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<ul><li><p>Executive Leadership Council (ELC) Projecting Open Spaces on Boards and C-SuitesJuly 26 2013</p></li><li><p>1MERCER</p><p>Introduction and Objectives</p><p>The Executive Leadership Council (ELC) engaged Mercer on a research project to address two questions related to board composition:</p><p> 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?</p><p>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</p><p>This report summarizes our research approach, turnover and projection findings, literature review, and next steps</p></li><li><p>2MERCER</p><p>18%</p><p>16%</p><p>14%10%</p><p>10%</p><p>10%</p><p>8%</p><p>6%6%</p><p>19%</p><p>16%</p><p>14%10%</p><p>10%</p><p>10%</p><p>8%</p><p>6%7%</p><p>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</p><p>Industrials</p><p>Financials</p><p>Health Care</p><p>Information Technology</p><p>Consumer Staples</p><p>Energy</p><p>Utilities</p><p>Materials</p><p>Telecommunication Services</p><p>FORTUNE 500 Sector Distribution</p><p>RESEARCH GROUPSector Distribution 8</p><p>75554331</p><p>Consumer Discretionary9</p></li><li><p>3MERCER</p><p>$11$13</p><p>$18 $19</p><p>$23</p><p>$26$28</p><p>$33$35</p><p>$43</p><p>$13$15</p><p>$19$18</p><p>$26$27</p><p>$30</p><p>$18</p><p>$36</p><p>$20</p><p>Utilities Materials Industrials ConsumerDiscretionary</p><p>InformationTechnology</p><p>Health Care Financials Telecom-municationServices</p><p>ConsumerStaples</p><p>Energy</p><p>FORTUNE 500Average 500-company revenue size = $23.8 billion</p><p>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</p><p>RESEARCH GROUPAverage 50-company revenue size = $23.0 billion</p></li><li><p>4MERCER</p><p>Approach: Data Sources Mercer leveraged both internal and external data sources to complete the research</p><p>MercerDatabase</p><p>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</p><p>CompanyReports</p><p>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</p><p>SupplementalInformation</p><p>Company financial data were collected from S&amp;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</p><p>1 2 3</p></li><li><p>5MERCER</p><p>Approach: Calculating Turnover Rates Attrition rates are focused on actual terminations in 2010 and 2011</p><p>average number of termination events in 2010 and 2011 fiscal years</p><p>average active headcount as of2009, 2010, and 2011 year-ends</p><p>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</p><p>= %</p><p>Note: Due to research limitations in collecting turnover data for 2012, it has been excluded from the analysis period.</p></li><li><p>6MERCER</p><p>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</p><p>INTERPRETATION</p><p>Of 5,500 c-suite jobs (e.g., CEO and ten direct reports at Fortune 500 companies), there will be approximately 410 vacancies annually.</p><p>Consumer Discretionary (n=9 companies)</p><p>Industrials (n=8 companies)</p><p>Financials(n=7 companies)</p><p>Consumer Staples(n=5 companies)</p><p>Health Care(n=5 companies)</p><p>Information Technology(n=5 companies)</p><p>Energy(n=4 companies)</p><p>Materials(n=3 companies)</p><p>Utilities (n=3 companies)</p><p>Telecommunication Services (n=1 company)</p><p>5%</p><p>7.4%average turnover rate </p><p>(n=50 companies)</p><p>11%</p><p>5%</p><p>4%</p><p>10%</p><p>9%</p><p>9%</p><p>13%</p><p>2%</p><p>8%</p><p>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 &amp; Development, Sales, Manufacturing, Finance, Law, Human Resources, Information Technology, Strategy, and Public Relations.