29th Annual Board of Directors Study 2002...29th Annual Board of Directors Study 2002 Consumer Products 3 Boards going forward can anticipate closer examination of how they measure

KORN/FERRY INTERNATIONAL

29th AnnualBoard of Directors Study

2002

Consumer Products

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2002

Consumer Products

Executive SummaryIt has been an extraordinarily turbulent year for American companies and theirboards, marked by near-unprecedented volatility in investment markets, sharperosion of investor confidence, heightened focus on the validity and credibilityof financial reporting practices, and high-profile corporate failures such asEnron and Worldcom. In this environment, the board's critical role in overseeingfundamental corporate practices — how effectively that role is being executed andhow it can be strengthened — has come under scrutiny as never before.

This publication, a supplement to Korn/Ferry International's 29th Annual Boardof Directors Study, presents responses and findings from survey participants onthe boards of Consumer Products companies. The study indicates that theseorganizations are making long-term progress in efforts to implement board practices for stronger corporate governance — but that some significant gaps still remain.

The findings are based on responses from directors of over 40 Consumer Products companies.

This year:

■ 65 percent of boards have written guidelines on corporate governance;

■ 33 percent of boards formally evaluate the entire board's performance on aregular basis; and

■ 55 percent of boards have a formal committee that reviews corporategovernance processes and board operations.

While progress is being made regarding corporate governance processes andboard evaluation, boards will have to do more — especially in light of newregulatory mandates designed to formalize these processes in the wake of thepast year's notable failures of board oversight.

For example, corporate governance rule proposals adopted by the New YorkStock Exchange Board of Directors in August state that listed companies mustadopt and disclose corporate governance guidelines on management successionand other key processes. Yet our survey of directors reveals that:

■ only 49 percent of boards have a management succession committee orprocess, and

■ 59 percent of companies have undergone a management succession process in the last three years.

Mandates such as those of the NYSE, with prescriptions for formal governanceguidelines, could create issues for the significant percentage of companies that,according to our survey, do not have such guidelines or processes at this time.

The Korn/Ferry Consumer Products survey also shows that evaluation of individual directors clearly has not yet taken hold as a board practice.

■ 80 percent of respondents say that individual directors should be evaluatedregularly regarding performance. However:

● only 17 percent of boards currently conduct such evaluations, and

● only 25 percent of directors on those boards think that the evaluationsare effective.



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Consumer Products

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Boards going forward can anticipate closer examination of how they measurethe performance and, ultimately, the effectiveness of directors on behalf ofshareholders, as part of the heightened concern over how well boards executetheir oversight role.

Other key survey findings include:

■ Independence is an essential concern of directors:

● 81 percent of directors say the former CEO shouldn't sit on the board.

● 76 percent of directors say the board should hold regular executivesessions without the CEO during board meetings, yet

▲ only 43 percent of boards hold such sessions.

■ Directors are spending an increasing amount of time on board matters — an average of 16 hours per month, or approximately 192 hours annually.

■ Most directors (58 percent) say their company's CEO compensation programis effective.

■ 55 percent of directors think the majority of a director's compensation shouldbe in stock.

■ 40 percent of boards have a requirement that directors own shares ofcompany stock.

■ 61 percent of directors would like to see their board become more diverse byincreasing its minority representation.

Korn/Ferry's 29th Annual Board of Directors Study — Consumer Productshighlights provides a comprehensive and illuminating look into the state ofboard practices at the nation's leading companies — charting progress made, as well as progress still to be achieved. The publication represents Korn/Ferry'songoing commitment to generating and sharing timely, practical informationfrom the nation's corporate leaders regarding their efforts to maintain andextend "best practices" for corporate governance.

We hope that you find the study informative and useful, and that it provides you withinsight into the key steps that governance programs must take to address today'spressing concerns about the credibility and responsibility of corporate America.


Survey Responses

The following responses are a supplement to Korn/Ferry International’s29th Annual Board of Director’s Study. The findings are based on responses fromover 40 Consumer Products companies.

Board Composition

The average board in our survey consists of two inside directors and sevenoutside directors. According to respondents, the optimal board size is twoinside directors and eight outside.

