With board composition on everyone’s agenda this year, corporate boards are evolving at a truly unprecedented pace. Today’s S&P 500 boards are recruiting directors who are younger and more diverse in all aspects, while boards are becoming accustomed to new standards of engagement, disclosure, and investor influence. This pace of change, however, is merely mirroring that of today’s increasingly complex and digital world.
Each year, the Spencer Stuart Board Index offers us an effective snapshot of S&P 500 boardrooms. The 2017 Board Index takes a deep dive into all aspects of board composition (e.g., age, leadership, board size, committee structure, refreshment policies), as well as other timely governance topics including shareholder engagement and board compensation.
Below, we give you just a “quick tour” of 2017’s notable highlights – just a scratch on the surface.
1. Among all new S&P 500 directors, 45% are serving on their first public corporate board (up from 32% last year).
Significance: Boards are broadening their profile of “the corporate director.” Not only are fewer CEOs serving on boards, but companies are recruiting more directors who are younger, non-retired, and diverse in their skill sets. Whether these recruitment trends can be credited to investor pressure or better board evaluation practices, they’re driving greater diversity of thought, age, gender, and ethnicity among new S&P 500 directors.
- S&P 500 boards appointed 397 new independent directors, the most since 2004.
- Female representation among new directors rose to 36% in 2017, a 20-year high.
- 20% of new independent directors are male and female minorities, defined as African-American, Hispanic/Latino or Asian.
- Nearly one in five (19%) of new independent directors have backgrounds in the technology or telecommunications industries.
What’s Powering this Trend? Investors have placed a heightened focus on board composition, and in turn, we’ve seen a significant spike in first-time directors (i.e., a 13-percentage-point increase from 2016). Investors have urged boards to focus on diversity of skill sets and better alignment to strategy. In 2017, we saw both State Street and BlackRock vote against Nom/Gov committee members, and other investors have indicated that they will follow suit in 2018.
In addition, fewer active CEOs are serving on boards. Only 37% of S&P 500 CEOs serve on outside public boards, which is down from 52% a decade ago. Furthermore, boards are cracking down on “overboarding” (i.e., serving on too many boards), likely due to the increased responsibilities of today’s directors and a dash of investor pressure.
The Outlook? Board composition was the number-one governance issue this year, and we don’t see that changing anytime soon. Expect even more investors to take action in 2018. Make sure any disclosure around board refreshment outlines the board’s process: Here’s our strategy. Here’s our gap in skill sets. Here’s how we filled that gap.
Further Resources: Trends in Board Recruitment and Mandatory Age Requirements and Next Gen Board Leaders
2. While board evaluations are now conducted by nearly every S&P 500 board, only 37% reported conducting some form of individual director assessment.
Significance: Board evaluations are the lynchpin of effective board refreshment and performance. Yet, nearly two-thirds of S&P 500 boards are still missing a critical piece of the process (i.e., peer reviews).
- As a result of their last evaluation, 58% of S&P 500 boards made changes to board meeting agendas or the allocation of meeting time; 34% made changes to board composition or skills.
- Other areas of improvement included: use of executive sessions (30%), informal board time such as board dinners (26%), board oversight of risk (24%), and CEO succession planning (20%).
Trends Over Time? The number of boards that reported conducting individual director assessment was virtually unchanged from five years ago (i.e., 37% in 2017; 36% in 2012). Board turnover in 2017 also remained low at 0.81 new directors per board—despite the fact that 46% of corporate directors indicate that someone on their board should be replaced (PwC’s 2017 Annual Corporate Directors Survey).
Obstacles to Overcome: Too many boards continue to treat evaluations as a compliance exercise. Peer reviews can be uncomfortable, and they are too often perceived as a threat to board collegiality; yet, they continue to be the most-effective mechanism for improving director performance. In the end, an effective evaluation process falls squarely on the shoulders of board leadership, who must ensure the “performance-measurement mindset” is an integral part of board culture.
