Presented By:

John MestepeyManaging DirectorEdward W Kelley & Partners

Charles Herington PresidentAvon Latin America

NACD Florida Chapter

March 1, 2007

SheratonFt. Lauderdale

Board of Director Recruitment: Two Perspectives -

The Candidate and the Nominating Committee

What’s Happening to Board Recruitment• Reform Environment – Driving Changes

SOX SEC Regulations NYSE Recommendations

• NYSE

Recommends that nominating and compensation committees be composed entirely of independent directors

• Board Size Increasing

Need for more independent directors Work/time required making it more difficult to sit on more than one committee

• Traditional Candidates are Harder to Recruit Active CEO’s (In 1998 CEO’s sat on average two boards, by 2003 that number was

one. Today, less than one.)

• Spotlight on Nominating Committees CEO used to run show – today, not so

New requirements for disclosure of nominating process and results, together with constant shareholder pressure to become more involved in director nominations should place this issue high on the list of board priorities.

Too often, however it isn’t.

Nominating Committee

New Realities:• Average compensation for directors for 1,500 companies surveyed by I.S.S. = $160,000 – up 12% over 2005

• Only 54% of companies granted stock options in 2006 – down from 74% in 2002

• 57% of companies surveyed by I.S.S. have lead directors – was 3% in 2002

• 70% have boards where 2/3 of members are independent directors

• 85% have fully independent audit committees – 70% in 2002

• Fewer classified boards – 55% in 2006

Some Guidelines

• Director Nomination Process is a Job For the Full Board. Delegation to a nominating committee (or subcommittee) can be appropriate. Boards should not merely transfer director nominations to the governance committee. Rather, the board and committee should discuss this subject thoroughly, define parameters and goals, before delegating it to a committee. The nominating committee then proposes the names of candidates for board approval.

• Before Looking a Board Must Define Exactly What Qualities to Look For.

• Qualities and Characteristics Should Follow the Overall Direction and Strategy of the Company. Who Owns the Strategy?

As strategy changes, skills on the board may shift. Director education can help immensely.

Some Guidelines

List areas of expertise needed on board over next three to five years (will vary

greatly depending on industry and other factors)

Apply list to all current members; One approach is to rate all board members on a

scale of 1 – 10, totaling the board score for each area on the list

Note which areas could use improvement or reinforcement

Keep in mind the areas of current board deficiencies when recruiting potential new board members

Keep in mind any openings that will occur as a result of director rotation policies

Keep matrix evergreen by updating it as least annually to reflect any changing needs of the board

Create, Update & Maintain Board Expertise Matrix

Some Guidelines

Smith Jones Davis TotalE-Commerce 4 3 6 13

Acquisition Experience 8 7 7 22

International Marketing 2 3 1 6

Research & Development 6 7 8 21

LEGEND: Names of directors are on the horizontal axis and skills considered are over next 3 – 5 years are located on the vertical axis. Directors rated on a 1 – 10 scale, where 1 is very little competency and 10 denotes very high competency.

In example above, the board discovered a deficiency in International Marketing and should consider seeking a director with the expertise. Depending upon how critical, the committee can decide to enlarge the board immediately or wait for an opening through periodic turnover to accommodate the new director.

Sample Board Competency Matrix

Some Guidelines

First step is to define what to look for in candidates

General criteria outlined in the board’s governance guidelines

The more specific criteria from the matrix exercise

The more specific the criteria, the more productive and easier the search will become

Once the existing strengths and weaknesses of the board have been evaluated, the search can begin

Some Guidelines

Should you hire a search firm to assist?

Benefits Considers large pool of candidates Generally a quicker process Reduces burden on directors Avoids difficult task of rejecting people approached but not selected Less biases – influences of current directors is lessened

Drawbacks Potential for less control over process May require more committee time Cost

Maybe yes, maybe no.

Some Guidelines

Organizational Review

• Meet with board or committee overseeing the search (governance or search committee) discuss corporate strategy, goals, culture

• Set specifications

• Identifying sources of candidates; Target likely sources by discussing backgrounds, abilities, competence, industry sectors and job categories

Candidate Identification and Review

• Create initial slate of candidates

• Consider each for pertinent experiences, skills, cultural fit; Conflicts of interest measured; Approach each to gauge interest, etc.

• Status report to board

The Search Process (same either way)

• Schedule a series of interviews

Committee

Board

CEO

• Educational credentials verified

• Candidates may want to do due diligence meet with auditors, other directors, senior management, etc.

• After offer and acceptance, more formal reference checks, criminal and civil record reviews dating back at least a decade - NO SURPRISES!

Some Guidelines Candidate Interview and Presentation

Some Guidelines

Who Makes Final Decision

• In the past the CEO often did searches and left the board in the dark

• Now boards have more control of nomination process. Recent regulations and the mandated role of Governance Committee caused changes. Should still include CEO in interviewing.

• All board members and CEO should approve

Extending the Offer

• A member of board, not CEO, should extend the officer (non-executive chair, lead director, governance committee chair)

On Boarding

• Helpful to have a formal orientation program – hit the ground running

Summary

“This new, disciplined approach to director recruitment will force boards to analyze each director opening and facilitate the nominating committee’s ability to be successful. In the end, if done successfully, the board should be able to recruit directors who have specific expertise that will contribute to the company’s overall success.”

- Julie Daum