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Executive Leadership Council (ELC) Projecting Open Spaces on Boards and C-SuitesJuly 26 20131MERCERIntroduction and ObjectivesThe 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 representationThis report summarizes our research approach, turnover and projection findings, literature review, and next steps2MERCER18%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 sizeIndustrialsFinancialsHealth CareInformation TechnologyConsumer StaplesEnergyUtilitiesMaterialsTelecommunication ServicesFORTUNE 500 Sector DistributionRESEARCH GROUPSector Distribution 875554331Consumer Discretionary93MERCER$11$13$18 $19$23$26$28$33$35$43$13$15$19$18$26$27$30$18$36$20Utilities Materials Industrials ConsumerDiscretionaryInformationTechnologyHealth Care Financials Telecom-municationServicesConsumerStaplesEnergyFORTUNE 500Average 500-company revenue size = $23.8 billionApproach: 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 sizeRESEARCH GROUPAverage 50-company revenue size = $23.0 billion4MERCERApproach: Data Sources Mercer leveraged both internal and external data sources to complete the researchMercerDatabaseInformation 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: 2009-2012CompanyReportsFor 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 statsSupplementalInformationCompany 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 LinkedIn1 2 35MERCERApproach: Calculating Turnover Rates Attrition rates are focused on actual terminations in 2010 and 2011average number of termination events in 2010 and 2011 fiscal yearsaverage active headcount as of2009, 2010, and 2011 year-ends2009 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.6MERCERResults: Average Turnover Rate at the C-Suite Based on actual turnover observed in 2010 and 2011 among Named Executive Officers of Research Group companiesINTERPRETATIONOf 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.7MERCERResults: Average Turnover Rate at the Board Level Based on actual turnover observed in 2010 and 2011 among Board Members of Research Group companiesINTERPRETATIONOf 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 12.8MERCER6%11%19%27%32%0%10%20%30%40%50%60%2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 202310% replacement 25% replacement 50% replacement 75% replacement 90% replacementProjections: 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 scenariosNote: 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.Startingratioin2013assumesBlack/AfricanAmericansrepresent4.2%ofexecutiveteammembers(i.e.,CEOandhis/herdirectreports),basedonAugust2010CorporateDiversityReportledbySenatorRobertMenendezReplacementscenariosreflectthepercentageofpotentialvacanciesfilledbyBlack/AfricanAmericancandidates.Forexample,the50%replacementscenarioassumeshalfofallvacancieswillbefilledbyadiversecandidateBlack/African-American Representation, as a % of total C-Suite9MERCER9%14%23%31%36%0%10%20%30%40%50%60%2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 202310% replacement 25% replacement 50% replacement 75% replacement 90% replacementProjections: 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 scenariosNote: See Appendix for comparison of Senator Menendez's diversity survey results with Mercer's research.Startingratioin2013assumesBlack/AfricanAmericansrepresent8.8%ofboardmembers,basedonaveragenumberofBlack/AfricanAmericanmembersonboardsofthe50companyResearchGroupforthepastthreeyears(20102012)ReplacementscenariosreflectthepercentageofpotentialvacanciesfilledbyBlack/AfricanAmericancandidates.Forexample,the50%replacementscenarioassumeshalfofallvacancieswillbefilledbyadiversecandidateBlack/African-American Representation, as a % of total Board10MERCERSummary of Literature Review: Value of Corporate Diversity The following summarizes supporting and contrasting views regarding the economic and social