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The #1 Investor Issue in 2017: Board Composition



February 13, 2017

To learn more about these topics, request a replay of the recent Equilar webinar with PwC and Vanguard, and visit the Equilar BoardEdge page.

The numbers are in regarding board composition, diversity and recruiting. Depending on your perspective, they may raise an eyebrow.

  • 15.1% of Russell 3000 directors are women, up from 13.9% in 2015 (Equilar)
  • 50% representation of males and females, or gender parity, won’t be reached until 2055 at current rate of growth (Equilar)
  • 738 companies have zero women (Equilar)
  • 35% of directors say that a fellow member should no longer be in the boardroom (PwC)

chart

The confluence of these trends formed the foundation for a discussion during a recent webinar featuring Glenn Booraem, a Principal at Vanguard, and Paula Loop, Leader of PwC’s Governance Insights Center. The panel was hosted by Equilar representatives David Chun, Founder and CEO, and Belen Gomez, Senior Director of Research and Board Services.

The data points above clearly show that diversity on boards has been slow to manifest, and the methods boards have in place to evaluate performance and identify opportunities to add new members are often unclear and undefined.

However, the news is not all bad, Booraem said, and statistics on the current state of play tell part of but not the entire story. These figures are lagging indicators and don’t necessarily take into account the actions that are being taken now to increase diversity and create more thoughtful approaches to board composition.

Glenn Booraem
Vanguard

“There’s a body of emerging research that very clearly supports the impact of diversity on boards,” said Booraem. “The current snapshot may not be where we’d like to get over time, so it’s important for us to understand what boards’ processes are and how they think about the pool of candidates and skill sets they are pulling in.”

For example, he noted, there are some boards who have detailed action plans, while there are others for whom a question of diversity and refreshment seems to surprise them. The 738 boards that don’t currently have a woman is a worthwhile stat to understand, but an equally important point is whether those firms want to make improvement against this and what their trajectory is in implementing a plan.

A similar case in point is connected to one of the most repeated statistics from PwC’s annual study of corporate directors each year. In the 2016 edition, 35% of board members said that another director in their boardroom should be replaced, whether it’s due to their long tenure, being unprepared for meetings, or simply not having the right experience.

Paula Loop
PwC

“This has been a consistent response in the past few years, which on one hand means the bar is set high for board service,” said PwC’s Loop. “However, it also begs the question of why something hasn’t happen as a result. If you’ve identified or indicated that someone needs to go, why don’t boards seem to be able to do something about it?”

There is an answer to this perpetually rhetorical question, the panelists said: board evaluations. For example, it’s important to provide feedback as early as possible to incoming board members, who can’t reasonably be expected to be at the top of their game at the first meeting. That kind of process implementation also sets the tone throughout a director’s tenure, so that as they become more experienced—and also reach the point where it may be time to retire or step down from the board—they will be familiar with a rigorous evaluation process.

“Performance at the board and individual director level is important to ensuring strategic relevance of the board,” said Booraem. “When it comes to evaluations, most people tilt toward removing the ‘bad directors,’ and while I presume that’s the case sometimes, the broader question for us as investors is whether this complement of directors is ‘fit for purpose’ and appropriately aligned with company strategic goals.”

One of the other things that is starting to change, to Booraem’s point about the trajectory, is what PwC’s survey calls the “search for new blood.” In the past five years, the methods by which boards are finding new members are seeing a shift. The predominant way board members have added new directors throughout the years has been to ask around the room “who do you know?” According to the PwC survey, that still happens as part of a board search at least 87% of the time.

As Equilar’s Chun explained in a recent Directors & Boards article, this can be a valuable mechanism to turn up potential directors—clearly a high-functioning board comprising experienced directors would likely have common connections who fit the bill. However, it also has the potential to fill an echo chamber and put the board at risk of “board amnesia,” or the likelihood that they won’t be able to remember every qualified candidate they’ve known throughout a career.

Because of the availability of information available, and due to the investor focus on board composition and refreshment, boards are more likely to seek other sources, the PwC survey found. As that number or directors who said they rely on personal connections for board recommendations dropped from 91% in 2012, 18% of directors said they are taking investor recommendations, up from 11% in 2012, and 11% of boards said they using public databases—up from 4% five years ago.

A common retort to adding diversity is that there are not enough qualified candidates, and Loop noted that the push from investors to get more focus on this issue will help move the needle. For example, 93% of women polled for the survey said there was the talent pool for potential diverse directors was big enough, while just 64% of men agreed in the affirmative to that question.

“Investors are getting more companies to think about what they’re doing,” said Loop.

She added that as a result, boards are doing a better job focusing on the broader talent pool and looking beyond former CEOs to other levels of the C-suite where they may find diverse individuals who have the qualifications they need.


Click here to request access to a replay of the full webinar.

To learn more about other upcoming board education events, please visit http://www.equilar.com/equilar-events.

For more information on Equilar’s research and data analysis, please contact Dan Marcec, Director of Content & Communications at dmarcec@equilar.com.


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