Over the last several years, Board Composition has become an area of focus for many Nominating and Governance Committees and Boards, and it is the subject of a recent Deloitte report, “On the Board’s Agenda.” Deloitte identifies four specific topics related to Board Composition upon which Nominating Committees and Boards will likely focus in 2016: (1) skills and qualifications of directors, (2) director independence, (3) director tenure and board refreshment and (4) board diversity.
- Skills and Qualifications of Directors. Since 2009, SEC proxy rules have required that companies “briefly discuss the specific experience, qualifications, attributes or skills that led to the conclusion that the person should serve as a director.” Though this is a seemingly straightforward directive, Deloitte points out that many institutional investors can be very critical of a board’s stated rationale, and as a result, boards have struggled to craft adequate disclosure under the rule. Deloitte notes that some boards have dealt with this issue by including a “skills matrix” in their Company’s proxy statement, while others have instead focused on the board’s collective strength as a unit. Using the latter approach, companies are able to focus disclosure on what skills and attributes make the board strong as a whole, rather than justifying one single individual’s attributes in isolation. Deloitte cautions that whichever approach a company chooses, the goal should always be to demonstrate that the company’s board is properly skilled and qualified to effectively oversee and advise management.
- Director Independence. Both the New York Stock Exchange and NASDAQ require that listed companies have a majority of independent directors, and each has developed categorical standards for determining director independence. While many companies simply follow the standards set out by these exchanges, many others develop their own, more stringent standards. However, Deloitte notes that Boards, and specifically Nominating Committees, face the difficult but necessary task of identifying and nominating directors who have sufficient experience within the Company’s industry, but who also meet the Company’s strict standards for independence.
- Director Tenure and Board Refreshment. Closely related to the issue of director independence is that of “refreshing” boards of directors. Between 2010 and 2014, the average board tenure of Fortune 100 companies saw a modest decrease from 9.2 years to 8.9 years. As many institutional investors and proxy advisors, including Institutional Shareholder Services, State Street, CalPERS and CalSTRS have noted, it becomes difficult to argue that a director who has served 10 or more years remains truly independent. Deloitte notes several strategies that companies have employed to facilitate board refreshment. According to the 2014 Board Practices Report published by the Society of Corporate Secretaries and Governance Professionals and the Deloitte Center for Corporate Governance, 72% of the top 250 companies maintained age-based mandatory retirement policies in an effort to cause boards to refresh more naturally. The report does, however, note that the age of mandatory retirement appears to be increasing as boards themselves age. Finally, many companies have attempted to better utilize board and individual director evaluations, aiming to increase candor and facilitate discussion among board members regarding when a company may benefit from the fresh perspectives of new directors.
- Board Diversity. Board diversity is one of the newest issues companies face in evaluating board composition and may refer to gender, ethnicity, age, experience or any other trait that makes a particular director unique. While board diversity is universally desirable, some forms of diversity are easier to address than others. For example, the 2020 Women on Boards Gender Diversity Index noted that between 2014 and 2015 there was an increase in the number of women on Fortune 1000 boards from 17.7% to 18.8%. However, the Spencer Stuart Board Index reported that the most desired quality for new directors in 2015 was that they were an active CEO or COO – positions not typically held by women, minorities or younger candidates for director. Deloitte notes that by identifying non-traditional director qualities and skill sets, such as technological expertise, boards can increase board diversity while also improving their company’s ability to adapt to a changing competitive environment.
Deloitte’s Center for Corporate Governance fosters dialogue and knowledge-sharing, and develops thought leadership on governance issues to help advance collaboration among corporations, board members, the accounting profession, academia and government. Directors may find more helpful resources at Deloitte’s Center for Corporate Governance website here.