine what the candidate has done that gives the board comfort that he or she can handle a crisis.”55

Part V: What Behaviors and Key Relationships Set the Most Successful Board Leaders Apart?

In 2019, Russell Reynolds Associates published the results of its second biannual Board Culture and Director Behavior Survey, completed by 750 corporate (supervisory board-level) directors of large public companies worldwide.56 This data provides a roadmap for driving improvement in board effectiveness and, potentially, corporate performance. The report focused on understanding a group the firm called “Gold Medal Boards”—those that rate themselves as operating in a highly effective manner and that oversee a high-performing company (one that has outperformed relevant total shareholder return [TSR] benchmarks for two or more years consecutively).

These boards spent the same amount of time on their work as the global peer set, but prioritized more strategic, longer-term, and forward-looking discussions. Their directors are more likely to seek to understand other perspectives, focus on being present at meetings, and build deep relationships with management and investors. The report noted, “While all directors can contribute to the board's success, the board chair has a unique set of responsibilities, both in the tone that he or she sets and for how time and resources are deployed.” While the report did not look separately at lead directors, its authors believe that the observations about board chairs apply to other types of independent board leaders.

According to the report, Gold Medal Board directors are more likely to report that their board chair focuses the board's attention on relevant matters, encourages independence, and fosters and facilitates high-quality debates. The report states, “We have found that the strongest chairs are great facilitators; they get the best out of the board as a group as well as out of individual directors. The existence of these board chair behaviors results in the board being 14.4 percent more likely to earn Gold Medal Board status.”

Bar chart depicts an observed behaviors of Board Chairs According to Research from Russell Reynolds Associates.

FIGURE 7.3 Observed Behaviors of Board Chairs According to Research from Russell Reynolds Associates

The differences in the behaviors observed of Gold Medal board chairs and other boards leaders is quite distinctive (Figure 7.3).

Among the U.S. cut of the global peer set, directors said they often or very often observed the board leaders focusing the board's attention on relevant matters (98%), encouraging independent mindset (94%), fostering and facilitating high-quality debates (93%), drawing out the relevant expertise of directors (86%), and actively seeking different points of view (77%). Sixty-six percent of U.S. directors saw their board leaders often or very often providing constructive feedback.

Relationship with the CEO

The relationship between the lead director and the CEO is critical. The selection of a lead director by the board will often take into account the potential chemistry between the two people who must be able to work closely together while respecting each other's roles and respecting the independence of the lead director. The precise nature of the relationship will be affected by the tenure of the CEO in their role with a new CEO requiring more support and often coaching.

Regardless of which responsibilities are adopted by boards, in our experience lead directors believe that developing a productive partnership with the CEO is essential; the challenge is doing so in a way that maintains appropriate professional independence and skepticism while being generally supportive. This can be a tightrope walk. As one lead director said, “Lead directors' relationships with CEOs have to have an edge. They cannot be best buddies.”57

Creating the right type of relationship takes time and effort. One survey found that 50 percent of lead directors talk to the CEO more than five times between board meetings.58 One lead director explained, “We have frequent, less structured conversations—probably a few times a month,” while another said, “We talk quite frequently, maybe one to two times a week.”59

The lead director works with the CEO in shaping the board agenda and ensuring the concerns and interests of board members can impact the agenda. The lead director also provides feedback to the CEO after the executive session of the board. The ability to accurately convey the meaning of messages from the board is essential to maintain trust. The lead director may also act as a sounding board for the CEO on key topics. For example, as discussed earlier, during an M&A transaction, the lead director may help ensure the CEO remains objective and is not subject to “deal heat.”

Relationship with the Board

The lead director is in effect primus inter pares or “first among equals” in the board. They are the voice of the independent directors and they play an influential leadership role without having the positional authority of a board chair. They must maintain the trust of the other board directors and ensure that all views are heard during the executive session without management present.

The ability to capture the sense of the board and convey that accurately to the CEO is essential. It is in the executive session that dissenting views may first be heard, particularly if the CEO does not encourage or solicit such opinions during the formal board meeting. Some directors keep their skepticism of managements' plans under wraps until they can discuss their thoughts and feelings with fellow directors to calibrate if their concerns are shared or not. While no one expects the lead director to bury their own views, they are expected to convey the perspective of the board as a whole to the CEO. This requires a degree of diplomacy and the ability to keep their own ego in check.