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2002

Consumer Products

2

7Outside

Inside

0 1 2 3 4 5 6 7 8 0 1 2 3 4 5 6 7 8

2

8Outside

Inside

Current Board Size Optimal Board Size

No63%

Yes37%

No81%

Yes19%

Does the former CEOsit on the board?

Should the former CEOsit on the board?


Do you have any of the following minorities currentlyrepresented on your board?

Women 85%

African American 62%

Hispanic 3%

Asian 6%

Other 3%

Diversity in the Boardroom

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Consumer Products

Yes44%

No56%

Yes76%

No24%

Does the board typically holdregular executive sessions withoutthe CEO during board meetings?

Should the board typically holdregular executive sessions withoutthe CEO during board meetings?

OutsideDirectors

15%

CEO 35%

0 5 10 15 20 25 30 35

OutsideDirectors

56%

CEO 89%

0 20 40 60 80 100

Is there a limit to the number ofother boards on which the CEOand board members may serve

as outside directors?

Should there be a limit to the numberof other boards on which the CEO

and board members may serveas outside directors?

No61%

Yes39% Yes

61%

No39%

If your chairman is also the CEO,do you have an elected orappointed lead director?

Should a board that has aninside director as chairman elect

or appoint an outside directoras the lead director?

Yes Yes


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16average hours per monthspent on board matters.51% more hours than

in 2001.

Management Succession

In spite of the frequency of change at the top, more than half (51 percent) of thesecompanies do not have a management succession committee or process, despitestrong public and regulatory support for creation and disclosure of such.

No51%

Yes49%

Yes59%

No41%

Does the board have a management succession committee or process?

In the last three years, has your company undergone a managementsuccession process?



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Managing Corporate Governance

The percentage of directors reporting a formal committee that reviews corporategovernance processes and board operations is 55 percent.

Similarly, 65 percent report their boards have written guidelines on corporategovernance and 87 percent report these guidelines are helpful to the board.

Does your board have a formal committee that reviews corporate governanceprocesses and board operations?

Does the board have written guidelines on corporate governance?

Do you believe written governance guidelines are helpful to a board?

Yes55%

No45%

Yes65%

No35%

No13%

Yes87%


SomewhatEffective

41%

Effective41%

VeryEffective

6%

VeryIneffective

8%Ineffective

4%

Yes18%

No82%

SomewhatEffective

54%

Effective25%

VeryEffective

7%

VeryIneffective

7%

Ineffective7%

If YES: How effective is the evaluation?

Does your board evaluate individuals on a regular basis?

If YES: How effective is this evaluation of individual directors?

Evaluating Performance

Only 33 percent reported the practice of evaluating the entire board’s performance.The percentage of boards regularly evaluating individual director performance is18 percent.

Is the entire board’s performance formally evaluated on a regular basis?

Yes33%

No67%

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Is there a director on yourboard you feel should be

replaced?

Yes 30%

No 70%



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80% of respondents felt

that individual directorsshould be evaluated

regularly as totheir performance.

Risk & Crisis

Though the past year was characterized by devastating crises, these events werenot a catalyst for greater board involvement in risk and crisis management.Almost three-quarters (73 percent) of the directors indicated that their board andmanagement team had not developed or discussed a crisis management planprior to September 11th. Similarly, 72 percent reported no action had beentaken post-September 11th.

Yes27%

No73%

Yes28%

No72%

Had your board and management team developed or discussed a crisis management plan prior to September 11th?

Has your board taken any action to address crisis management since thetragedy of September 11th?


No45%

Yes55%

Other

Combination

Primary Stock Options

Primary Stock Grants 49%

42%

3%

9%

0 10 20 30 40 50

If YES: What form of stock?

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Board Experience

How difficult has it been for your board to add directors with the followingskill sets?

0

40

20

60

80

100Not At All DifficultSomewhat DifficultVery Difficult

LegalMarketingFinancialTechnicalInternational

9% 9%

0%

54%

37%

20%

80%

4%

34%

62%

1%

23%

76%

48%43%

Compensation

Uncertainty about stock as executive compensation seems to have affectedtrends in stock as director compensation. Sixty percent of Consumer Productsboards do not require directors to own shares of company stock, while the per-centage of directors believing the majority of a director's compensation shouldbe in stock is 55 percent this year. Directors are divided as to the form of stock,with stock grants preferred by 49 percent and stock options cited by 42 percent.

