February 8, 2017
As reported in the Equilar Gender Diversity Index (GDI), at the current rate of change it would take nearly 40 years to reach gender parity on Russell 3000 boards. While there is meaningful progress being shown in some regards, and companies are slowly but surely adding females and other diverse directors to their boardrooms, in others, there is little accountability and responsibility being taken. And investors who care about these issues are working to influence change.
Investors are becoming more and more engaged in working with boards to communicate what kinds of directors they believe are well suited, and in turn, companies are disclosing more in their proxy statements to show what they are thinking when it comes to board qualifications and skills.
At the recent Board Leadership Forum, co-hosted by Equilar, NACD and Nasdaq in San Francisco, a panel of investors and governance professionals looked deeper at these issues to provide perspective on expectations are for the board and how they can take steps to engage with shareholders around diversity.
“The vote for directors is one of the most important we make every year,” said one institutional investor. “We have 8,000 companies and 40,000 directors, and you are our representatives. It’s very important that we are on the same page, and we depend on you.”
The question is—even when a board can agree that it’s time to refresh its director slate—what are the best ways to evaluate who should go, and how do they make space for new candidates?
According to the PwC Annual Corporate Directors Survey, 39% of board members polled said that at least one member of the board should no longer be on it, or that they were “beyond their ‘sell-by’ date,” as one panelist put it. Meanwhile, three-fourths of boards had directors with more than 10 years on that board, another noted, and when board members get to a certain tenure, they may feel entitled to stay on until retirement if there are not other controls in place.
“There has to be some mechanism to refresh the board as needed as business strategy changes,” said one investor. “We are not supporters of hard and fast mandatory retirement ages or tenures, but we need a way to allow for turnover.”
Some of the ways proposed to keep this topic at the forefront is by showcasing diversity in the proxy statement, even if it’s not required to be disclosed. That, alongside a skills matrix or other disclosure that represents the variety of viewpoints and experience directors are bringing to the boardroom, opens the door for shareholder engagement around this issue because it helps investors have a window into how the board is composed.
Another request from one of the investors was to ensure annual election of directors and a majority vote standard. As a recent Wall Street Journal article noted, the number of classified boards is decreasing as more and more companies opt for annual votes for all board members. In addition, the introduction of proxy access at more than half of S&P 500 companies means that shareholders now have more power and say in whether or not a board should be refreshed if they feel like it has become too stale.
A recent study conducted by the Stanford Rock Center for Corporate Governance and The Miles Group found that 57% of directors agree that their board is effective in bringing new talent—while that is a majority, it means that 43% felt they were not. Meanwhile, only one-third of respondents said they were positively planning for turnover. If that’s the case, the panelists posited, what message does that send to investors?
Overall, the panel agreed that despite some of the rhetoric out there, boards are not clamoring for more diversity as a general rule. The numbers are slow to increase because there is not enough commitment to change at a broad level, they said, and it will take strong efforts from investors and other governance advocates to prove to them they need fresh faces in the boardroom. The fact of the matter is that there is not a supply problem when it comes to diverse candidates. “There are more qualified people available for board positions than there are positions available,” one investor noted. “The problem is being able to tell them when to leave.”
Ultimately, board refreshment is not about ushering in change for the sake of change. As the PwC statistic implies, some directors may not be carrying their weight in the boardroom, and it could be for a simple reason that the company has changed direction and their skills and experience are needed less than a new area.
Adding more directors is not the answer either, as an overloaded board will have difficulty making decisions together. Directors have to have fortitude and backbone to say they may have to go with a different skill set. It’s the role of the nominating and governance committee to set expectations on the front end that a directorship is not a permanent retirement hobby, and evaluation processes are in place for directors to honestly assess themselves in the face of change—and make those changes when necessary.
To learn more about upcoming board leadership 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 firstname.lastname@example.org.