Their relationship with the board is further complicated by the fact that they are often required to provide feedback to individual directors about their behavior in board meetings. The other directors need to know that the feedback will be fair and constructive.

Relationship with New Directors

In the last few years there has been an increasing interest in new director onboarding. The drive by institutional investors for public company boards to regularly refresh their composition has created a new breed of board director who may not have served on a board before and who is more likely to be reporting to a CEO than sitting in that particular seat. Yet the skillsets they bring—such as experience in leading digital transformation—are highly coveted. The need to get new directors up-to-speed and contributing quickly has never been greater.

In 2018, Russell Reynolds Associates surveyed 161 directors who had been recently appointed to Fortune 500 company boards.60 Surprisingly, 24 percent of those directors had not even met the lead independent director before their first board meeting.

As we described earlier, one of the critical behaviors of board leadership is providing feedback to directors but only 30 percent of new directors were debriefed after their first meeting by the nonexecutive chair and 19 percent by the lead director. Worse still, the majority (56%) of new directors had still not received any feedback on their performance from the nonexecutive chair or lead director on or around the six-month mark.

Lead directors can help improve the effectiveness of new directors by taking more responsibility for the onboarding process and playing a key role themselves. In some cases, lead directors may want to act as board mentors for the first year and provide ongoing feedback to help new directors understand the board culture and the context for board discussions. Alternatively, board leaders can ensure that a mentor is selected and work with the mentor to ensure that new directors are given constructive feedback. In the survey, only 6 percent of new directors had a mentor even though misunderstanding board culture is a sure way to derail a new director or diminish their potential contribution.

Conclusion

The lead director role has come a long way from its humble beginnings as the executive session chair. Amid the increasing professionalization of corporate governance and the growing assertiveness of investment stewardship professionals, we expect that the responsibilities and authorities of the role will continue to grow and that the trend toward clear, robust disclosure about board leadership decisions will accelerate.

About the Authors

Photo of Richard Fields.

Richard Fields is counsel and director of Corporate Stakeholder Engagement at King & Spalding. Rich advises public company boards of directors, C-suite executives, and in-house counsel on issues related to corporate governance, board leadership, and stakeholder engagement.

Rich's expertise includes board composition and leadership, effective disclosure, activist and other shareholder interventions, shareholder and other stakeholder engagement, board and director evaluations, ESG issues, and other complex issues involving boards and corporate leaders.

Rich is an authority on corporate governance and board leadership and a sought-out author and speaker. He regularly appears in Agenda, Ethical Boardroom, Governance Minutes, and C-Suite Insight, has lectured at a corporate governance course at Harvard University, and presented at events for Corporate Board Member, Equilar, NYSE Governance, and others. Rich was one of four global winners of the Millstein Center for Global Markets and Corporate Ownership's Rising Star of Corporate Governance Award in 2015.

Rich co-chaired the Shareholder-Director Exchange Working Group and was a principal architect of the SDX Protocol, a guide for shareholder engagement supported by investors today representing more than $15 trillion in assets under management.

Prior to joining King & Spalding, Rich was a partner at Tapestry Networks where he worked closely with the chairs of compensation and audit committees, independent board chairs and lead directors, and the stewardship leaders of the world's largest asset managers. At Tapestry, he led scores of roundtable dialogues for board leaders, senior governance professionals, regulators, political leaders, and other key players in the corporate governance and shareholder landscape.

Photo of Anthony Goodman.

Anthony Goodman is a senior member of Russell Reynolds Associates' Board & CEO Advisory Partners. Anthony has significant experience working with board directors and their stakeholders across sectors in the United States and Europe. Anthony advises boards of major public, private, and family-owned businesses on a wide variety of confidential matters.

Anthony is cochair of The Conference Board ESG Center Human Capital Oversight & Disclosure Working Group, a member of the National Association of Corporate Directors in the United States, and the International Corporate Governance Network. He is Governance Committee chair of Boston Scores, a nonprofit that provides after-school programs in public schools. For five years, Anthony wrote the Leading View column for the Financial Times covering many corporate governance issues of the day. Anthony is a guest lecturer on board matters at Boston University Law School and Harvard-T.H. Chan School of Public Health.

Prior to joining Russell Reynolds, Anthony was a partner at Tapestry Networks for more than 12 years. While at Tapestry, Anthony created and led many board director networks, including those for Fortune 500 lead directors and audit committee chairs. Anthony was also founder and co-chair of the Shareholder-Director Exchange (SDX) Working Group, which developed the first protocol for board-shareholder engagement in the United States. Anthony received his Master of Arts in Politics, Philosophy, and Economics from Oxford University, where he was also elected president of the Oxford Union.

