Finding the right mix of people to serve on a company’s board of directors is undoubtedly a difficult task. With increasing globalization, changing marketplace dynamics and shareholder expectations, it is essential that boards have the right mix of experience and expertise to oversee the opportunities and challenges that their companies face. Finding directors with the right skills, however, is not the only thing boards should be considering. As discussed below, to achieve optimal board composition consideration should also be given to the diversity of the board, director tenure and board size, all of which have been making headlines as of late.
- Board Expertise. Based on PwC’s annual survey, directors continue to view financial, industry and operational expertise as the most important director attributes.i Expertise in risk management and technology/digital media followed closely behind as important attributes to have on a company’s board.ii Depending on a company’s business and the particular risks that it faces, companies may need to beef up their boards by adding members with expertise in particular areas of concern.
While many boards have made significant improvements in their oversight of risk management, others would still benefit from the addition of a director with in-depth experience in enterprise risk management. As high-profile cyber attacks continue to make headlines, having a director with IT experience may be critical to effectively oversee the risk in this area and to help ensure that the company is adequately protected against, as well as prepared for, a cyber attack. Plus, with the expanding role that technology has in business, including the Internet, social media and cloud computing, boards of almost all companies would gain from the addition of a tech-savvy director. To fill this void, boards may have to step out of the box of traditional director traits and tap candidates who are younger and have less conventional backgrounds. Lastly, with increasing globalization, multinational companies may find that they would benefit from a more internationally diverse board.
- Board Diversity. While finding the optimal mix of skills for the board is important, there is also a growing focus on the need for a diversified board, particularly with respect to gender. According to a recent ISS survey, 60 percent of investor respondents and 75 percent of issuer respondents indicated that they consider overall diversity when evaluating boards.iii In a recent speech, SEC Chairman Mary Jo White urged companies and shareholders to do more to increase the participation of women in boardrooms, suggesting that shareholders make known what actions they want taken.iv Since 2008, shareholders have submitted approximately 100 proposals on board diversity, more than half of which were submitted in 2013 and 2014, asking U.S. companies to include women and minorities in their pool of director candidates and to adopt formal policies addressing board diversity.v
Board diversity is not merely a women’s issue—it can also have economic implications for companies and make for a stronger board. Several studies show a positive correlation between women in the boardroom and company financial performance. Particularly, studies have shown that companies with boards of directors that have three or more women have better financial performance, higher returns on equity and greater returns to shareholders.vi According to U.S. Secretary of Commerce PennyPritzker, increasing the number of women in corporate leadership positions is necessary to boost economic competitiveness, noting that 73 percent of buying decisions in the United States are made by women, and women control $12 trillion of $18.4 trillion in consumer spending globally.vii This may explain why S&P 500 companies selling household or personal products consistently have the most female board members, averaging 33 percent female members during 2008 through 2014.viii
This push for female directors may finally be catching on. Based on a report by ISS, in 2014, nearly 30 percent of new board nominees for S&P 500 companies were women, which is a significant jump from 15 percent in 2008.ix But there is still a long way to go. Despite studies showing the benefits of having female board members and mounting pressure by shareholders, women currently make up only 18.7 percent of the boards at S&P 500 companies.x
- Director Tenure. Director tenure is another board consideration that has made its way into the spotlight. While many U.S. companies have some form of mandatory retirement age policy for directors, only three percent of S&P 500 companies have term limits for directors, none of which is less than 10 years.xi Term limit policies may facilitate board refreshment, but they do so at the risk of losing directors with highly valued firm knowledge, expertise or perspectives. Long-tenured directors are often among the savviest and most skilled directors, highly valued for their deep understanding of the company and the industry and their ability to provide historical perspective on strategic decisions and company specific issues. In the past few years, however, shareholder groups have argued that long-tenured directors are more likely to align with management, thereby compromising the directors’ independence, and make it difficult for companies to refresh their boards with new skill sets and address diversity among their board members. A new shareholder proposal is brewing for the 2015 proxy season that would require at least 67 percent of a company’s board to have less than 15 years of tenure. This resolution has been submitted at Costco Wholesale and other submissions are expected at companies where more than two-thirds of the directors have served for 10 years or more, and the board shows other signs of stagnation or entrenchment.xii
Also, ISS updated its Governance Quickscore scoring system by adding several new governance factors, one of which is director tenure. ISS will now consider, when determining a company’s Governance Quickscore, the percentage of non-management directors who have served on the board for more than nine years. ISS has indicated that a tenure of more than nine years can potentially compromise a director’s independence. Some investors also view long tenure as problematic. The Council of Institutional Investors revised its best-practices corporate governance policies last year to include tenure as a factor boards should consider when determining whether a director is independent.xiii And State Street Global Advisors adopted a policy to vote against long-tenured directors and nominating committee members in companies it identifies as needing “board refreshment.”xiv
- Board Size. The size of corporate boards has become a topic of conversation due to a study finding that of companies with a market capitalization of at least $10 billion, those with smaller boards tended to substantially outperform peer companies with larger boards.xv Citing examples such as Apple with eight directors and Netflix with a mere seven, the study suggested that smaller boards allow for deeper debates and more nimble decision-making.xvi Researchers suggest that individual directors are more likely to assume responsibility and ownership and have more detailed discussions when there are fewer directors and are more cohesive with fellow board members. On the other hand, directors on a smaller board have to carry a greater workload and smaller boards may find it more difficult to achieve diversity of experiences and perspectives.
