TheCorporateCounsel.net

Here we go again, this time from a new report on board refreshment policies from The Conference Board, ESGAUGE, and other collaborators:

As US corporations seek to increase diversity of backgrounds, skills, and professional experience on their boards, they face a central hurdle: limited board turnover that creates few openings for new directors. Indeed, the percentage of newly elected directors in the S&P 500 has remained flat over the past several years.

Broc griped about the stalemate on board diversity as far back as 2017, and The Conference Board’s recommendations to overcome the impasse are pretty much unchanged from when I blogged about the lack of director turnover and its impact on board composition over a year ago. In that regard, consistency is a good thing – it now just requires execution. Here’s what the current-year analysis says:

Companies have a variety of board refreshment tools at their disposal to increase diversity of backgrounds, skills, and professional experience on their boards. The tools that focus on triggering discussions of turnover or reinforcing a culture of board refreshment may be particularly valuable.

These include overboarding policies, policies requiring directors to submit their resignation upon a change in their primary professional occupation, guidelines on average board tenure, individual director evaluations as part of the annual board self-evaluation process, and informal discussions that set an expectation that directors do not need to serve until they are required to leave, but rather should consider whether their contributions are still relevant to the needs of the company. Unlike policies that mandate turnover, such as term limits and retirement policies, these more flexible tools can lead to a more thoughtful process in proactively aligning board composition with the company’s strategic needs.

An encouraging finding from this report is that there has been an uptick in individual director evaluations & use of independent facilitators:

Almost all companies disclose conducting some form of annual board evaluation (which, for NYSE companies, is mandated by listing standards) — and the combination of full board, committee, and individual director evaluations is growing in popularity. As of July 2022, 99 percent of S&P 500 and 97 percent of Russell 3000 companies disclosed carrying out board evaluations. In the S&P 500, conducting full board, committee, and individual director evaluations has become the most common practice (52 percent of companies reported this combination as of 2022 compared to 37 percent in 2018). Indeed, in the S&P 500, the practice of conducting only board and committee evaluations has declined from 58 percent in 2018 to 46 percent as of 2022. Although the Russell 3000 has seen a similar pattern, with a rise in full board, committee, and individual evaluations (from 18 percent in 2018 to 34 percent as of July 2022), 60 percent of Russell 3000 companies continue to conduct only full board and committee evaluations.

Companies are increasingly disclosing their use of an independent facilitator for board evaluations — and larger companies are more likely to disclose hiring an independent facilitator than their smaller counterparts. As of July 2022, 29 percent of S&P 500 companies and 15 percent of Russell 3000 firms disclosed hiring an independent facilitator for board evaluations versus 14 percent of S&P 500 and 6 percent of Russell 3000 companies in 2018. In 2022, 42 percent of the largest companies, with annual revenues of $50 billion and over, disclosed their use of an independent facilitator, but only 5 percent of the smallest companies with annual revenues of under $100 million did so.

Check out our “Board Evaluations” Practice Area for resources on this topic.

– Liz Dunshee