Notes

  1. 1.   Richard Fields is counsel and director of Corporate Stakeholder Engagement at King & Spalding. Anthony Goodman is a consultant in the board and CEO Advisory Partners of Russell Reynolds Associates. They were both formerly partners at Tapestry Networks. The authors would like to thank Ana-Lisa Jones, Alex Madronal, and P. J. Neal at Russell Reynolds Associates, and Jon Wu from King & Spalding, for additional research and editing of the chapter.
  2. 2.   Warren Brown, “GM Loses Record $4.5 Billion; Announces 12 Plant Closings,” Washington Post, February 25, 1992, http://tech.mit.edu/V112/N8/gm.08w.html.
  3. 3.   Doron P. Levin, “Company Reports; G.M. Lost $23.5 Billion Last Year,” New York Times, February 12, 1993, sec. Business Day, https://www.nytimes.com/1993/02/12/business/company-reports-gm-lost-23.5-billion-last-year.html. Much of this loss was an accounting charge related to increasing retiree health benefit costs, but the company still lost more than $2 billion from operations.
  4. 4.   Judith H. Dobrzynski, “Chairman to Step Down in G.M. Shift,” New York Times, December 5, 1995, sec. Business Day, https://www.nytimes.com/1995/12/05/business/chairman-to-step-down-in-gm-shift.html.
  5. 5.   “Chairing the Board” (The Millstein Center for Corporate Governance and Performance, Yale School of Management, 2009), https://millstein.law.columbia.edu/sites/default/files/content/docs/2009%2003%2030%20Chairing%20The%20Board%20final.pdf.
  6. 6.   “Chairing the Board” (The Millstein Center for Corporate Governance and Performance, Yale School of Management, 2009), https://millstein.law.columbia.edu/sites/default/files/content/docs/2009%2003%2030%20Chairing%20The%20Board%20final.pdf, internal citation to MacAvoy and Millstein, footnote 30.
  7. 7.   Judith H. Dobrzynski, “Chairman to Step Down in G.M. Shift,” New York Times, December 5, 1995, sec. Business Day, https://www.nytimes.com/1995/12/05/business/chairman-to-step-down-in-gm-shift.html.
  8. 8.   Ibid.
  9. 9.   Adolf Augustus Berle and Gardiner Coit Means, The Modern Corporation and Private Property (New York: Macmillan, 1933), https://catalog.hathitrust.org/Record/001430475.
  10. 10. See, for example, the oft-quoted line from Roman poet Juvenal, “Quis custodiet ipsos custodies?” (translated as “Who guards the guards?,” or “Who watches the watchers?”). Juvenal, “The Decay of Feminine Virtue, Satire VI: (circa 100 a.d.).
  11. 11. See discussion in “Chairing the Board” (The Millstein Center for Corporate Governance and Performance, Yale School of Management, 2009), https://millstein.law.columbia.edu/sites/default/files/content/docs/2009%2003%2030%20Chairing%20The%20Board%20final.pdf, page 13.
  12. 12. Ibid.
  13. 13. Ibid.
  14. 14. “Separating the Roles of CEO and Chairman: Solution or Illusion?” (Oliver Wyman, 2004), https://www.oliverwyman.com/content/dam/oliver-wyman/global/en/files/archive/2004/OWD_Separating_the_Roles_of_CEO-Chairman_WP_1110.pdf.
  15. 15. Bernard Simon, “4 Big Canadian Banks Split Jobs of Chairman and Chief,” The New York Times, September 10, 2003, sec. Business Day, https://www.nytimes.com/2003/09/10/business/4-big-canadian-banks-split-jobs-of-chairman-and-chief.html.
  16. 16. “Commission on Public Trust and Private Enterprise Findings and Recommendations” (The Conference Board, August 8, 2002), https://www.conference-board.org/pdf_free/SR-03-04.pdf. Note that, for clarity, the summary above reorders the commission's recommendation and frames the term “lead director” as an indication of an independent director with incremental authority and responsibility. For example, in its report, the Commission called the lead director counterweight to a chair/CEO the “Presiding Director.” In today's common usage, as explained on page 20, “Presiding Director” is typically seen as a less empowered role than “Lead Director.” The full report of the Commission, including Commissioner John Biggs's dissent from this recommendation, is worth reading.
