Executive Leadership Council (ELC) Projecting Open Spaces on Boards and C-SuitesJuly 26 2013

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Introduction and Objectives

The Executive Leadership Council (ELC) engaged Mercer on a research project to address two questions related to board composition:

– What is the value of diversity on a board?– How many "open spaces" will there be on company c-suites and boards in the future?

Following discussions with the ELC, Mercer moved forward on a basic research approach, leveraging Mercer's internal databases and reviewing company filings to approximate typical turnover at the c-suite and board level, based on a subset of Fortune 500 companies, and provide high-level forecasts of potential improvements in minority representation

This report summarizes our research approach, turnover and projection findings, literature review, and next steps

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18%

16%

14%10%

10%

10%

8%

6%6%

19%

16%

14%10%

10%

10%

8%

6%7%

Approach: Research Group Profile Mercer selected 50 companies from the Fortune 500 to include in the Research Group, mirroring the index's sector distribution and average revenue size

Industrials

Financials

Health Care

Information Technology

Consumer Staples

Energy

Utilities

Materials

Telecommunication Services

FORTUNE 500 Sector Distribution

RESEARCH GROUPSector Distribution 8

75554331

Consumer Discretionary9

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$11$13

$18 $19

$23

$26$28

$33$35

$43

$13$15

$19$18

$26$27

$30

$18

$36

$20

Utilities Materials Industrials ConsumerDiscretionary

InformationTechnology

Health Care Financials Telecom-municationServices

ConsumerStaples

Energy

FORTUNE 500Average 500-company revenue size = $23.8 billion

Approach: Research Group Profile continued Mercer selected 50 companies from the Fortune 500 to include in the Research Group, mirroring the index's sector distribution and average revenue size

RESEARCH GROUPAverage 50-company revenue size = $23.0 billion

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Approach: Data Sources Mercer leveraged both internal and external data sources to complete the research

MercerDatabase

Information was gathered from Mercer's Global Disclosure Database (GDD) for the 50- company Research Group. Fields collected include: name and title of the top five Named Executive Officers (NEOs) disclosed in summary compensation tables (SCT) of annual proxy filings, and total number of board directors. Data were pulled for the four most recent fiscal years: 2009-2012

CompanyReports

For the c-suite (i.e., top five NEOs) research, observed turnover events were validated by actual company filings (e.g., proxy statement, annual report, and/or press releases). For the board analysis, names of board directors serving during each respective fiscal year were collected from company proxy statements, noting both turnover events and select diversity stats

SupplementalInformation

Company financial data were collected from S&P Research Insight. To ensure validity of all turnover events observed, additional research, as necessary, was conducted to validate an incumbent's tenure with the organization. Supplemental sources include: Bloomberg Businessweek, Forbes, and LinkedIn

1 2 3

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Approach: Calculating Turnover Rates Attrition rates are focused on actual terminations in 2010 and 2011

average number of termination events in 2010 and 2011 fiscal years

average active headcount as of2009, 2010, and 2011 year-ends

2009 year-end headcount would represent number of incumbents at the beginning of 2010 (similarly, 2010 year- end headcount would represent the beginning-year number for 2011), ensuring that we are capturing all those who had the potential to terminate during the year

= %

Note: Due to research limitations in collecting turnover data for 2012, it has been excluded from the analysis period.

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Results: Average Turnover Rate at the C-Suite Based on actual turnover observed in 2010 and 2011 among Named Executive Officers of Research Group companies

INTERPRETATION

Of 5,500 c-suite jobs (e.g., CEO and ten direct reports at Fortune 500 companies), there will be approximately 410 vacancies annually.

Consumer Discretionary (n=9 companies)

Industrials (n=8 companies)

Financials(n=7 companies)

Consumer Staples(n=5 companies)

Health Care(n=5 companies)

Information Technology(n=5 companies)

Energy(n=4 companies)

Materials(n=3 companies)

Utilities (n=3 companies)

Telecommunication Services (n=1 company)

5%

7.4%average turnover rate

(n=50 companies)

11%

5%

4%

10%

9%

9%

13%

2%

8%

Note: Based on May 2013 working paper published by Harvard Business School, recent studies show a CEO's typical span of control (e.g., his/her direct reports) is ten. Typical c-suite roles represent the following functions: Marketing, Research & Development, Sales, Manufacturing, Finance, Law, Human Resources, Information Technology, Strategy, and Public Relations.

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Results: Average Turnover Rate at the Board Level Based on actual turnover observed in 2010 and 2011 among Board Members of Research Group companies

INTERPRETATION

Of 6,000 board memberships (e.g., 12 members per board at Fortune 500 companies), there will be approximately 470 vacancies annually.

