What The Board Wants to Know: Answers to 12 Common Questions

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The Expectations of Public Company Directors Continue to Rise and the Work is Increasingly Challenging

As the business world becomes more complex, organizations are becoming harder to lead and manage, with scrutiny from investors, regulators, shareholders, activists and the media on the rise. There are growing expectations that directors will more closely oversee areas that have historically been management’s responsibility, from the talent pipeline to corporate culture.

While public company boards have made much progress over the past decade in upgrading their governance, the pace of change is not as fast as many stakeholders desire. Board quality and composition are at the heart of corporate governance, yet boards select many directors in the absence of a comprehensive understanding of their needs and long-term strategy. Some directors, especially those who are both long retired and long tenured, are challenged by the rapid pace of change in the modern business environment.
 

Institutional investors are looking for more data and higher quality insights. To help fill that void, Russell Reynolds recently partnered with The Conference Board1 to undertake a detailed analysis of Russell 3000 and S&P 500 companies, collecting data, examining corporate governance practices, and answering some of the most common questions about how these companies are overseen – and by whom.

A Detailed Look Into the “Who” and “How” of Corporate Boards

In a world of increasing transparency and growing expectations, there is greater demand for data, best practices and insight around how the best boards operate.

Russell Reynolds recently co-sponsored the 2019 edition of Corporate Board Practices in the Russell 3000 and S&P 500, a study led by The Conference Board. This report examines corporate governance at 3,348 companies, making it one of the most in-depth board studies ever produced. The full 240-page report is available online.

Russell Reynolds Board and CEO Advisory Partners wants to share with you a brief set of insights from our research and data analysis about directors, boards, and how they operate.

#1 –Director Gender Diversity
Gender diversity remains a key priority of institutional investors and boards themselves. In the last several years, Fortune 500 boards have far outpaced others in gender diversity thanks to aggressive recruiting efforts.

Gender diversity still lags when it comes to board leadership roles.  Additionally, board leadership varies greatly by industry, with the consumer sector being the most diverse and energy being the least.

#2 –Director Tenure

Unlike the UK, US boards do not have statutory tenure limits or other mechanisms to drive board refreshment. US boards have found it a challenge to remove long tenured, underperforming directors because of the personal relationships that develop over years of service.

#3 –Director Recruitment

Recruiting top director candidates has become increasingly challenging. CEOs, CFOs, digital experts, and business transformation experience are all in high demand, and some candidates are approached regularly for board seats –giving them the ability to be especially choosy.

Given the high demand and relatively low supply for expertise in industries including technology, or public company financial experience, there is an increasing willingness to recruit first time directors.

One-third of the Russell 3000, and more than half of the S&P 500, consider gender diversity as part of their process for assessing director candidates. While some companies are specific about considering ethnicity, among other attributes, most use more generic language.#

#4 –Director Overboarding

Demands on directors’ time has never been greater, and boards are much more aware of potential capacity limitations. More than 77% of S&P 500, and 60% of Russell 3000 companies now have overboarding policies, and Vanguard, BlackRock, and others have tightened their definition of overboarding to more than four public company boards.

#5 –Director Age

Diversity remains a bigger challenge than many boards and nominating committees would care to admit. We often see an unconscious bias against younger directors (from technology in particular) as directors raise concerns about seniority and depth of experience from their brief careers. The image of the director in the his or her mid-60s is hard to overcome.
 

#6 –Director Retirement

Just 41% of S&P 500 and 24% of Russell 3000 boards have adopted retirement policies, and those that have are increasing the maximum age over time. US institutional investors generally do not support mandatory retirement ages, but would rather have boards conduct regular board composition assessments, refreshing the board as needed to stay aligned with strategic needs.

#6 –Director Retirement

Most US boards have not adopted term limits, unlike the UK and some other countries. When they do exist, it is most often at the 15-year mark.

#7 –Board Leadership

The combined role of CEO and Board Chair has been on the decline for the past several years, and newly-appointed CEOs are unlikely to simultaneously be named Chairman. That said, approximately 1 in 5 board chairs are a non-independent directors other than the CEO, and in that scenario it is typically the retiring CEO elevated into the role.

Building board leadership involves helping directors develop a breadth of understanding around key areas of oversight, and giving them the opportunity to lead a committee. 13% of S&P 500 and 20% of Russell 3000 boards now have a formal policy on board committee member rotation.

#8 –Board Structure and Operations

Generally, boards prefer to limit the number of directors to help maximize effectiveness and board intimacy. Given the lack of director turnover and refreshment, this greatly impacts the opportunity for greater board diversity.

The average S&P 500 board has fewer than eight meetings per year, including special meetings. We see that most US boards have between 4 and 5 regularly scheduled meetings per year. At the same time, some industries meet more often given the complexities of their work.

While all boards have an Audit Committee, and most have a standalone Compensation Committee, committee structure varies significantly across boards. The composition reflects differences in companies, industries, and markets, but should be reevaluated on a regular basis.

#9 –Director Qualifications and Skills

Board composition should be driven by strategy, and regularly reviewed. In the last several years, the focus on directors with technology and digital experience has risen dramatically. Boards have increased their emphasis on ensuring that directors with specific subject matter expertise can contribute broadly to board discussions to avoid having a single topic director.

Pension funds such as NYCERS have pushed for expanded use of skills matrices and other tools for showing director qualifications. We anticipate this trend continuing to increase. That said, many boards check too many boxes for each director’s skills, negatively impacting the credibility of their matrix.
 

#10 –Director Independence

Director independence may look good on paper, but may not be reflected in how a board operates. Based on our experience, some founder-led and family-controlled public companies have a subset of directors who are technically independent but unlikely to demonstrate independent thinking and actions.

#11 –Board Assessment

While 80% of Russell 3000 companies conduct board assessments, those assessments are often survey-based and produce little value and impact. There is a growing trend toward using a combination of surveys, interviews, external benchmarking, and third party experts to conduct meaningful assessments that will improve board performance and effectiveness.

#12 –Director Education

Boards are increasingly focused on continuing director education. Best practice companies sponsor directors to attend outside education programs, as well as bring in outside experts to educate the full board on relevant and important topics.