Director Skills: Diversity of Thought and Experience in the Boardroom

Anthony Garcia is Associate Vice President at ISS Custom Research. This post is based on an ISS memorandum by Mr. Garcia.

While Mike D of the Beastie Boys was “bustin’ out trap kits” to demonstrate his skill as a rapper, nominating committees were more focused on the education, background, and experiences of potential candidates for the board of directors. And while this approach yields sufficiently qualified board candidates, boards may benefit from taking a closer look at the particular set of skills that a director would bring to the board, or in Mike D’s terms, what skills will pay the bills.

The questions are: what are those skills, and, perhaps more importantly, do those skills translate to better practices at the company? In looking at the role of the board in terms of (1) serving as the fiduciary to shareholders and (2) adopting policies to oversee risk, an increase in the number of unique skills in the boardroom translates to better board practices on governance, environmental, and social issues.

Some critical director skills are missing from many company boards

The charts below look at each skill individually based on its prevalence at the nominee- and board-level. The nominee-level view shows the proportion of directorships with each particular skill, while the board-level view looks at whether the company includes at least one nominee with a particular skill and is based on the percentage of companies with each skill on their board. Almost every director has at least some form of professional skill that they bring to the board and many also have experience in a leadership position. While there is a strong correlation between the director-level and board-level ranks, there are some skills, such as international experience and risk management, which are more represented on the individual director-level compared to the board-level. Therefore, while the marketplace overall may be emphasizing these skills in the boardroom, not all companies are following the trend. Furthermore, skills such as human resources and corporate social responsibility, which likely have the strongest correlation to the current focus on E&S issues, remain some of the least prevalent skills both at the director- and board-level.

Recently appointed directors bring more non-traditional skills to the board

Although the responsibilities of the board have continued to proliferate, the focus remains on traditional skillsets such as leadership, financial, industry, and CEO experience. Skills such as risk management, corporate social responsibility (CSR), legal background, and human resources have shown only marginal gains. The chart below focuses on the change in the prevalence of skills comparing directors that first joined the board prior to 2000 to directors that joined the board after 2011. The bars in the chart represent the change in percentage points in skill prevalence from pre-2000 to post-2011 director appointees. The decrease in the “traditional” skills does not mean that industry knowledge and leadership experience are no longer desirable skills for a director, but rather that companies are taking a more holistic view of skills on both a director- and board-level basis.

Women directors are more qualified than men in many skills categories

Given that there is not a cap on the number of skills a nominee can have, the decreases in leadership, financial background, industry knowledge, and CEO experience does not perfectly correlate to the increased prevalence among other skills. Rather, the change in skills may be more closely linked to the changing composition of the board—specifically, as the proportion of board seats held by women increases. Of the 13 skill categories that are more prevalent among recently appointed directors, women directors surpass men in skill prevalence for 9 of the skill categories (69%). In particular, women surpass men in the following categories that have seen an increase (including both traditional and non-traditional board skillsets): audit, strategic planning, technology, sales, risk management, legal, government, CSR, and human resources. A higher proportion of female directors also come from academia, one of the categories with less prevalence among recently appointed directors. The skill that saw the greatest growth—international experience—is also likely correlated with ethnic diversity.

A common retort by companies in relation to challenges to increasing gender diversity on the board is a lack of suitable candidates with the necessary experience. Every sector, except for the energy sector, has at least 20% women directors in total with industry experience, but no sector has reached 30% gender diversity on the board. Industry experience is on the rise as a particular skill among women directors. In every sector but telecommunication services, the percent of women directors with industry experience has increased from pre-2000 levels.

How director skills translate to board performance

Board performance can be evaluated in two ways—the board’s decisions in acting as the fiduciary for shareholders and the board’s stewardship managing the company’s actions on behalf of shareholders. The board’s performance in stewardship can be evaluated through the governance, environmental, and social pillars of the ISS QualityScore as a proxy for ways in which the board acts on behalf of shareholders. This assessment includes the policies the board proactively adopts to manage risk and transparency to shareholders regarding the company policies and practices. On all three pillars, companies with greater diversity of skills have better performance.

Nearly all companies (98%) have at least half (10) of the board skills tracked by ISS, and most companies have between 60%-90% of skills. The chart below buckets the Russell 1000 companies into three categories based on the number of unique skills present on the board. The breakout creates two equal-sized tails that highlight the differences in quality score for companies that “lack” diversity of skills relative to other large- and mid-cap companies and those that have the highest levels of skills diversity.

ISS’s QualityScore captures both quantitative and qualitative aspects of governance, environmental and social issues, and provides a 1-10 score that indicates a company’s risk where 1 indicates best-practices and 10 indicates relatively higher risk. The chart below analyzes the percent of companies with high-risk practices, a quality score of 8-10, across governance, social, and environmental pillars. Companies with less diversity of skills on the board have higher rates of risk across all three pillars.

Hallmarks of an effective skills matrix

The SEC adopted rules requiring boards to disclose whether the audit committee includes at least one financial expert as part of implementation of Sarbanes-Oxley. While there are also exchange-requirements for companies to have a compensation and nominating committee, the requirements for those committees is focused on independence of the members rather than his or her skillset. These basic requirements are akin to the minimum standards for graduating high school and being a college applicant; investors may begin to review qualifications more critically and evaluate which nominees are truly stand-out candidates for admission to the Board of Directors.

  • A matrix that does more than “check the box”: The NYC Fund’s Boardroom Accountability Project 2.0 has focused on having companies disclose a “matrix” of skills, as well as race and gender, of the directors. The Project has a “compendium of best practices” that provides examples of the formats and details that are considered within the scope disclosure best-practices. With regard to race and gender, some of the examples disclosed gender and racial information in aggregate format while others listed the race and gender for each board member. With regard to skills, some companies simply listed the skills of each nominee; some provided a brief description of the underlying qualifications for the skill; some also broke out the director’s biography categorically based on the identified skills; the best examples also highlighted the relevance of the particular skill in the context of the company’s business.
  • Standardized skill disclosure: There is guidance for what constitutes a financial expert for Sarbanes-Oxley compliance. While being a former or current CEO is straightforward answer for whether a director has that skill, something like technology is much less clear. Would working at a company in the information technology sector suffice? Does the director need to be a Chief Technology officer? Setting market standards would reduce the uncertainty and expense for each company to take on the responsibility individually and would also increase investor confidence in analyzing a board based on skills.
  • Skills mapped to specific responsibilities: The analysis shows that having a particular skill on the board will reduce ESG risks. However, a more in-depth assessment would also consider the skills that exist on the board’s committees and map those skills to the responsibilities of key committees. For example, if the board gives the audit committee oversight of cybersecurity, has the board included any audit committee members that have technology or risk management experience?

Skill refreshment considered as part of board refreshment

Tracking skills may help identify when refreshment is necessary—whether refreshment comes in the form of adding a new director to the board or replacing a director for one with a skillset that is unique among the rest of the board. Companies should look beyond whether a particular candidate is qualified to serve on the board and more critically evaluate the value that director can bring based on the current makeup of the board skillset. The skill-based approach may also help with the business-case justification for increasing diversity on the board.

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