Consumer Discretionary (n=9 companies)

Industrials (n=8 companies)

Financials(n=7 companies)

Consumer Staples(n=5 companies)

Health Care(n=5 companies)

Information Technology(n=5 companies)

Energy(n=4 companies)

Materials(n=3 companies)

Utilities (n=3 companies)

Telecommunication Services (n=1 company)

7%

7.8%average turnover rate

(n=50 companies)

5%

9%

4%

9%

12%

17%

2%

2%

11%

Note: Average board size among the 50-company Research Group is 12.

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6%

11%

19%

27%

32%

0%

10%

20%

30%

40%

50%

60%

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

10% replacement 25% replacement 50% replacement 75% replacement 90% replacement

Projections: Future Minority Representation at the C-Suite Based on annual attrition of 7.4%, the following approximates future Black/African- American representation at Fortune 500 c-suites per various replacement scenarios

Note: Senator Menendez's report analyzes responses of Fortune 500 companies to a custom survey on corporate diversity. See Appendix for comparison of his study with Mercer's research.

Starting ratio in 2013 assumes Black/African‐Americans represent 

4.2% of executive team members

(i.e., CEO and his/her direct 

reports), based on August 2010 Corporate Diversity Report led by

Senator Robert Menendez

Replacement scenarios reflect the percentage of potential 

vacancies filled by Black/African‐American candidates. For 

example, the 50% replacement scenario assumes half of all 

vacancies will be filled by a diverse candidate

Blac

k/Af

rican

-Am

eric

an R

epre

sent

atio

n, a

s a

% o

f to

tal C

-Sui

te

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9%

14%

23%

31%

36%

0%

10%

20%

30%

40%

50%

60%

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

10% replacement 25% replacement 50% replacement 75% replacement 90% replacement

Projections: Future Minority Representation at the Board Level Based on annual attrition of 7.8%, the following approximates future Black/African- American representation at Fortune 500 boards per various replacement scenarios

Note: See Appendix for comparison of Senator Menendez's diversity survey results with Mercer's research.

Starting ratio in 2013 assumes Black/African‐Americans represent 

8.8% of board members, based on average number of 

Black/African‐American members on boards of the 50‐company 

Research Group for the past three years (2010‐2012)

Replacement scenarios reflect the percentage of potential 

vacancies filled by Black/African‐American candidates. For 

example, the 50% replacement scenario assumes half of all 

vacancies will be filled by a diverse candidate

Blac

k/Af

rican

-Am

eric

an R

epre

sent

atio

n, a

s a

% o

f to

tal B

oard

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Summary of Literature Review: Value of Corporate Diversity The following summarizes supporting and contrasting views regarding the economic and social value of corporate diversity

In one study, researchers found – after controlling for size, industry, 

and other corporate governance measures –

statistically significant 

positive relationships between the presence of women or 

minorities on the board and firm value, as measured by Tobin’s Q 

(market value over replacement cost of assets)

Firms that do not integrate their diverse workforce face higher 

costs than firms that do, in the form of turnover and absenteeism 

from minorities who may be dissatisfied with their career prospects

Corporate diversity promotes better understanding of the external 

market; heterogeneity of backgrounds leads to broader views for 

better, informed decisions. Diversity may also promote greater 

cultural sensitivity, which is critical in a globalizing business world

Various studies show insignificant relationships between gender or 

ethnic diversity of boards and their financial performance

Value of diversity often cited as being offset by the negative impact 

of group conflict, in terms of contrasting views and goals

Similarly, although decisions of a more diverse board may be of 

higher quality, this benefit is potentially outweighed by the negative 

effects of a slower decision‐making process, particularly as the 

ability to react quickly to market dynamics is important

Economic impact of diversity may vary by industry and company, 

i.e., there is no overall impact as effects may be different under 

different circumstances at different times ("contingency theory")

There is an observed relationship between board diversity and 

increased innovation and company reputation. Diversity signals that 

the organization is well prepared to understand the diverse 

environment in which the firm operates

Minorities in leadership positions are inspirational to the workforce

A study on drivers of success for Black/African‐American males 

examined four broad dimensions: human capital, social capital, 

individual differences, and demographic attributes. Findings show 

that human capital and demographic attributes were most related 

to success, suggesting that targeted investments (e.g., on training 

and education) can effectively enhance future opportunities

Minority directors less likely to be perceived as being "business 

experts," which may undermine their credibility on boards

There are generally two approaches for advocating the value of 

diversity: one is based on equity and moral principle, and the 

second is based on increased shareholder value. Unless the latter 

can also be addressed, diversity efforts will often be regarded as 

"tokenism" – a superficial gesture as opposed to a genuine initiative

The effectiveness of diversity programs is dependent on actual 

ethnic diversity of the management team. "Talking" diversity must 

be coupled with "walking" diversity – at highest levels of leadership 

– in order to create and sustain impact

ECON

OMIC

SOCI

AL

SUPPORTING CONTRASTING

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Concluding Points How can corporate diversity be effectively enhanced and maintained?