  17. 17. “Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto by the New York Stock Exchange Inc. Relating to Corporate Governance (Securities and Exchange Commission Release No. 34-47672; File No. SR-NYSE-2002-33” (2003), https://www.sec.gov/rules/sro/34-47672.htm. Also, “Chairing the Board” (The Millstein Center for Corporate Governance and Performance, Yale School of Management, 2009), https://millstein.law.columbia.edu/sites/default/files/content/docs/2009%2003%2030%20Chairing%20The%20Board%20final.pdf, pages 13–14.
  18. 18. “Chairing The Board” (The Millstein Center for Corporate Governance and Performance, Yale School of Management, 2009), https://millstein.law.columbia.edu/sites/default/files/content/docs/2009%2003%2030%20Chairing%20The%20Board%20final.pdf, pages 13–15.
  19. 19. Florence E. Harmon, “Proxy Disclosure Enhancements (17 CFR Parts 229, 239, 240, 249, and 274), Release Nos. 33-9089; 34-61175; IC-29092; File No. S7-13-09” (2009), https://www.sec.gov/rules/final/2009/33-9089.pdf, page 43.
  20. 20. Florence E. Harmon, “Proxy Disclosure Enhancements (17 CFR Parts 229, 239, 240, 249, and 274), Release Nos. 33-9089; 34-61175; IC-29092; File No. S7-13-09” (2009), https://www.sec.gov/rules/final/2009/33-9089.pdf, page 43.
  21. 21. “Today's Independent Board Leadership Landscape” (EY Center for Board Matters, October 2018), https://www.ey.com/Publication/vwLUAssets/ey-todays-independent-board-leadership-landscape/$FILE/ey-todays-independent-board-leadership-landscape.pdf.
  22. 22. “Chairing the Board” (The Millstein Center for Corporate Governance and Performance, Yale School of Management, 2009), https://millstein.law.columbia.edu/sites/default/files/content/docs/2009%2003%2030%20Chairing%20The%20Board%20final.pdf, page 8: “I'm a lead director—and that is a completely different job than being a chairman.”
  23. 23. “The Relationship between the Lead Director and the CEO,” Lead Director Network ViewPoints (Tapestry Networks and King & Spalding, March 24, 2011), http://www.tapestrynetworks.com/sites/default/files/publication_pdf/LDN%20ViewPoints%209%20-%20Lead%20director%20and%20CEO%20-%2024%20March%202011.pdf, page 3. “Fundamentally, [Lead Director Network members] do the same things, regardless of which title they carry. … The only distinction, according to members, is in stakeholders' eyes.”
  24. 24. “Today's Independent Board Leadership Landscape” (EY Center for Board Matters, October 2018), https://www.ey.com/Publication/vwLUAssets/ey-todays-independent-board-leadership-landscape/$FILE/ey-todays-independent-board-leadership-landscape.pdf.
  25. 25. “Corporate Governance Principles for US-Listed Companies” (Investor Stewardship Group), accessed May 8, 2019, https://isgframework.org/corporate-governance-principles/.
  26. 26. “Corporate Governance Principles for US-Listed Companies” (Investor Stewardship Group), accessed May 8, 2019, https://isgframework.org/corporate-governance-principles/, principle 4.3.
  27. 27. “Proxy Voting Guidelines for U.S. Securities” (BlackRock, January 2019), https://www.blackrock.com/corporate/literature/fact-sheet/blk-responsible-investment-guidelines-us.pdf, page 6.
  28. 28. “Guidelines and Attributes for Effective Independent Board Leadership” (State Street Global Advisors, February 2016), https://www.ssga.com/investment-topics/environmental-social-governance/2019/04/guidelines-and-attributes-for-effective-independent-board-leadership.pdf.
  29. 29. CII's membership is broader, and encompasses roughly $40T of assets under management, but the vast majority of those assets are controlled by nonvoting asset management firms. See “About Us” (Council of Institutional Investors), accessed May 8, 2019, https://www.cii.org/about_us.
  30. 30. “Policies on Corporate Governance” (Council of Institutional Investors, October 24, 2018), https://www.cii.org/corp_gov_policies, policy 2.4.
