December 7, 2016
As shareholders become more interested in the composition of their portfolio companies’ boards of directors, issuers are increasingly disclosing explicit information in their proxy statements about director skill sets. According to data included in the recent Equilar report Executive and Compensation Governance Outlook 2017, featuring commentary from Hogan Lovells and Labrador, the number of companies that included a board skills matrix in their proxy statements nearly doubled in the past year, from 32 companies in the S&P 500 in 2015 to 63 in 2016.
The skills matrix typically manifests as a visual representation of experience and qualifications for the directors up for nomination at the upcoming annual meeting. While a director biography includes an individual’s qualifications, skills matrices framing the skill sets represented on the board as a whole are becoming more common and make assessing boards as a whole a simpler exercise. Below is a list of the top 20 skills that were included in these matrices displayed in S&P 500 proxy statements.
As the corporate landscape continues to evolve, so have the skills required on the board of directors. Most companies expect directors to have at least some level of executive and/or financial experience in their past, but as new considerations create greater risks, boards are cultivating an array of experience from a diverse set of directors to engender more comprehensive oversight. Moreover, they are also disclosing this information more readily in order to show their investors and other stakeholders they are taking these new risks seriously.
“A lot of progress has already been made in showing director skills and qualifications, often through the use of skills matrices and even icons,” said Molly Doran, Director, Advisory Services for Labrador. “However, there is room for improvement when it comes to the board evaluation processes and explaining how the current board composition and nominee selection process address the company’s future needs.”
The Equilar analysis on board skills matrices uncovered further proof that director skills go far beyond the CEO and CFO position. While experience in those top executive roles is certainly valuable with respect to board service, companies are expanding criteria for director recruitment beyond those qualifications to bring a diverse set of skills and perspectives to create more well rounded boards. CEO experience at a public company is among the skills that these companies included in their board matrices, but by no means is the most sought-after qualification.
“Board and management composition changes can be abrupt, resulting from personal issues such as illness, scandal, family demands or rapid changes in the business or regulatory landscape,” said Amy Bowerman Freed, a Securities partner with Hogan Lovells. “For example, cybersecurity expertise at the board level was once considered a luxury item, and today it is almost always viewed as a core competency at the board level.”
“Boards must have an active process by which board composition, performance and effectiveness is evaluated,” Freed added. “Effective nominating committees often conduct bottoms-up analyses of board competencies to identify gaps or overlaps in skill sets, [which] enable companies to manage poor board performers and develop and implement off-ramp strategies.”
For more information on this topic, including company disclosure examples from public filings, Equilar clients may download Executive Compensation and Governance Outlook 2017 by clicking here. Non-clients may request a complimentary report by filling out the form.
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