Further Resources: Board Evaluation Blog Series
3. The average age of an S&P 500 board member is 63.1, which is two years older than a decade ago.
Significance: Powered by low turnover and rising age limits, boards are steadily growing older. As companies undergo digital transformations and focus on new consumer generations, how could this trend negatively impact board and company performance?
- Among boards with a mandatory retirement age, 42% have set the limit at 75 or older, an increase from 39% last year and 11% in 2007.
- Despite the average board member age being 63.1, new S&P 500 directors in 2017 had an average age of 57.3. The oldest new director was 73; the youngest was 28.
Conflicting Trends? As boards recruit more young, digital directors, the average age in S&P 500 boardrooms continues to rise… why is that? In a recent article for Next Gen Board Leaders, we explored these two seemingly antithetical trends. Low board turnover (i.e., only 0.81 new directors per board in 2017) continues to drive up the average age, despite great strides in age diversity among new S&P 500 directors.
The Outlook: Investors will become increasingly critical of boards that rely on mandatory age limits or tenure limits as their means for refreshment; instead, they want to understand your board’s process for refreshment and how your age dispersion contributes to diversity of thought in the boardroom. Boards may need to think differently about the ways younger directors can contribute. Likewise, a sharp and contributing director shouldn’t be kicked off the board just because he or she turns 72.
Further Resources: 90% of Board Members Say ‘Age’ is Important to Diversity of Thought
4. 55% of directors (versus 39% last year) said they were contacted by large institutional investors and/or largest shareholders specifically regarding a governance-related topic.
Significance: Shareholder engagement is increasingly seen as good governance by major investors and proxy advisors. In turn, more boards are recognizing the value of these interactions.
- 82% of respondents said that management or the board proactively reached out to the company’s largest shareholders.
- The most common topics about which companies proactively engaged with shareholders were “say on pay” and environmental/social/governance (ESG) issues (48% each), followed by board refreshment (43%).
Further Insights: Throughout our Board Performance Review Series, we’ve learned that major investors like BlackRock and Vanguard generally identify two types of engagement: (1) when there’s something substantive to discuss (e.g., issues around board composition or CEO compensation) and (2) informal relationship-building discussions, which allow the investors and boards to connect and swap perspectives.
Over time, we actually do want to meet with just about everybody… Now that we’re on the downside of the proxy season, our one-on-one engagement with companies on a relationship-building basis is really going to pick up. That’s an important part of our process for both informing ourselves on the specifics at individual companies, but also for understanding the range of practice—and using those discussions with companies to drive best practices more broadly across the portfolio.
Glenn Booraem, Principal & Head of Investment Stewardship at Vanguard, during the Board Performance Review
Furthermore, PwC’s 2017 Annual Corporate Directors Survey indicated that boards are not only becoming more open to shareholder engagement, but that they’re beginning to recognize the value of these interactions:
A majority of directors (76%) at least ‘somewhat’ believe that their board received valuable insights from shareholder engagement; 77% believe that their engagements positively impacted (or is likely to positively impact) proxy voting (up from 59% in 2016).
PwC’s 2017 Annual Corporate Directors Survey
The Outlook: As both sides become more accustomed to shareholder engagement, directors should focus on how they can continue to improve the quality of these meetings. In our resources below, investors share expectations and best practices for their engagements with boards. Among the advice: “Explain your thought process” and “Leave the babysitters and the 100-page slide deck at home”.
As 2018 nears, we expect the heightened focus on board composition to continue and investor pressure to increase. What kind of impact will the recently formed Investor Stewardship Group (ISG) have in 2018? How will investors and activists continue to drive action on diversity or ESG initiatives? These questions will be at the forefront as we head into the next proxy season.
To access the full report to Spencer Stuart’s 2017 Board Index, click here. And don’t miss our recent episode with Spencer Stuart’s Julie Daum…