  31. 31. In one 2011 meeting of the Lead Director Network, a few lead directors and board chairs acknowledged that even if the responsibility set includes “chairing board meetings,” the CEO often plays the biggest role. One said, “The CEO leads the board meetings. As lead director, I set the agenda, but he runs the board meetings.” A member who serves on the board of a company with a nonexecutive chairman stated, “At my company, the nonexecutive chairman sets the agenda for the board meetings, but the CEO actually runs the meetings.” Another member observed, “At companies where there is a nonexecutive chairman, the nonexec chair doesn't really run the meetings. He merely opens the discussions, turns it over to the CEO, and then closes the discussion.… That's maybe 4 percent–5 percent of the meeting that the chairman leads.” See “The Relationship between the Lead Director and the CEO,” Lead Director Network ViewPoints (Tapestry Networks and King & Spalding, March 24, 2011), http://www.tapestrynetworks.com/sites/default/files/publication_pdf/LDN%20ViewPoints%209%20-%20Lead%20director%20and%20CEO%20-%2024%20March%202011.pdf, page 5.
  32. 32. “Governance & Sustainability Principles” (The California Public Employees' Retirement System, June 18, 2018), https://www.calpers.ca.gov/docs/forms-publications/governance-and-sustainability-principles.pdf.
  33. 33. “Governance QualityScore” (ISS, March 29, 2019), https://www.issgovernance.com/file/products/qualityscore-techdoc.pdf, page 16.
  34. 34. “The Director's Book: Role of Directors for National Banks and Federal Savings Associations” (Office of the Comptroller of the Currency, July 2016), https://www.occ.gov/publications/publications-by-type/other-publications-reports/The-Directors-Book.pdf, page 14.
  35. 35. Michael S. Gibson, “Accountability as Lead Independent Director of Wells Fargo & Company Board of Directors” (February 2, 2018), https://www.federalreserve.gov/newsevents/pressreleases/files/enf20180202a3.pdf.
  36. 36. “IBM Board Corporate Governance Guidelines” (IBM, January 29, 2019), https://www.ibm.com/investor/att/pdf/IBM-Board-Corporate-Governance-Guidelines.pdf.
  37. 37. “Governance Guidelines” (State Street, February 2019), http://investors.statestreet.com/CustomPage/Index?KeyGenPage=302720.
  38. 38. “Delta Air Lines Inc. Corporate Governance Principles” (Delta Air Lines, December 14, 2016), https://s2.q4cdn.com/181345880/files/doc_downloads/governance/Corporate-Governance-Principles-12-14-2016.pdf, pages 3–4.
  39. 39. Both authors were previously partners at Tapestry Networks, the organization that has convened the Lead Director Network since 2008. King & Spalding sponsored the Lead Director Network from 2008 until the end of 2018. The authors thank Tapestry, King & Spalding, and most importantly the Lead Director Network members, for insights that have shaped their thinking and shaped this chapter.
  40. 40. “The Relationship between the Lead Director and the CEO,” Lead Director Network ViewPoints (Tapestry Networks and King & Spalding, March 24, 2011), http://www.tapestrynetworks.com/sites/default/files/publication_pdf/LDN%20ViewPoints%209%20-%20Lead%20director%20and%20CEO%20-%2024%20March%202011.pdf, page 4.
  41. 41. Ibid.
  42. 42. “The Relationship between the Lead Director and the CEO,” Lead Director Network ViewPoints (Tapestry Networks and King & Spalding s, March 24, 2011), http://www.tapestrynetworks.com/sites/default/files/publication_pdf/LDN%20ViewPoints%209%20-%20Lead%20director%20and%20CEO%20-%2024%20March%202011.pdf, page 7.
  43. 43. Ibid.
  44. 44. “The Relationship between the Lead Director and the CEO,” Lead Director Network ViewPoints (Tapestry Networks and King & Spalding, March 24, 2011), http://www.tapestrynetworks.com/sites/default/files/publication_pdf/LDN%20ViewPoints%209%20-%20Lead%20director%20and%20CEO%20-%2024%20March%202011.pdf, page 8.
  45. 45. “Planning for CEO Succession,” Lead Director Network ViewPoints (Tapestry Networks and King & Spalding, April 24, 2013), http://www.tapestrynetworks.com/sites/default/files/publication_pdf/LDN%20ViewPoints%20-%20Planning%20%20for%20CEO%20succession%20-%2024%20April%202013_Final.pdf, page 2.