Do you think the majority of a director’s compensation should be in stock?


VeryEffective

25%

Effective58%

Fairly effective-needs changes

14%

Ineffective3%

Yes40%

No60%

How do you feel about your company’s CEO compensation program?

Is there a requirement that directors own shares of company stock ?

If YES: What is the requirement?

Average 1250 shares


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Survey Demographics

Are you responding as an inside or outside director?

What is your title or status with your primary company?

25.3%

74.7%Outside

Inside

0 10 20 30 40 50 60 70 80

0 5 10 15 20 25 30 35 40 45 50

Other

Retired

Retired CEO

Corporate Secretary

Chief Technical Officer

Chief Financial Officer

Vice Chairman

General Counsel

CEO

President

Board Chairman26.9%

22.8%

29%

2.1%

.7%

2.8%

0%

.7%

9%

18.6%

18.6%



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0%

3.4%

19.5%

43.6%

4.7%

28.8%

0 10 20 30 40 50

75 Years or Older

65-74

55-64

45-54

35-44 Years

34 Years or Younger

0 10 20 30 40 50

Over 10 Years

6-10

3-5 Years

1-2 Years

Less Than One Year 2.1%

12.8%

28.4%

23.6%

33.1%

How long have you served on this board?

Your age:

$400 millionis the average

revenue of companies

of respondents.


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Which of the following best describes your company:

5.2%

16.2%

13.7%

4.2%

3.7%

3.7%

8.4%

1.6%

1.6%

4.2%

1%

1.6%

.5%

6.3%

2.6%

4.7%

4.7%

1.6%

3.1%

.5%

2.1%

1%

.5%

.5%

2.6%

0%

0 3 6 9 12 15

OtherTransportation

ScientificRubber

PublishibgMetals

Industrial and Farm EquipmentHealthcare Services

ForestryHealthcare Products

EnergyElectronicsConsumerChemicals

Building MaterialsAutomotive

ApparelAerospace

Advance TechnologyE-Commerce

EntertainmentInsurance

Other ServicesProfessional Services

Other FinancialBank



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About Korn/Ferry International’s Consumer PracticeWhether your organization specializes in Consumer Products; Retail andApparel; Media and Entertainment; Travel, Hospitality and Leisure; orAdvertising and Marketing services, Korn/Ferry's Global Consumer Market has the experience and judgment to deliver the right candidates through superior service.

Korn/Ferry consultants help our clients gain insight into the complex issuesfacing consumer companies. Our consultants possess deep consumer industryexpertise, having held key executive positions with consumer companies inaddition to their years of executive search and consulting experience.

Whether your organization's needs are global or local, Korn/Ferry's GlobalConsumer Market offers an unmatched network of offices, with comprehensiveworldwide coverage and a critical local presence with strong regional teamsbased in Europe, North America, Latin America and the Asia/Pacific region.

When your company is ready to find the best senior executives, Korn/Ferry'sGlobal Consumer Market will organize the right team to serve your needs inorder to build a successful long-term partnership. Korn/Ferry is proud ofthe depth and breadth of its relationships, in terms of both the many young,entrepreneurial companies the firm serves, as well as the partnerships withmultinational firms worldwide.

Regardless of the size or corporate culture of the business, Korn/Ferry'sGlobal Consumer Market has the team in place to provide outstandingcandidates to fill your executive search needs.

About Korn/Ferry International

Korn/Ferry International (NYSE:KFY), with over 70 offices in 36 countries, is theworld's leading provider of executive human capital solutions. Based in Los Angeles,the firm works closely with clients worldwide to deliver customized executivesearch, management assessment and mid-level search services, including theidentification of CEOs, COOs, CFOs, board members and other senior-levelexecutives; the formal evaluation of senior management teams; and the recruitmentof middle managers through its Futurestep subsidiary.

For more information, visit the Korn/Ferry International web site atwww.kornferry.com or the Futurestep web site at www.futurestep.com.

For additional copies of this study, please call

the Global Marketing Department at (310) 552-1834.


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29th Annual Board of Directors Study 2002...29th Annual Board of Directors Study 2002 Consumer Products 3 Boards going forward can anticipate closer examination of how they measure