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26 November 2018
Is board stability always a good thing? A new study from consultant Spencer Stuart showed that, in 2018, 428 new directors were elected to boards of companies in the S&P 500, the most new directors since 2004, representing an increase of 8% from 2017. What's more, 57% of boards added at least one new director, and 22% appointed more than one new director. However, overall turnover remained "modest." While these new directors added "fresh skills, qualifications and perspectives"—and many were women, minorities and/or first-time directors—nevertheless, the study concludes, "progress is mixed."
Let's start with the good news: Women represented 40% of the incoming class (compared with 36% last year) and minority women were 9% of the new directors (up from 6% last year). What's more, women were also taking on more leadership roles, chairing 20% of audit committees, 19% of compensation committees and 24% of nom/gov committees. And, it was no longer imperative that director candidates have prior experience as a CEO or on a public company board: one-third of the new class were first-time directors, many of whom were younger than their peers with prior service (17% were age 50 or younger). About 60% of the first-time directors were women (46%) or minorities (24%), bringing fresh perspectives to boards. Outreach to identify members of the new class was expanded, as many were drawn from non-standard pools of candidates: of the new class of directors, 65% came "from outside the most senior board and company leadership roles." The new class was also more likely to be actively employed (56%), reversing a 10-year decline. About a quarter were financial experts, and more than one-third of these younger directors had a tech background. Women in the new class also tended to have different backgrounds compared with male peers. According to the study, women are "more frequently line and functional leaders and financial executives," and less frequently CEOs, with backgrounds in tech/telecom and consumer, compared with male peers with backgrounds in private equity/investment.
However, the study observes, "progress in boardroom diversity is mixed." Only 7% of independent board chairs and only 10% of lead/presiding directors were women, percentages that were relatively flat compared with last year. In addition, the percentage of minority men (defined in the study as African-American, Hispanic/Latino or Asian) declined, representing only 10% of the incoming class, down from 14% last year. Significantly, the study concludes, "[w]ith only 8% of all S&P 500 directors joining a board in the past year, moving the needle on boardroom diversity is difficult. As a result, in spite of the record number of new female directors, representation of women on S&P 500 boards increased incrementally to 24% of all directors, up from 22% in 2017 and 18% in 2013."
What's the reason for the low turnover? According to the study, mandatory retirement policies are key to facilitating board turnover, with 71% of boards of S&P 500 companies disclosing a mandatory retirement age. But the ages set for retirement in those policies "continue to climb. Of the universe of S&P 500 companies with retirement age policies, 43.5% set the age at 75 or older, compared with 42% last year and just 11% in 2008. Three boards have a retirement age of 80. More than half mandate retirement at age at 73 or higher." As result, 56% of the directors who left these boards last year were 70 or older, and 36% served on the board for 15 or more years. For all directors that left boards of companies in the S&P 500 last year, the average age of departure was 68.4 and the average tenure was 12.7 years. Accordingly, the study concludes that, "[a]bsent changes in boardroom trends and refreshment practices, future turnover rates of S&P 500 boards will remain low. Only 16% of independent directors on boards with age caps are within three years of mandatory retirement[, and with] mandatory retirement ages rising, many have a long runway until they reach the age cap."
With board turnover remaining low, the opportunities for increasing board diversity are more limited. This article in the WSJ explained that the tendency to retain board members began around 2008, as a result of the financial crisis: according to an executive at Spencer Stuart, this "'shift emerged during the financial crisis in 2008, when companies wanted to maximize stability and retain directors who knew their business well, … adding that a copycat mentality took over. Corporations watch each other's policies closely, and what starts as an action taken by a few companies can quickly become an entrenched practice among a broader universe of firms.'" The executive continued that, when boards do have vacancies, "they are using those vacancies to diversify, with a focus on adding women and people of color as well as professionals who have experience with current business challenges such as digital transformation or hot-button technology issues like cybersecurity…." (Note, however, that according to the study, "a total of 69 women directors (average tenure 13 years) retired during the past year, replaced by 33 women.")
Of course, companies have been spurred to enhance board diversity by the policies advanced by a number of large institutional investors. For example, the voting guidelines regarding board composition issued this year by BlackRock (reportedly the largest asset management firm) made clear that BlackRock expected "boards to be comprised of a diverse selection of individuals who bring their personal and professional experiences to bear in order to create a constructive debate of competing views and opinions in the boardroom. In addition to other elements of diversity, we would normally expect to see at least two women directors on every board." (See this PubCo post.) BlackRock is certainly not the only asset manager to try to tackle this issue. For example, State Street Global Advisors, which initiated its "Fearless Girl" campaign in 2017, has announced that, during the 2017 proxy season, it voted against reelection of board members at 512 companies for failing to take action regarding their board gender diversity and, in the first half of 2018, voted against reelection of board members at 581 companies. Starting in 2020, State Street will vote against the entire slate of board members on the nominating committee if a company does not have at least one woman on its board, and has not engaged in successful dialogue on board gender diversity for three consecutive years. More generally, in its survey of over 60 institutional investors with an aggregate of $32 trillion under management, the EY Center for Board Matters reported that, among investors' top priorities for companies in 2018, board composition, particularly gender diversity, was a top priority for 82%. About half of respondents reported that they consider board diversity in voting, while a quarter do so in the context of proxy contests and shareholder proposals. The driver appears to be the "interest in effective board composition, given the wide range of studies demonstrating the benefits of diversity, including how diverse perspectives enhance issue identification and problem-solving ability and impede 'group think.'" (See this PubCo post.) California's new law requiring a minimum number of women on boards of public companies, including foreign corporations with principal executive offices located in California, could have also have some impact. (See this PubCo post.)
For further information on this topic please contact Cydney Posner at Cooley LLP by telephone (+1 415 693 2000) or email (firstname.lastname@example.org). The Cooley LLP website can be accessed at www.cooley.com.
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