Based on a 25% replacement scenario to fill potential vacancies, it will take:– 7.5 years to fill 500 c-suite positions (out of 5,500 positions)– 3 years to fill 200 board memberships (out of 6,000 memberships)

Companies can focus on diverse replacement, but to ensure this objective is met in an effective and sustainable manner, they should focus on providing the right opportunities for diverse talent (e.g., training) and developing programs and plans to support and manage talent over time (e.g., succession planning is important to ensure strong talent pipeline)

Understanding the critical career experiences that diverse talent may share will be invaluable– As a potential next step, Mercer can assist with creating a survey and/or interview

protocol for collecting experiential data

Appendix A: Methodology and Research Details

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List of Companies in the Research Group (n=50)

Consumer Discretionary

(n=9 companies) Industrials

(n=8 companies) Financials

(n=7 companies) Health Care

(n=5 companies) Information Technology

(n=5 companies) 

•

AUTOZONE INC•

BORGWARNER INC•

DIRECTV•

JAMBA INC•

JOHNSON CONTROLS 

INC•

MACY'S INC•

TIME WARNER CABLE 

INC•

VF CORP•

VIACOM INC

•

CUMMINS INC•

DANAHER CORP•

DEERE & CO•

EMERSON ELECTRIC CO•

ILLINOIS TOOL WORKS•

PARKER‐HANNIFIN 

CORP•

TEXTRON INC•

WASTE MANAGEMENT 

INC

•

AFLAC INC•

AMERICAN EXPRESS CO•

BANK OF NEW YORK 

MELLON CORP•

CHUBB CORP•

CITIGROUP INC•

FRANKLIN RESOURCES 

INC•

PNC FINANCIAL SVCS 

GROUP INC

•

ABBOTT LABORATORIES•

AETNA INC•

ALLERGAN INC•

BECTON DICKINSON & 

CO•

MERCK & CO

•

AUTOMATIC DATA 

PROCESSING•

MICROSOFT CORP•

TEXAS INSTRUMENTS 

INC•

VISA INC•

XEROX CORP

Consumer Staples

(n=5 companies) Energy

(n=4 companies) Utilities

(n=3 companies) Materials

(n=3 companies) Telecomm. Services

(n=1 company) 

•

KIMBERLY‐CLARK CORP•

LAUDER (ESTEE) COS 

INC•

PEPSICO INC•

WALGREEN CO•

WHOLE FOODS MARKET 

INC

•

MARATHON OIL CORP•

OCCIDENTAL 

PETROLEUM CORP•

TESORO CORP•

WILLIAMS COS INC

•

AES CORP•

EDISON 

INTERNATIONAL•

PUBLIC SERVICE ENTRP 

GRP INC

•

AIR PRODUCTS & 

CHEMICALS INC•

NUCOR CORP•

PPG INDUSTRIES INC

•

CENTURYLINK INC

Note: One company in the Research Group, Jamba Inc., is not considered a Fortune 500 company.

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Comparison of Senator Menendez's Corporate Diversity Report Findings and Mercer Research

Findings, by source Corporate Diversity Report, led by Senator 

Robert MenendezMercer Research, as summarized in this report

Number of organizations •

219 companies

•

All are Fortune 500; 71 are Fortune 100

•

Timeframe: Survey conducted in 2010

•

50 companies

•

49 are Fortune 500

•

Timeframe: Attrition analysis covers 

terminations in 2010 and 2011

C‐Suite

(e.g., CEO and his/her 

direct reports)

Average Size •

15.8 members •

11.0 members

based on Harvard Business School working 

paper studying typical CEO spans of control

Black/African‐

American 

representation (%)

•

4.2%

about one out of every 24 executives•

n/a

data on ethnicity not collected from proxy 

statements for NEOs

Board of Directors Average Size •

11.7 members •

11.6 members

Black/African‐

American 

representation (%)

•

8.8%

about one out of every 11 Board members•

8.8%

about one out of every 11 Board members

Female 

representation (%)•

18.0%

about one out of every five Board members•

18.4%

about one out of every five Board members

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Methodology: Data Assumptions and Limitations Interpretation of results needs to be made within the context of research constraints

C-SUITE / TOP FIVE ANALYSIS

Due to the nature of disclosures (i.e., required reporting of a firm's CEO, CFO, and additional three‐highest paid officers), 

we may observe incumbents who appear to terminate in the following year, but whose compensation may have just 

dropped them below the reporting threshold for purposes of the proxy statement

To address this issue, all terminations were validated and/or revised based on actual company reports. If an incumbent was 

in the SCT one year and not in the following years, but is still

an active employee of the company during the time period 

examined, he/she was added to the headcount for calculating turnover and not considered a termination