</p></li><li><p>7MERCER</p><p>Results: Average Turnover Rate at the Board Level Based on actual turnover observed in 2010 and 2011 among Board Members of Research Group companies</p><p>INTERPRETATION</p><p>Of 6,000 board memberships (e.g., 12 members per board at Fortune 500 companies), there will be approximately 470 vacancies annually.</p><p>Consumer Discretionary (n=9 companies)</p><p>Industrials (n=8 companies)</p><p>Financials(n=7 companies)</p><p>Consumer Staples(n=5 companies)</p><p>Health Care(n=5 companies)</p><p>Information Technology(n=5 companies)</p><p>Energy(n=4 companies)</p><p>Materials(n=3 companies)</p><p>Utilities (n=3 companies)</p><p>Telecommunication Services (n=1 company)</p><p>7%</p><p>7.8%average turnover rate </p><p>(n=50 companies)</p><p>5%</p><p>9%</p><p>4%</p><p>9%</p><p>12%</p><p>17%</p><p>2%</p><p>2%</p><p>11%</p><p>Note: Average board size among the 50-company Research Group is 12.</p></li><li><p>8MERCER</p><p>6%</p><p>11%</p><p>19%</p><p>27%</p><p>32%</p><p>0%</p><p>10%</p><p>20%</p><p>30%</p><p>40%</p><p>50%</p><p>60%</p><p>2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023</p><p>10% replacement 25% replacement 50% replacement 75% replacement 90% replacement</p><p>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</p><p>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.</p><p>Startingratioin2013assumesBlack/AfricanAmericansrepresent</p><p>4.2%ofexecutiveteammembers</p><p>(i.e.,CEOandhis/herdirect</p><p>reports),basedonAugust2010CorporateDiversityReportledby</p><p>SenatorRobertMenendez</p><p>Replacementscenariosreflectthepercentageofpotential</p><p>vacanciesfilledbyBlack/AfricanAmericancandidates.For</p><p>example,the50%replacementscenarioassumeshalfofall</p><p>vacancieswillbefilledbyadiversecandidate</p><p>Blac</p><p>k/Af</p><p>rican</p><p>-Am</p><p>eric</p><p>an R</p><p>epre</p><p>sent</p><p>atio</p><p>n, a</p><p>s a </p><p>% o</p><p>f to</p><p>tal C</p><p>-Sui</p><p>te</p></li><li><p>9MERCER</p><p>9%</p><p>14%</p><p>23%</p><p>31%</p><p>36%</p><p>0%</p><p>10%</p><p>20%</p><p>30%</p><p>40%</p><p>50%</p><p>60%</p><p>2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023</p><p>10% replacement 25% replacement 50% replacement 75% replacement 90% replacement</p><p>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</p><p>Note: See Appendix for comparison of Senator Menendez's diversity survey results with Mercer's research.</p><p>Startingratioin2013assumesBlack/AfricanAmericansrepresent</p><p>8.8%ofboardmembers,basedonaveragenumberof</p><p>Black/AfricanAmericanmembersonboardsofthe50company</p><p>ResearchGroupforthepastthreeyears(20102012)</p><p>Replacementscenariosreflectthepercentageofpotential</p><p>vacanciesfilledbyBlack/AfricanAmericancandidates.For</p><p>example,the50%replacementscenarioassumeshalfofall</p><p>vacancieswillbefilledbyadiversecandidate</p><p>Blac</p><p>k/Af</p><p>rican</p><p>-Am</p><p>eric</p><p>an R</p><p>epre</p><p>sent</p><p>atio</p><p>n, a</p><p>s a </p><p>% o</p><p>f to</p><p>tal B</p><p>oard</p></li><li><p>10MERCER</p><p>Summary of Literature Review: Value of Corporate Diversity The following summarizes supporting and contrasting views regarding the economic and social value of corporate diversity</p><p>Inonestudy,researchersfound aftercontrollingforsize,industry,</p><p>andothercorporategovernancemeasures</p><p>statisticallysignificant</p><p>positiverelationshipsbetweenthepresenceofwomenor</p><p>minoritiesontheboardandfirmvalue,asmeasuredbyTobinsQ</p><p>(marketvalueoverreplacementcostofassets)</p><p>Firmsthatdonotintegratetheirdiverseworkforcefacehigher</p><p>coststhanfirmsthatdo,intheformofturnoverandabsenteeism</p><p>fromminoritieswhomaybedissatisfiedwiththeircareerprospects</p><p>Corporatediversitypromotesbetterunderstandingoftheexternal</p><p>market;heterogeneityofbackgroundsleadstobroaderviewsfor</p><p>better,informeddecisions.Diversitymayalsopromotegreater</p><p>culturalsensitivity,whichiscriticalinaglobalizingbusinessworld</p><p>Variousstudiesshowinsignificantrelationshipsbetweengenderor</p><p>ethnicdiversityofboardsandtheirfinancialperformance</p><p>Valueofdiversityoftencitedasbeingoffsetbythenegativeimpact</p><p>ofgroupconflict,intermsofcontrastingviewsandgoals</p><p>Similarly,althoughdecisionsofamorediverseboardmaybeof</p><p>higherquality,thisbenefitispotentiallyoutweighedbythenegative</p><p>effectsofaslowerdecisionmakingprocess,particularlyasthe</p><p>abilitytoreactquicklytomarketdynamicsisimportant</p><p>Economicimpactofdiversitymayvarybyindustryandcompany,</p><p>i.e.,thereisnooverallimpactaseffectsmaybedifferentunder</p><p>differentcircumstancesatdifferenttimes("contingencytheory")</p><p>Thereisanobservedrelationshipbetweenboarddiversityand</p><p>increasedinnovationandcompanyreputation.Diversitysignalsthat</p><p>theorganizationiswellpreparedtounderstandthediverse</p><p>environmentinwhichthefirmoperates</p><p>Minoritiesinleadershippositionsareinspirationaltotheworkforce</p><p>AstudyondriversofsuccessforBlack/AfricanAmericanmales</p><p>examinedfourbroaddimensions:humancapital,socialcapital,</p><p>individualdifferences,anddemographicattributes.Findingsshow</p><p>thathumancapitalanddemographicattributesweremostrelated</p><p>tosuccess,suggestingthattargetedinvestments(e.g.,ontraining</p><p>andeducation)caneffectivelyenhancefutureopportunities</p><p>Minoritydirectorslesslikelytobeperceivedasbeing"business</p><p>experts,"whichmayunderminetheircredibilityonboards</p><p>Therearegenerallytwoapproachesforadvocatingthevalueof</p><p>diversity:oneisbasedonequityandmoralprinciple,andthe</p><p>secondisbasedonincreasedshareholdervalue.Unlessthelatter</p><p>canalsobeaddressed,diversityeffortswilloftenberegardedas</p><p>"tokenism" asuperficialgestureasopposedtoagenuineinitiative</p><p>Theeffectivenessofdiversityprogramsisdependentonactual</p><p>ethnicdiversityofthemanagementteam."Talking"diversitymust</p><p>becoupledwith"walking"diversity athighestlevelsofleadership</p><p> inordertocreateandsustainimpact</p><p>ECON</p><p>OMIC</p><p>SOCI</p><p>AL</p><p>SUPPORTING CONTRASTING</p></li><li><p>11MERCER</p><p>Concluding Points How can corporate diversity be effectively enhanced and maintained?</p><p>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)</p><p>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)</p><p>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 </p><p>protocol for collecting experiential data</p></li><li><p>Appendix A: Methodology and Research Details</p></li><li><p>13MERCER</p><p>List of Companies in the Research Group (n=50)</p><p>ConsumerDiscretionary</p><p>(n=9companies)Industrials</p><p>(n=8companies)Financials</p><p>(n=7companies)HealthCare</p><p>(n=5companies)InformationTechnology</p><p>(n=5companies)</p><p>AUTOZONEINC</p><p>BORGWARNERINC</p><p>DIRECTV</p><p>JAMBAINC</p><p>JOHNSONCONTROLS</p><p>INC</p><p>MACY'SINC</p><p>TIMEWARNERCABLE</p><p>INC</p><p>VFCORP</p><p>VIACOMINC</p><p>CUMMINSINC</p><p>DANAHERCORP</p><p>DEERE&amp;CO</p><p>EMERSONELECTRICCO</p><p>ILLINOISTOOLWORKS</p><p>PARKERHANNIFIN</p><p>CORP</p><p>TEXTRONINC</p><p>WASTEMANAGEMENT</p><p>INC</p><p>AFLACINC</p><p>AMERICANEXPRESSCO</p><p>BANKOFNEWYORK</p><p>MELLONCORP</p><p>CHUBBCORP</p><p>CITIGROUPINC</p><p>FRANKLINRESOURCES</p><p>INC</p><p>PNCFINANCIALSVCS</p><p>GROUPINC</p><p>ABBOTTLABORATORIES</p><p>AETNAINC</p><p>ALLERGANINC</p><p>BECTONDICKINSON&amp;</p><p>CO</p><p>MERCK&amp;CO</p><p>AUTOMATICDATA</p><p>PROCESSING</p><p>MICROSOFTCORP</p><p>TEXASINSTRUMENTS</p><p>INC</p><p>VISAINC</p><p>XEROXCORP</p><p>ConsumerStaples</p><p>(n=5companies)Energy</p><p>(n=4companies)Utilities</p><p>(n=3companies)Materials</p><p>(n=3companies)Telecomm.Services</p><p>(n=1company)</p><p>KIMBERLYCLARKCORP</p><p>LAUDER(ESTEE)COS</p><p>INC</p><p>PEPSICOINC</p><p>WALGREENCO</p><p>WHOLEFOODSMARKET</p><p>INC</p><p>MARATHONOILCORP</p><p>OCCIDENTAL</p><p>PETROLEUMCORP</p><p>TESOROCORP</p><p>WILLIAMSCOSINC</p><p>AESCORP</p><p>EDISON</p><p>INTERNATIONAL</p><p>PUBLICSERVICEENTRP</p><p>GRPINC</p><p>AIRPRODUCTS&amp;</p><p>CHEMICALSINC</p><p>NUCORCORP</p><p>PPGINDUSTRIESINC</p><p>CENTURYLINKINC</p><p>Note: One company in the Research Group, Jamba Inc., is not considered a Fortune 500 company.</p></li><li><p>14MERCER</p><p>Comparison of Senator Menendez's Corporate Diversity Report Findings and Mercer Research</p><p>Findings,bysource CorporateDiversityReport,ledbySenator</p><p>RobertMenendezMercerResearch,assummarizedinthisreport</p><p>Numberoforganizations </p><p>219companies</p><p>AllareFortune500;71areFortune100</p><p>Timeframe:Surveyconductedin2010</p><p>50companies</p><p>49areFortune500</p><p>Timeframe:Attritionanalysiscovers</p><p>terminationsin2010and2011</p><p>CSuite</p><p>(e.g.,CEOandhis/her</p><p>directreports)</p><p>AverageSize </p><p>15.8members </p><p>11.0members</p><p>basedonHarvardBusinessSchoolworking</p><p>paperstudyingtypicalCEOspansofcontrol</p><p>Black/African</p><p>American</p><p>representation(%)</p><p>4.2%</p><p>aboutoneoutofevery24executives</p><p>n/a</p><p>dataonethnicitynotcollectedfromproxy</p><p>statementsforNEOs</p><p>BoardofDirectors AverageSize </p><p>11.7members </p><p>11.6members</p><p>Black/African</p><p>American</p><p>representation(%)</p><p>8.8%</p><p>aboutoneoutofevery11Boardmembers</p><p>8.8%</p><p>aboutoneoutofevery11Boardmembers</p><p>Female</p><p>representation(%)</p><p>18.0%</p><p>aboutoneoutofeveryfiveBoardmembers</p><p>18.4%</p><p>aboutoneoutofeveryfiveBoardmembers</p></li><li><p>15MERCER</p><p>Methodology: Data Assumptions and Limitations Interpretation of results needs to be made within the context of research constraints</p><p>C-SUITE / TOP FIVE ANALYSIS</p><p>Duetothenatureofdisclosures(i.e.,requiredreportingofafirm'sCEO,CFO,andadditionalthreehighestpaidofficers),</p><p> wemayobserveincumbentswhoappeartoterminateinthefollowingyear,butwhosecompensationmayhavejust</p><p> droppedthembelowthereportingthresholdforpurposesoftheproxystatement</p><p>Toaddressthisissue,allterminationswerevalidatedand/orrevisedbasedonactualcompanyreports.Ifanincumbentwas</p><p> intheSCToneyearandnotinthefollowingyears,butisstill</p><p>anactiveemployeeofthecompanyduringthetimeperiod</p><p> examined,he/shewasaddedtotheheadcountforcalculatingturnoverandnotconsideredatermination</p><p>SomecompaniesmayreportExecutiveChairsandViceChairsintheirSCT.Inothercases,thecombinedroleofChairman&amp;</p><p> CEOmaybesplitintotwopositionsatsomepointduringourresearchtimeframe</p><p>Incumbentswhowereeverinpureboardpositions(e.g.,Chairman</p><p>nonCEO),includingthoseresultingfromrolesplits,</p><p> wereexcludedfromourcalculationofturnoverastheydonotrepresentchurninthemanagementranksnorwoulditbe</p><p> anaccurateapproximationofopenspacesinthecsuite.Theseindividualsarecoveredintheboardanalysis</p><p>Withoutdataforfiscalyear2013,terminationsinfiscalyear2012arenoteasilyobservedfromMercer'sGDDsincewe</p><p> conductedacomparisonofincumbentsyearoveryeartoflagpotentialterminations</p><p>Turnoverratescalculatedfocusedonaveragenumberofactualterminationsbetweenfiscalyears2010and2011</p><p> =limitation, =workaround</p></li><li><p>16MERCER</p><p>Methodology: Projections Calculating future minority representation</p><p>Projections are based on the follo...</p></li></ul>