As companies focus on board composition, it would be wise for boards to also keep an eye on developments in proxy access. The SEC amended its rules in 2011 to require companies to include in their proxy materials proxy access shareholder proposals, which typically seek to allow shareholders that meet certain criteria to nominate directors and have those directors included in the company’s proxy materials. The number of proxy access proposals submitted over the years has been relatively low, but this is changing for 2015. As part of the Boardroom Accountability Project, New York City Pension Funds have submitted 75 proxy access shareholder proposals for the 2015 proxy season, targeting companies with perceived climate change issues, excessive CEO pay or lack of board diversity.xvii While monitoring how the 2015 proxy season unfolds, companies should have a plan to address how to respond to a proxy access proposal if one comes their way.
This post was excerpted from our annual Top 10 Topics for Directors in 2015 alert. To read the full alert, please click here.
i PwC’s 2014 Annual Corporate Directors Survey, at p. 10.
ii Id.
iii ISS 2014-2015 Policy Survey Summary of Results (Sept. 2014), at p. 6.
iv Yin Wilczek, “SEC Chair Calls on Companies, Shareholders to Beef Up Number of Women Directors,” Bloomberg BNA Securities Regulation and Law Report (Sept. 16, 2014).
v ISS, Gender Diversity on Boards: A Review of Global Trends (Sept. 25, 2014), at p. 5. This upswing in shareholder proposals is largely attributable to efforts by the Thirty Percent Coalition, an organization composed of national women’s organizations, institutional investors, senior business executives and others, whose objective is to achieve 30 percent female representation on U.S. public company boards by the end of 2015.
vi Credit Suisse Research Institute, “Gender Diversity and Corporate Performance” (Aug. 2012); Catalyst, “The Bottom Line: Connecting Corporate Performance and Gender Diversity” (2007).
vii Sue Reisinger, “Conflicting Reports on Women in Corporate Leadership,” Corporate Counsel (Sept. 29, 2014).
viii ISS, Gender Diversity on Boards: A Review of Global Trends, supra, at p. 7.
ix Id., at p. 10.
x Tom Huddleston Jr., “Boardroom Breakthrough: Gender Diversity is Flourishing Among Board Nominees,” Fortune (Sept. 25, 2014). See also, Theo Francis, “More Women Nominated to Boards at Big U.S. Companies,” The Wall Street Journal (Sept. 25, 2014).
xi Spencer Stuart Board Index 2014, at p. 4.
xii Shirley Wescott, “Fall Season Offers Glimpses into 2015,” Alliance Advisors (October 2014).
xiii Council of Institutional Investors, “CII Members Approve Two New Corporate Governance Best Practices” (Sept. 27, 2013).
xiv Rakhi Kumar, “Addressing the Need for Board Refreshment and Director Succession in Investee Companies,” State Street Global Advisors, IQ Insights (2014).
xv Joann S. Lublin, “Smaller Boards Get Bigger Returns,” The Wall Street Journal (Aug. 26, 2014).
xvi Id.
xvii Press Release, “Comptroller Stringer, NYC Pension Funds Launch National Campaign to Give Shareowners a True Voice in How Corporate Boards are Elected” (Nov. 6, 2014).