Some companies may report Executive Chairs and Vice Chairs in their SCT. In other cases, the combined role of Chairman & 

CEO may be split into two positions at some point during our research timeframe

Incumbents who were ever in pure board positions (e.g., Chairman

non‐CEO), including those resulting from role splits, 

were excluded from our calculation of turnover as they do not represent churn in the management ranks nor would it be 

an accurate approximation of open spaces in the c‐suite. These individuals are covered in the board analysis

Without data for fiscal year 2013, terminations in fiscal year 2012 are not easily observed from Mercer's GDD since we 

conducted a comparison of incumbents year‐over‐year to flag potential terminations

Turnover rates calculated focused on average number of actual terminations between fiscal years 2010 and 2011

=  limitation,  =  workaround 

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Methodology: Projections Calculating future minority representation

Projections are based on the following inputs and assumptions:

– Assume headcount remains constant over time, i.e., every vacancy is filled by one replacement

– Annual attrition is based on the Research Group's overall average termination rates (7.4% for the c-suite and 7.8% at the board level)

– Assume turnover for minorities and non-minorities in each year is proportionate to the ratio of minorities to non-minorities in the prior year. As minority representation grows, their likelihood of terminating also increases

– For annual potential vacancies, the various replacement scenarios estimate the number that can be filled by a diverse candidate (e.g., 10% replacement scenario shows that for 100 potential vacancies, 10 can be filled with a diverse candidate)

– Representation in each year calculated as: number of minorities divided by total headcount, which is kept constant over time

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Bibliography: Literature Reviewed

1.

“Board Composition and Financial Performance: Uncovering the Effects of Diversity in an Emerging Economy.”

Jyoti

D. Mahadeo, Teerooven

Soobaroyen, and Vanisha

Oogarah

Hanuman. April 2010.

2.

“The Gender and Ethnic Diversity of US Boards and Board Committees and Firm Financial Performance.”

David A. Carter, Frank D’Souza, Betty J. 

Simkins, and W. Gary Simpson. September 2010.

3.

“The Value of Board Diversity in Banking: Evidence from the Market for Corporate Control.”

Jens Hagendorff

and Kevin Keasey. December 2008.

4.

“Corporate Governance, Board Diversity, and Firm Value.”

David A. Carter, Betty J. Simkins, and W. Gary Simpson. February 2003.

5.

“Women on corporate boards: key influencers or tokens?”

Beate

Elstad

and Gro

Ladegard. November 2010.

6.

“Female board appointments and firm valuation: short and long‐term effects.”

Kevin Campbell and Antonio Minguez Vera. June 2009.

7.

“Board Dynamics and the Influence of Professional Background, Gender and Ethnic Diversity of Directors.”

Nicholas van der

Walt and Coral 

Ingley. July 2003.

8.

“The Emergence of Corporate Governance from Wall St. to Main St.:

Outside Directors, Board Diversity, Earnings Management, and Managerial 

Incentives to Bear Risk.”

Nicholas van der

Walt and Coral Ingley. February 2003

9.

“Board of Director Diversity and Firm Financial Performance.”

Nicholas L. Erhardt, James D. Werbel

and Charles B. Shrader. April 2013.

10.

“Establishing a diversity

program is not enough: Exploring the determinants of diversity climate.”

Andrew O. Herdman

and Amy McMillan‐

Capehart

March 2010.

11.

“Demographic Diversity in the Boardroom: Mediators of the Board Diversity–Firm Performance Relationship.”

Toyah Miller and María Del 

Carmen Triana. July 2009.

12.

“Evaluating career success of African American males: It’s what you know and who you are that matters.”

C. Douglas Johnson and Lillian T. Eby. 

December 2011.

Appendix B: Mercer's Talent Barometer Survey

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Mercer Talent Barometer Survey: Key Highlights Survey includes responses from HR and talent management executives of 1,268 organizations representing 65 countries around the globe and a variety of industries

Educational institutions are failing to generate the talent required by many organizations today

Some employers are addressing the educational gap by partnering with educational institutions or designing student programs

Respondents say that professional sciences (business, law, etc.) and formal sciences (IT, math, etc.) are the most important to their organizations

Although most respondents conduct regular talent reviews, relatively few map out future talent needs or have succession plans in place

Buying talent from the market is more common than building talent from within

The most prevalent career experience programs were internal- mobility programs and fast-track career development for high- potential talent

EDUCATION

CAREER EXPERIENCE

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Mercer Talent Barometer Survey: Education Highlights Despite high unemployment in many regions of the world, organizations today face a shortfall of qualified talent to fill critical roles

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Mercer Talent Barometer Survey: Career Experience Highlights 66% of respondents indicated they fill critical roles from the outside; 34% fill from within, although this latter group perceived their workforce plans as more effective