value of corporate diversityInonestudy,researchersfound aftercontrollingforsize,industry,andothercorporategovernancemeasuresstatisticallysignificantpositiverelationshipsbetweenthepresenceofwomenorminoritiesontheboardandfirmvalue,asmeasuredbyTobinsQ(marketvalueoverreplacementcostofassets)Firmsthatdonotintegratetheirdiverseworkforcefacehighercoststhanfirmsthatdo,intheformofturnoverandabsenteeismfromminoritieswhomaybedissatisfiedwiththeircareerprospectsCorporatediversitypromotesbetterunderstandingoftheexternalmarket;heterogeneityofbackgroundsleadstobroaderviewsforbetter,informeddecisions.Diversitymayalsopromotegreaterculturalsensitivity,whichiscriticalinaglobalizingbusinessworldVariousstudiesshowinsignificantrelationshipsbetweengenderorethnicdiversityofboardsandtheirfinancialperformanceValueofdiversityoftencitedasbeingoffsetbythenegativeimpactofgroupconflict,intermsofcontrastingviewsandgoalsSimilarly,althoughdecisionsofamorediverseboardmaybeofhigherquality,thisbenefitispotentiallyoutweighedbythenegativeeffectsofaslowerdecisionmakingprocess,particularlyastheabilitytoreactquicklytomarketdynamicsisimportantEconomicimpactofdiversitymayvarybyindustryandcompany,i.e.,thereisnooverallimpactaseffectsmaybedifferentunderdifferentcircumstancesatdifferenttimes("contingencytheory")Thereisanobservedrelationshipbetweenboarddiversityandincreasedinnovationandcompanyreputation.DiversitysignalsthattheorganizationiswellpreparedtounderstandthediverseenvironmentinwhichthefirmoperatesMinoritiesinleadershippositionsareinspirationaltotheworkforceAstudyondriversofsuccessforBlack/AfricanAmericanmalesexaminedfourbroaddimensions:humancapital,socialcapital,individualdifferences,anddemographicattributes.Findingsshowthathumancapitalanddemographicattributesweremostrelatedtosuccess,suggestingthattargetedinvestments(e.g.,ontrainingandeducation)caneffectivelyenhancefutureopportunitiesMinoritydirectorslesslikelytobeperceivedasbeing"businessexperts,"whichmayunderminetheircredibilityonboardsTherearegenerallytwoapproachesforadvocatingthevalueofdiversity:oneisbasedonequityandmoralprinciple,andthesecondisbasedonincreasedshareholdervalue.Unlessthelattercanalsobeaddressed,diversityeffortswilloftenberegardedas"tokenism" asuperficialgestureasopposedtoagenuineinitiativeTheeffectivenessofdiversityprogramsisdependentonactualethnicdiversityofthemanagementteam."Talking"diversitymustbecoupledwith"walking"diversity athighestlevelsofleadership inordertocreateandsustainimpactECONOMICSOCIALSUPPORTING CONTRASTING11MERCERConcluding 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 dataAppendix A: Methodology and Research Details13MERCERList of Companies in the Research Group (n=50)ConsumerDiscretionary(n=9companies)Industrials(n=8companies)Financials(n=7companies)HealthCare(n=5companies)InformationTechnology(n=5companies)AUTOZONEINCBORGWARNERINCDIRECTVJAMBAINCJOHNSONCONTROLSINCMACY'SINCTIMEWARNERCABLEINCVFCORPVIACOMINCCUMMINSINCDANAHERCORPDEERE&COEMERSONELECTRICCOILLINOISTOOLWORKSPARKERHANNIFINCORPTEXTRONINCWASTEMANAGEMENTINCAFLACINCAMERICANEXPRESSCOBANKOFNEWYORKMELLONCORPCHUBBCORPCITIGROUPINCFRANKLINRESOURCESINCPNCFINANCIALSVCSGROUPINCABBOTTLABORATORIESAETNAINCALLERGANINCBECTONDICKINSON&COMERCK&COAUTOMATICDATAPROCESSINGMICROSOFTCORPTEXASINSTRUMENTSINCVISAINCXEROXCORPConsumerStaples(n=5companies)Energy(n=4companies)Utilities(n=3companies)Materials(n=3companies)Telecomm.Services(n=1company)KIMBERLYCLARKCORPLAUDER(ESTEE)COSINCPEPSICOINCWALGREENCOWHOLEFOODSMARKETINCMARATHONOILCORPOCCIDENTALPETROLEUMCORPTESOROCORPWILLIAMSCOSINCAESCORPEDISONINTERNATIONALPUBLICSERVICEENTRPGRPINCAIRPRODUCTS&CHEMICALSINCNUCORCORPPPGINDUSTRIESINCCENTURYLINKINCNote: One company in the Research Group, Jamba Inc., is not considered a Fortune 500 company.14MERCERComparison of Senator Menendez's Corporate Diversity Report Findings and Mercer ResearchFindings,bysource