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Board De-Classification May Lead to More Diversity

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January 8, 2016

Board diversity issues have come to the forefront in recent years, and shareholders are pushing companies across the S&P 500 to elect new and diverse candidates to join their boardrooms. Progress has been steady, but many critics are calling for faster and greater changes in board composition.

In addition to the push for new directors, more scrutiny is being placed on the accountability and effectiveness of elected directors. As such, shareholders’ push for regular evaluation and refreshment of boards has led to a downward trend in the prevalence of classified boards.

A classified board creates different “classes” of directors, who are each elected for a term of more than one year. Each year one “class” of directors faces re-election, allowing a majority of the board to remain in place. Proponents of classified boards say that this system creates continuity on the board and allows directors to focus on long-term goals absent the risk of not being re-elected. This system also deters hostile takeovers, since a majority of a classified board cannot be overturned in one year. Proponents of declassified boards suggest increased accountability to shareholders.

As back and forth between shareholders and boards continues, data shows a notable move away from classified boards. The prevalence of classified boards in the S&P 500 declined by 66.5% from 2010 to 2014—in 2014, only 10.5% of boards were classified, down from 31.3% in 2010.

Classified board prevalence dropped significantly in all sectors from 2010 to 2014. The basic materials sector had the most drastic drop of 28.0 percentage points and the utilities sector had the smallest drop of 9.7 percentage points. The technology sector currently has the lowest percentage of classified boards at 4%—a total of three companies.

The decline of classified boards reflects the increased focus on director accountability and diversity. Now that more and more directors face re-election each year, there are more opportunities to appoint new candidates to refresh a company’s boardroom. In addition, incumbent directors face an annual evaluation of their performance in the form of shareholder vote. As declassified boards become the norm across the S&P 500, boardrooms may in turn see more movement to become more accountable and diverse.

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The data in this report is powered by Equilar’s BoardEdge, which not only includes information on 135,000 directors and executives qualified for board service, but also more than a dozen categories about each board member’s background and leadership experience, but also features a network tool clearly displaying how board members are connected to each other.

For more information on BoardEdge, or to request a demo, click here.

For more information on Equilar’s research and data analysis, please contact Dan Marcec, Director of Content & Marketing Communications at dmarcec@equilar.com. Allyson Hahn, research analyst, contributed to this article.