The heart of a board’s effectiveness lies in the quality of its composition. Boards have evolved along with the changes in the marketplace, which have been substantial in the last decade. The wrongdoing and fraudulent practices of some major financial corporations since the financial crisis have created pressure for boards to be less static and more progressive. It’s no longer assumed that the same cadre of board directors will be re-elected without too much reflection and introspection.
To be effective, today’s boards need the right skills to reflect the business’s strategic priorities, to address evolving challenges and to be adept at evaluating relevant areas of risk. Shareholders and regulatory bodies are less likely to overlook boards that have board directors with long tenures. Best practices for board re-election look at a host of new issues, including:
- Environmental, social and governance (ESG)
- New regulatory compliance issues
- Greater emphasis on governance
Best practices for board composition helps to guide boards in the direction of how to approach board director re-election so that the company has a skilled, well-composed board.
Best Practices for Re-electing Board Directors
New best practices for electing and re-electing board directors are emerging to assure regulatory bodies, shareholders and the public that boards are performing their due diligence in overseeing the corporations they lead.
Longstanding best practices for board member re-election have included issues such as conflicts of interest, ethics, accountability, transparency, fairness and compliance. Best practices have evolved to include a new focus on diversity, gender, separation of board chair and CEO, and independent directors. In fact, independent outside directors should always comprise a majority on the board. The composition of the board should include a variety of skill sets that align directly with the strategic priorities of the business.
New best practices encourage boards to limit the maximum number of terms that board directors can serve to continually guarantee board refreshment. Good corporate governance practices require today’s boards to be proactive on all fronts rather than be reactive as they’ve been in the past.
As boards have changed their focus on how they conduct succession planning, boards are considering all aspects of board composition including size. It’s generally accepted that corporate board size should range from eight to 12 board directors. Less than that won’t provide the necessary degree of perspectives for healthy board functioning. Boards that have more than 12 directors risk not having enough time to hear a wide variety of perspectives and board engagement may suffer as a result.
Cybersecurity has been a major issue for corporate boards and will likely continue to be in the coming years. The emphasis on cyber protection is motivating boards to look for ways to add IT expertise on their boards. Some boards have opted to address this issue by adding a board director with IT expertise, whereas other boards have sought to replace existing board members with others who have cybersecurity skills and knowledge.
Regulations require all publicly traded companies to perform board self-evaluations annually to assure shareholders that boards have the right composition and skills to effectively lead the company. Beyond the fact that some boards are mandated to do self-evaluations, board directors have a lot to learn about themselves through the process of board self-evaluations and individual director self-evaluations.
To be effective, board self-evaluations should be more than a rote exercise. Evaluations should help boards identify gaps in board skills and abilities. The results can tell boards many things, including whether current board directors are performing as well as they should be or whether the board should replace them at the end of their term. Evaluations may also tell boards whether they need additional board members with specific skills or demographics on their board.
Board directors should reveal through their evaluations that they’re committed to the company and its purpose, that they behave appropriately, and that they embody the company’s culture in word and in deed. Boards need to be careful not to re-elect board directors for the purpose of covering executive weaknesses, which should be addressed at the management level. Self-evaluations should also demonstrate that board directors are willing to offer their skills and expertise and are not subject to giving in to groupthink.
Diligent’s Board Evaluation tool is part of Governance Cloud, a suite of fully integrated governance software solutions. The assessment tool allows facilitators to use a variety of question formats for the most comprehensive results. Board directors can complete their evaluations using any electronic device, including computers, phones or tablets. The platform has the capability of adding online references and helpful links to additional information and appendices for reference and context.
Additional Considerations for Considering Board Director Re-election
Non-executive directors are crucial to company success. Some of the things that boards should look for in their board is whether they have a majority of independent directors and whether those directors are devoting the proper amount of time to board service. Non-executive directors are subject to shareholder approval and public scrutiny. Boards should take this into consideration when deciding whether to offer up current board directors on the nomination slate.
Boards aren’t required to use professional advisors to assess whether board directors should be re-elected. However, investors expect boards to be objective and transparent in how they determine which directors should remain on the board. A third party brings recruitment expertise to the boardroom, along with a cadre of high-performing candidates.
Timing is also an important consideration when disclosing their recommendations for retaining and appointing board directors. Often, boards make these details known at the Annual Shareholders’ Meeting, which gives shareholders adequate time to review the capabilities of board nominees.
Board appointments, whether they are new appointments or reappointments, must stem from some type of standard, rational process. Nomination committees must be able to demonstrate beyond a reasonable doubt that their choices for board directors were made according to board director merit and the needs of the board to support strategic planning and the company’s overall purpose.