With changes continuing to occur across the corporate landscape and many more on the horizon in the coming years, board members are constantly reassessing their companies’ position in the marketplace, and their own composition as boards. Each year, PwC U.S. (PricewaterhouseCoopers) conducts a corporate directors survey, with this year’s responses focused on governing for the long term, and how boards are adapting to change and reorienting their approach. C-Suite dug into the details of the data on director sentiment and what we can expect to see going into 2016.
Paula Loop: Directors are holding fast to taking a long-term view. They’ve always done that, and trying to do so still, but there are disruptors in place causing them to be responsive to short-term questions and issues while trying to keep an eye on the long term.
Loop: More directors are realizing that engagement by the company and at least some individual board members is becoming more the norm than in the past. Most of the ones we surveyed are looking at protocols for who will have conversations with the investors, how often, where, when, etc.
Loop: I think the nominating and governance committees are tasked with more responsibility around boardroom succession than ever, and activists are putting pressure to make sure they do that. Boards are focused on composition because there are more skills needed in the boardroom today than they may have currently—particularly around technology, which is driving so many changes and disruption in business now. And when I say technology, I mean not only around cybersecurity but also things like digital marketing.
Gender is also a strong piece of the diversity initiative. As just one example, women control 80% of consumer spending in the U.S. So any company involved in consumer spending or services should be sure they have the voice of that gender on their board.
Some boards look at gender diversity as ‘let’s find a female CEO to join our board.’ And they look and there aren’t any available, so they assume there aren’t any qualified female board directors. If that’s the criteria, an increase in gender diversity is not going to happen quickly. On the other hand, some boards are broadening their horizons and looking at women who’ve run really large divisions, who are CMOs or human capital leaders, and who have broader skills that can apply to the boardroom beyond CEO or CFO experience. And that diversity of skills is a good thing for the board.
Loop: Again, I’ll point to activists who have raised the bar by pressuring boards to deliver. So boards are looking around the room and making sure they have the right skills to bring their “A” game.
However, very few boards have term limits, and mandatory retirement age is upwards of 72 and beyond, so there’s not an easy way to move off of boards. It’s beholden on a strong chair to address these issues. Interestingly, the figure actually increased from 2012, and 39% of directors said they thought at least one director shouldn’t be on the board, up from 31% three years ago. In other words, we must not have dealt with this problem in the past since the percentage seems to be growing.
Loop: I think investors are very clearly looking to directors for oversight on what management is doing. When activists or investors engage with directors, they want insight into strategic plans and capital allocation and any significant risks associated with that. And M&A is a significant part of that.
We are expecting deal activity to continue, and there already has been quite a bit this past year. For a director, M&A gets back to assessing the best use of corporate assets. They need to step back and make sure their decisions line up with their strategic plan that they’ve shared with the investor community and that they will ultimately drive value. This is a situation where directors are in a prime position to fulfill their fiduciary responsibility.
As you know, activist investors drive significant M&A activity. When activists come in, they often want to know what companies are doing with excess cash balances (are they considering dividends and buybacks?), and they’ll consider whether the company should stay together or whether it makes more sense to sell off some pieces. We’re also seeing activists scrutinize acquisitions or divestitures from the perspective of whether companies are getting the right value.
Loop: Really what our survey is telling us is that the directors would love to spend more time on this topic, recognizing that it is significant. CEO succession is something they should think about daily, but it’s a challenging concept. It depends where your CEO is in their tenure. If you just got a new one, you’re probably not spending too much time on it versus if you have an aging or ready-to-retire CEO. At the same time, some fairly high-profile CEOs have stepped down, and boards have had to scramble.
Loop: One of the other things that surprised me was when you look at skill sets on the board, IT background was fairly far down the chain. In our annual CEO survey, 86% said IT was going to change their business over next five years. So directors know it is a significant driver, but only 37% said that skill was critical expertise.
And one more highlight: 27% of directors that we surveyed related to proxy access felt that it was never appropriate. That sentiment will absolutely be challenged over the next year or two, since proxy access has significant momentum. It’ll be a very significant topic in the upcoming proxy season, and directors may have to think differently.