The Role and Value of the Lead Director — A Report from the Lead Director Network

Following the corporate scandals in the early part of this decade, there were calls to fundamentally change the way U.S. public company boards were structured — with some advocating for the “European model” of boards being led by independent chairmen rather than by a combined chairman-CEO. Many U.S. board members and business groups questioned whether the separation of the CEO and chairman roles actually adds value, so rather than implementing this profound change, the stock exchanges adopted what many consider to be a relatively weak compromise position. Under the approach adopted by the stock exchanges, the board is required only to appoint a director to preside over executive sessions of the independent directors and to receive shareholder communications.

Despite its humble beginnings, the appointment of “lead directors” has become a prevailing practice for U.S. public companies and lead directors have assumed increasing responsibilities within their companies. Still, there is little consensus at this point about which responsibilities lead directors should undertake and how they can act to improve both the governance and the performance of their companies. (In this posting, we refer to the director serving as “presiding” director, “lead” director, or independent non-executive chairman as a “lead director”.)

In order to consider these issues and respond to questions from our clients on these issues, King & Spalding and Tapestry Networks have created The Lead Director Network (LDN). The LDN brings together a select group of lead directors, presiding directors, and non-executive chairmen from many of America’s leading companies for private discussions about how to improve the performance of their corporations and earn the trust of their shareholders through more effective board leadership. The LDN currently includes 16 members (who serve as lead directors of 21 companies) and plans to meet three times per year. The group comprises lead directors from companies like Caterpillar, The Coca-Cola Company, Constellation Energy, Delta Air Lines, The Home Depot, Microsoft, Morgan Stanley, and others.

The inaugural meeting of the Lead Director Network was held on July 8, 2008, and the members present at the meeting considered the role and value of lead directors, how the role has evolved over recent years, and some of the key issues that lead directors are confronting. Following this meeting, King & Spalding and Tapestry Networks have published ViewPoints, to present highlights of the discussion that occurred at the meeting and to stimulate further consideration of these important topics.

Highlights of the July 8, 2008 meeting, as summarized in the ViewPoints document, include the following:

• The Origins of the Lead Director Role. While there were external factors that led to the establishment of the lead director position (including stock exchange listing requirements and pressure from various stakeholders to separate the CEO and chairman roles), internal factors have played an important role in the evolution of the position. Among the factors that may cause the expansion of the lead director role for a company are changes in the leadership of the company, a significant event (such as a government investigation or a potential change of control transaction) and directors’ own efforts to ensure board independence and improve board performance.

• Value of the Lead Director Role. Despite its modest beginnings, the lead director position has become increasingly important for many U.S. companies. Lead directors are contributing to improved corporate performance in at least four key areas: (1) taking responsibility for improving board performance, (2) building a productive relationship with the CEO, (3) supporting effective communications with shareholders, and (4) providing leadership in crisis situations. Ironically, these areas where lead directors are making the most valuable contributions are not among those officially described for the position by the NYSE.

• How the Title Affects the Role. Members analyzed the different meanings that lie behind the different titles — “lead director”, “presiding director” and “non-executive chairman” — and how these titles relate to the responsibilities of the role. While the title may signal differences in how the lead director position is perceived by other directors, members concluded that, in practice, the terms “lead” and “presiding” do not say much about the actual portfolio of responsibilities delivered by the director. By contrast, the term “non-executive chairman” typically does describe something different, often a larger role in both company and board leadership.

• Current Issues for Lead Directors. Members of the LDN identified five topics that they feel are important for lead directors and that they will discuss in more depth in future meetings: (1) how the board should be engaged in the development of corporate strategy, (2) the lead director’s role in crisis turbulent times, including preparing for a crisis situation, (3) the lead director’s role in succession planning for the CEO, the board, committee chairs and the top tier of management, (4) improving director and CEO evaluation processes and how individual director performance should be evaluated, and (5) alternative governance models (for example, the European model and models used by private equity firms).

• The Future of the Lead Director Position. The lead director position was created as a compromise between having a board with no leader of its independent directors and mandating that every company have a non-executive chairman. Six years after the creation of the position, the most important contributions of lead directors have come not from the duties mandated by stock exchange requirements, but from the responsibilities that lead directors in fact have undertaken for their companies. As some activist shareholders renew their call for the “European model” of board leadership, it will be interesting to see whether the lead director position will continue to evolve as a viable and preferred alternative for corporations and their stakeholders.

We welcome comments on the subject of lead directors and suggestions for future topics to be considered by the LDN members, and plan to make other postings based on the discussions and reports of the LDN.

Additional information regarding the LDN may be found on the websites of Tapestry Networks and King & Spalding.

A copy of the Lead Director Network ViewPoints report is available here.