  46. 46. “Crisis Preparedness and Response,” Lead Director Network ViewPoints (Tapestry Networks and King & Spalding, November 2017), http://www.tapestrynetworks.com/sites/default/files/publication_pdf/LDN%20ViewPoints%20-%20Crisis%20Management%20-%2024%20Oct%202017%20-%2011.28.17.pdf, page 4.
  47. 47. “Board Oversight of Major Transactions and Cybersecurity Incident Response,” Lead Director Network ViewPoints (Tapestry Networks and King & Spalding, April 2018), http://www.tapestrynetworks.com/sites/default/files/publication_pdf/LDN%20-%20March%2027%202018%20-%20ViewPoints%20-%20FINAL.pdf, page 6.
  48. 48. Ibid.
  49. 49. Richard Fields and Anthony Goodman, “Board-Shareholder Engagement,” in The Handbook of Corporate Governance: A Comprehensive Guide for Public, Private, and Not-for-Profit Board Members, ed. Richard LeBlanc (Hoboken, NJ: John Wiley & Sons, Inc., 2016), pages 403–424.
  50. 50. “Today's Independent Board Leadership Landscape” (EY Center for Board Matters, October 2018), https://www.ey.com/Publication/vwLUAssets/ey-todays-independent-board-leadership-landscape/$FILE/ey-todays-independent-board-leadership-landscape.pdf.
  51. 51. “Crisis Preparedness and Response,” Lead Director Network ViewPoints (Tapestry Networks and King & Spalding, November 2017), http://www.tapestrynetworks.com/sites/default/files/publication_pdf/LDN%20ViewPoints%20-%20Crisis%20Management%20-%2024%20Oct%202017%20-%2011.28.17.pdf, page 3.
  52. 52. “Incorporating Share Buybacks in Board-Driven Strategy,” Lead Director Network ViewPoints (Tapestry Networks and King & Spalding, November 2016), https://www.tapestrynetworks.com/sites/default/files/publication_pdf/LDN%20ViewPoints%20-%20Share%20buybacks%20-%2021%20Nov%202016%20-%20Web.pdf, page 4.
  53. 53. “Crisis Preparedness and Response,” Lead Director Network ViewPoints (Tapestry Networks and King & Spalding, November 2017), http://www.tapestrynetworks.com/sites/default/files/publication_pdf/LDN%20ViewPoints%20-%20Crisis%20Management%20-%2024%20Oct%202017%20-%2011.28.17.pdf, page 2.
  54. 54. Ibid.
  55. 55. “Crisis Preparedness and Response,” Lead Director Network ViewPoints (Tapestry Networks and King & Spalding, November 2017), http://www.tapestrynetworks.com/sites/default/files/publication_pdf/LDN%20ViewPoints%20-%20Crisis%20Management%20-%2024%20Oct%202017%20-%2011.28.17.pdf, page 3.
  56. 56. Jack “Rusty” O'Kelley III, Anthony Goodman, Ana-Lisa Jones, and PJ Neal, “Going for Gold: The 2019 Global Board Culture and Director Behaviors Survey” (New York: Russell Reynolds Associates, March 16, 2019), https://www.russellreynolds.com/newsroom/going-for-gold-the-2019-global-board-culture-and-director-behaviors-survey.
  57. 57. “Crisis Preparedness and Response,” Lead Director Network ViewPoints (Tapestry Networks and King & Spalding, November 2017), http://www.tapestrynetworks.com/sites/default/files/publication_pdf/LDN%20ViewPoints%20-%20Crisis%20Management%20-%2024%20Oct%202017%20-%2011.28.17.pdf, page 3.
  58. 58. “Lead Directors: A Study of Their Growing Influence and Importance” (PriceWaterhouseCoopers, 2010), http://risk4good.com/wp-content/uploads/2011/08/lead-director-survey-20111.pdf, page 3.
  59. 59. “The Relationship between the Lead Director and the CEO,” Lead Director Network ViewPoints (Tapestry Networks and King & Spalding, March 24, 2011), http://www.tapestrynetworks.com/sites/default/files/publication_pdf/LDN%20ViewPoints%209%20-%20Lead%20director%20and%20CEO%20-%2024%20March%202011.pdf, page 6.
  60. 60. Jack “Rusty” O'Kelley III and Susanne Suhonen, “Enhancing New Director Performance and Impact” (New York: Russell Reynolds Associates, July 10, 2018), https://www.russellreynolds.com/insights/thought-leadership/enhancing-new-director-performance-and-impact.
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