Board Composition: A Slow Evolution

The following post by Julie Daum, Laurel McCarthy and Ann Yerger is based on a Spencer Stuart publication.

Interest in the composition of U.S. boards has never been greater. Pressure for change is coming from many fronts, particularly from institutional and activist investors. We have been tracking board composition issues for more than 30 years, and as the data from our 2017 Spencer Stuart Board Index show, U.S. boards are evolving, slowly.

  • The number of new independent directors elected to S&P 500 boards during the 2017 proxy year rose to 397, the most since 2004 and an increase of 15% from 2016.
  • For the first time in the history of our survey, just over half (50.1%) of incoming independent directors on S&P 500 boards are women or minorities.
  • A record-breaking 45% of the new S&P 500 independent directors are serving on their first public company board.
  • Boards are seeking talent beyond C-suite chairs, CEOs, presidents or COOs. Slightly more than a third of new independent directors are active or retired C-suite executives, down from 47% 10 years ago.
  • Fewer active CEOs serve on boards. Today only 37% of S&P 500 CEOs serve on one or more outside public company boards, down from 52% 10 years ago.

Calls for greater boardroom diversity—encompassing considerations such as gender, race, age, skills, qualifications and backgrounds—are on the rise. And boards are responding.

Director skills and experiences are changing. Nearly 20% of new independent S&P 500 directors have experience in the technology or telecommunications industries. Directors with backgrounds in banking, finance, investment or accounting are in high demand, representing 29% of new directors in 2017, up from 19% in 2007. Of this group, directors with investing and investment management experience are of particular interest. Thirteen percent (13%) of new directors come from the investment field, up from 5% a decade ago; less than 20% of these directors were appointed under publicized settlements with activist investors.

S&P 500 boards are opening their doors to directors without prior public board experience. These first-time independent directors are more likely than other new directors to be actively employed (64% versus 42%). They are less likely to be C-suite executives and more likely to have other executive experiences, such as division or subsidiary leadership. They are younger, with an average age of 55.2, compared to 57.3 for other incoming independent directors. They are also more likely to be diverse; more than half (55%) of this year’s incoming first-time directors are women or minorities, a significant jump from 37% a year ago.

Female representation among all new independent S&P 500 directors rose to 36% in 2017—the highest percentage we’ve ever tracked—while 20% of incoming independent directors are minorities, defined as African-American, Hispanic/Latino or Asian. (Six percent of the new directors are women and minorities.) Women are increasingly assuming leadership roles on S&P 500 boards, chairing 20% of audit committees, 17% of compensation committees and 22% of nominating committees, up from 15%, 11% and 20%, respectively, in 2016.

Despite these steps forward, the overall pace of change in boardroom diversity remains slow. With 48% of S&P 500 boards adding no directors, board turnover continues to be low and hinders change to the overall composition of U.S. boardrooms.

  • Today 22% of all S&P 500 directors are women, up incrementally from 21% in 2016 and 17% in 2012.
  • Minority representation at the top 200 S&P 500 companies is low. Seventeen percent (17%) of directors of the top 200 companies are male or female minorities, and representation of African-Americans and Hispanics/Latinos in the top 200 boardrooms has not significantly changed over the past five to 10 years.

Boardroom refreshment faces other headwinds. About three-quarters (73%) of S&P 500 boards report having a mandatory retirement age for directors, unchanged over the past five years, and boards continue to raise retirement ages. Today 42% of S&P 500 companies with retirement policies set their retirement age at 75 or older, compared with 22% in 2012 and just 11% in 2007. Meanwhile, the percentage of S&P 500 companies disclosing some form of individual director assessments is low (37%) and largely unchanged. The data suggest that rather than using evaluations to evaluate director fit in the boardroom, boards are relying on mandatory retirement ages as a primary mechanism for board refreshment.

10 ways boards can continue to evolve

Purposeful leadership by directors is required to continue the evolution in the boardroom. In our experience working with boards, the most effective strategies for building a board composed of the diverse portfolio of skills, qualifications, perspectives and backgrounds matched to the company’s current and future strategic objectives and risks include these 10 elements:

  1. Continuously review the board’s skill sets and performance relative to the company’s strategy and direction. The annual board self-evaluation is a natural platform for the board to review its composition and future needs so that it is in the best position to oversee management as new challenges and market opportunities emerge.
  2. Expand the use of peer and self-evaluations, which can be invaluable tools for providing feedback to and enhancing the performance of new and tenured directors, and for identifying gaps in boardroom skills and experiences.
  3. Take a hard look at formal policies—such as mandatory retirement policies—intended to promote turnover and evaluate whether the policies may be impeding refreshment.
  4. Understand that boardroom diversity, defined broadly but with an emphasis on gender and racial diversity, is of growing interest not just to investors, but also to other key company stakeholders, including employees, suppliers and customers. A tangible commitment to boardroom diversity will be increasingly important, and a “one and done” mentality will be challenged more often in the future, particularly as boards plan for anticipated board vacancies. One approach is to strive to interview several qualified candidates for every open board seat.
  5. Carefully define the expertise that is important for the board—for example, industry or functional knowledge, digital expertise or international experience. Be clear about the perspectives or expertise that the board is looking to gain.
  6. Foster an open mind about what a director candidate should look like and the different ways a director can contribute. Consider senior business unit or functional leaders, including younger executives who may be experts in specific areas such as e-commerce, digital marketing and cybersecurity.
  7. Avoid creating an overly long list of director qualifications, which can limit the talent pool. Be realistic about desired director qualifications; sitting CEOs today are serving on fewer (if any) outside boards. The selection process should cast a wide net and look for the best candidate—not just the one known to board members.
  8. Consider candidates without prior board experience. When assessing first-time candidates, look at their underlying capabilities and mindset—including what we call “board intrinsics,” attributes such as intellectual approach, independent-mindedness, integrity, interpersonal skills and inclination to engage—to understand how likely they are to be able to contribute as well-rounded directors. Spencer Stuart’s Board Intrinsics™ assessment approach focuses on these critical underlying talents and competencies. Candidates who score well in all five areas are most likely to be capable of contributing as “all-round” directors, in addition to the specific knowledge, skill or set of experiences that makes them of interest to boards.
  9. Establish a robust new director orientation program. All new directors—male and female, first-time and experienced—benefit from an orientation program that helps them quickly get up to speed on the business and the company’s approach to governance.
  10. Commit to transparency about board governance practices. With investor attention to board performance on the rise, boards are enhancing their disclosure about key areas of investor interest, including board composition and leadership, director tenure and turnover, board evaluation and performance, and shareholder engagement.
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