CorporateDiversityReport,ledbySenatorRobertMenendezMercerResearch,assummarizedinthisreportNumberoforganizations 219companiesAllareFortune500;71areFortune100Timeframe:Surveyconductedin201050companies49areFortune500Timeframe:Attritionanalysiscoversterminationsin2010and2011CSuite(e.g.,CEOandhis/herdirectreports)AverageSize 15.8members 11.0membersbasedonHarvardBusinessSchoolworkingpaperstudyingtypicalCEOspansofcontrolBlack/AfricanAmericanrepresentation(%)4.2%aboutoneoutofevery24executivesn/adataonethnicitynotcollectedfromproxystatementsforNEOsBoardofDirectors AverageSize 11.7members 11.6membersBlack/AfricanAmericanrepresentation(%)8.8%aboutoneoutofevery11Boardmembers8.8%aboutoneoutofevery11BoardmembersFemalerepresentation(%)18.0%aboutoneoutofeveryfiveBoardmembers18.4%aboutoneoutofeveryfiveBoardmembers15MERCERMethodology: Data Assumptions and Limitations Interpretation of results needs to be made within the context of research constraintsC-SUITE / TOP FIVE ANALYSISDuetothenatureofdisclosures(i.e.,requiredreportingofafirm'sCEO,CFO,andadditionalthreehighestpaidofficers), wemayobserveincumbentswhoappeartoterminateinthefollowingyear,butwhosecompensationmayhavejust droppedthembelowthereportingthresholdforpurposesoftheproxystatementToaddressthisissue,allterminationswerevalidatedand/orrevisedbasedonactualcompanyreports.Ifanincumbentwas intheSCToneyearandnotinthefollowingyears,butisstillanactiveemployeeofthecompanyduringthetimeperiod examined,he/shewasaddedtotheheadcountforcalculatingturnoverandnotconsideredaterminationSomecompaniesmayreportExecutiveChairsandViceChairsintheirSCT.Inothercases,thecombinedroleofChairman& CEOmaybesplitintotwopositionsatsomepointduringourresearchtimeframeIncumbentswhowereeverinpureboardpositions(e.g.,ChairmannonCEO),includingthoseresultingfromrolesplits, wereexcludedfromourcalculationofturnoverastheydonotrepresentchurninthemanagementranksnorwoulditbe anaccurateapproximationofopenspacesinthecsuite.TheseindividualsarecoveredintheboardanalysisWithoutdataforfiscalyear2013,terminationsinfiscalyear2012arenoteasilyobservedfromMercer'sGDDsincewe conductedacomparisonofincumbentsyearoveryeartoflagpotentialterminationsTurnoverratescalculatedfocusedonaveragenumberofactualterminationsbetweenfiscalyears2010and2011 =limitation, =workaround16MERCERMethodology: Projections Calculating future minority representationProjections 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 time17MERCERBibliography: Literature Reviewed1.BoardCompositionandFinancialPerformance:UncoveringtheEffectsofDiversityinanEmergingEconomy.JyotiD.Mahadeo,TeeroovenSoobaroyen,andVanishaOogarahHanuman.April2010.2.TheGenderandEthnicDiversityofUSBoardsandBoardCommitteesandFirmFinancialPerformance.DavidA.Carter,FrankDSouza,BettyJ.Simkins,andW.GarySimpson.September2010.3.TheValueofBoardDiversityinBanking:EvidencefromtheMarketforCorporateControl.JensHagendorffandKevinKeasey.December2008.4.CorporateGovernance,BoardDiversity,andFirmValue.DavidA.Carter,BettyJ.Simkins,andW.GarySimpson.February2003.5.Womenoncorporateboards:keyinfluencersortokens?BeateElstadandGroLadegard.November2010.6.Femaleboardappointmentsandfirmvaluation:shortandlongtermeffects.KevinCampbellandAntonioMinguezVera.June2009.7.BoardDynamicsandtheInfluenceofProfessionalBackground,GenderandEthnicDiversityofDirectors.NicholasvanderWaltandCoralIngley.July2003.8.TheEmergenceofCorporateGovernancefromWallSt.toMainSt.:OutsideDirectors,BoardDiversity,EarningsManagement,andManagerialIncentivestoBearRisk.NicholasvanderWaltandCoralIngley.February20039.BoardofDirectorDiversityandFirmFinancialPerformance.NicholasL.Erhardt,JamesD.WerbelandCharlesB.Shrader.April2013.10.Establishingadiversityprogramisnotenough:Exploringthedeterminantsofdiversityclimate.AndrewO.HerdmanandAmyMcMillanCapehartMarch2010.11.DemographicDiversityintheBoardroom:MediatorsoftheBoardDiversityFirmPerformanceRelationship.ToyahMillerandMaraDelCarmenTriana.July2009.12.EvaluatingcareersuccessofAfricanAmericanmales:Itswhatyouknowandwhoyouarethatmatters.C.DouglasJohnsonandLillianT.Eby.December2011.Appendix