As you have likely experienced over the past year of change, corporate boards are at a crossroads. There is increasing pressure to improve board diversity. This does not just encompass people of color or women, but also younger executives who better understand and are more capable of managing growth through technology.
Recently, Spencer Stuart came out with their Board Index. According to the report, three groups in particular are putting pressure on boards to diversify:
- Activist investors continue to pressure boards, and changes to board composition are the most common rationale for activist activity, according to Gibson, Dunn & Crutcher, which tracks activist campaigns. Between 2014 and the first half of 2020, boards that have settled with activists have granted 2.2 board seats on average to activists — or 20% of their board seats after the settlement agreement.
- In the past several years, major institutional investors have pressed boards to ensure director skills and qualifications align with company strategy and to increase gender diversity and, more recently, racial and ethnic diversity, with some voting against nominating committee members on boards with too little diversity.
- State legislators, too, are pushing for progress on diversity. California, for example, passed diversity mandates establishing board quotas for women and underrepresented communities, while Illinois requires companies to disclose board diversity stats and practices for promoting diversity, equity and inclusion (DE&I) in the boardroom.
The challenge for many boards to meet these calls for change is simply the low turnover numbers, often less than one seat annually. One way to address this is to increase the number of people on the board. In the last year, more than a quarter of boards that recruited and appointed new independent directors increased the number of board seats to include women. While this is one option, a larger board can not necessarily afford to add more seats.
According to the report, turnover is required, yet 25% of S&P 500 boards had no change to their board composition. Additionally, mandatory retirement requirements will only affect a little more than 15% of board seats over the next three years, and term-limits are only in place at 6% of S&P boards.
The report recommends conducting a board assessment process including self-assessments and peer reviews. We also recommend using outside advisors to provide an objective view of the board’s current situation and ensure that reviews of individual directors are not biased in any way. This will also help clarify forward looking expectations and needs as you begin your board recruitment process.
Boards of Directors can also use this as a time to assess changes and or additions to the board, enabling them to proactively manage the transition process. According to the report, “ In addition to setting clear expectations about director tenure appropriate to the board culture, boards should periodically assess whether tenure-limiting policies are appropriate.”
Board of Directors recruitment should no longer be taken for granted. A review process with clear communication will hold board members more accountable and provide better direction for future growth. Re-nominations for existing board members will require continuous solid performance. Becoming comfortable with the notion that change can and will happen is going to be one of the new normal circumstances for boards. If you would like to increase the diversity of your board and aren’t sure how to start the board recruitment process, let us know how we can help.