The 2018 U.S. Spencer Stuart Board Index

Julie Hembrock Daum is a Consultant, Laurel McCarthy is a Senior Associate, and Erin Van Gessel is a Board Practice Analyst at Spencer Stuart. This post is based on a Spencer Stuart memorandum by Ms. Hembrock Daum, Ms. McCarthy, Ms. Van Gessel, and Ann Yerger.

In response to a variety of pressures—including an increasingly complex business environment with an unprecedented pace of change and disruption; a growing number and variety of business risks; and intensifying investor focus on the composition, diversity and quality of the boardroom—S&P 500 boards are reshaping, slowly. The 2018 U.S. Spencer Stuart Board Index (SSBI), our 33rd annual analysis of boardroom trends, finds that boards are adding directors with new skills, qualifications and perspectives. But change remains gradual, due to persistent low boardroom turnover.

SSBI Findings: Boards are Changing, but Progress is Slow

Highlights from this year’s SSBI include:

  • S&P 500 boards appointed 428 new independent directors in the 2018 proxy year, up 8% from last year and the highest number since 2004.
  • A majority (57%) of S&P 500 boards appointed at least one new director; 22% appointed two or more directors. Overall, the average S&P 500 company added 0.88 new directors (largely unchanged from 2017), replacing 0.84 directors who departed over the year.
  • Experience as a CEO or top corporate executive is no longer a must-have credential for board service. Only 35% of the new S&P 500 directors are active or retired CEOs, chairs, vice chairs, presidents or COOs, down from nearly half (47%) a decade ago.
  • Board experience is also no longer a pre-requisite. One-third of the incoming class are serving on their first public company board.
  • Directors with financial backgrounds are a priority, representing 26% of the new S&P 500 directors in 2018, up from 18% in 2008. Demand is high for experienced CFOs/financial executives and investment professionals.
  • Tech savvy, “digital directors” are a hot commodity, and boards are tapping younger “next gen” candidates with these skills. Seventeen percent (17%) of the incoming class are 50 or younger.
  • Female representation among new S&P 500 directors rose to 40%, the highest since Spencer Stuart began tracking this data in 1998. Despite this record, low overall turnover yielded an incremental increase in the percentage of women on S&P 500 boards: 24% of all S&P 500 directors are women, up from 22% in 2017 and 18% in 2013.
  • Minority men (defined as African-American, Hispanic/Latino or Asian) experienced a slowdown, representing 10% of the new independent directors, down from 14% last year.
  • This slowdown also can be seen in the representation of minorities at the top 200 S&P 500 companies. Today, 17% of the independent directors of the top 200 companies are male or female minorities, unchanged from last year and up only slightly from 14% in 2008.
  • Mandatory retirement policies continue to proliferate, and retirement ages continue to rise. Of the 71% of S&P 500 boards with age caps, 43.5% set the retirement age at 75 or older, compared with just 11% in 2008.
  • Mandatory retirement policies are clearly an important mechanism for driving the refreshment we are tracking in S&P 500 boardrooms. Three-quarters of the independent directors who left S&P 500 boards in the past year served on boards with mandatory retirement ages. The age limits influenced a majority of these departures.
  • For the second year in a row, half of S&P 500 boards split the chair and CEO roles. Independent board chairs continue to gain momentum, with slightly more than 30% of S&P 500 boards chaired by an independent director, up from 28% last year and 16% in 2008.
  • Although the roles and responsibilities of an independent chair of the board and a lead director are frequently similar, their compensation is vastly different. Independent chairs receive, on average, an additional $165,000 in annual pay, while lead directors are paid an average yearly supplement of around $40,000.

Looking ahead, absent changes in boardroom trends and refreshment practices, future turnover rates of S&P 500 boards will remain low. With independent directors averaging 63 years of age and mandatory retirement ages continuing to rise, many directors have a long runway until they are likely to retire. Only 16% of directors on boards with retirement policies are within three years of the age cap, while 28% of directors on boards without mandatory retirement policies are 70 or older.

Survey of S&P 500 Nominating and Governance Committee Members: Gender Diversity Tops List of Priorities

Results from our survey of more than 170 nominating and governance committee members of S&P 500 companies support our expectation of continued low boardroom turnover. On average, the surveyed nominating and governance committee members anticipate appointing/replacing one director each year over the next three years.

The survey shows that board composition has been a top-of-mind issue at S&P 500 companies. The top three issues addressed by the surveyed directors over the past year were: boardroom succession planning (96%), board diversity (93%) and new director skills (86%).

Clearly the surveyed committee members see their work in the diversity area as unfinished, since 74% said boardroom diversity will be a key focus over the next few years.

Gender diversity is a leading area of emphasis. Despite the fact that 87% of S&P 500 boards have two or more women directors, and 10 have 50% or more women directors, gender diversity is the top current priority of the surveyed S&P 500 directors, prioritized by 62% of the respondents. Minority representation was the fourth-ranked priority, prioritized by 43% of the surveyed directors.

Other priority skills and backgrounds of the surveyed directors include:

  • Active CEO/COO (49%)
  • Technology experience (48%)
  • Retired CEO/COO (41%)
  • Global perspective (41%)
  • Digital experience (40%)

The high surveyed demand for active CEOs/COOs runs against limited supply. Today only 45% of S&P 500 CEOs serve on an outside board, down from 51% a decade ago. And the 2018 SSBI finds that active or retired top executives comprise a decreasing share of director appointments, as boards cast a wider and deeper net to identify director talent and enhance boardroom diversity.

Finding talent that checks all the priority boxes is difficult at best, and the surveyed directors report that boards are exploring different channels for talent. Two-thirds of the surveyed directors reported considering “next gen” candidates who are 50 years old or younger, particularly as they seek directors with technology or digital backgrounds.

When it comes to board effectiveness, the surveyed nominating and governance committee members reported the following focus areas over the next few years: board evaluations (75%), board diversity (74%) and board leadership (48%).

Our review of S&P 500 board composition and governance in 2018 revealed a number of parallels between trends around board composition this year and trends affecting the boardroom in recent years, particularly the desire to refresh boardroom skills. Our survey of S&P 500 nominating & governance committee members demonstrates that many boards are proactively seeking to grow and evolve, albeit slowly. In many ways, this year’s U.S., Spencer Stuart Board Index highlights the push-and-pull of corporate boardrooms: there is demand for novel director skills and backgrounds, yet parameters around director qualifications and director refreshment stifle immediate change in the boardroom.

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