B: Mercer's Talent Barometer Survey19MERCERMercer 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 industriesEducational institutions are failing to generate the talent required by many organizations todaySome employers are addressing the educational gap by partnering with educational institutions or designing student programsRespondents say that professional sciences (business, law, etc.) and formal sciences (IT, math, etc.) are the most important to their organizationsAlthough most respondents conduct regular talent reviews, relatively few map out future talent needs or have succession plans in placeBuying talent from the market is more common than building talent from withinThe most prevalent career experience programs were internal- mobility programs and fast-track career development for high- potential talentEDUCATIONCAREER EXPERIENCE20MERCERMercer 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 roles21MERCERMercer 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 effectiveExecutive Leadership Council (ELC)Projecting Open Spaces on Boards and C-SuitesIntroduction and ObjectivesApproach: Research Group ProfileMercer selected 50 companies from the Fortune 500 to include in the Research Group, mirroring the index's sector distribution and average revenue sizeApproach: Research Group Profile continuedMercer selected 50 companies from the Fortune 500 to include in the Research Group, mirroring the index's sector distribution and average revenue sizeApproach: Data SourcesMercer leveraged both internal and external data sources to complete the researchApproach: Calculating Turnover RatesAttrition rates are focused on actual terminations in 2010 and 2011Results: Average Turnover Rate at the C-SuiteBased on actual turnover observed in 2010 and 2011 among Named Executive Officers of Research Group companiesResults: Average Turnover Rate at the Board LevelBased on actual turnover observed in 2010 and 2011 among Board Members of Research Group companiesProjections: Future Minority Representation at the C-SuiteBased on annual attrition of 7.4%, the following approximates future Black/African-American representation at Fortune 500 c-suites per various replacement scenariosProjections: Future Minority Representation at the Board LevelBased on annual attrition of 7.8%, the following approximates future Black/African-American representation at Fortune 500 boards per various replacement scenariosSummary of Literature Review: Value of Corporate DiversityThe following summarizes supporting and contrasting views regarding the economic and social value of corporate diversityConcluding PointsHow can corporate diversity be effectively enhanced and maintained?Slide Number 13List of Companies in the Research Group (n=50)Comparison of Senator Menendez's Corporate Diversity Report Findings and Mercer ResearchMethodology: Data Assumptions and LimitationsInterpretation of results needs to be made within the context of research constraintsMethodology: ProjectionsCalculating future minority representationBibliography: Literature ReviewedSlide Number 19Mercer Talent Barometer Survey: Key HighlightsSurvey includes responses from HR and talent management executives of 1,268 organizations representing 65 countries around the globe and a variety of industriesMercer Talent Barometer Survey: Education HighlightsDespite high unemployment in many regions of the world, organizations today face a shortfall of qualified talent to fill critical rolesMercer Talent Barometer Survey: Career Experience Highlights66% of respondents indicated they fill critical roles from the outside; 34% fill from within, although this latter group perceived their workforce plans as more effectiveSlide Number 23

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