Over the last several years, companies have put a greater focus on the composition of their boardrooms. Because the board of directors represents the shareholders, as investor interests shift, so must the composition of the board. Diversity on boards, particularly gender diversity and proper skill sets, are at the forefront of investors’ minds. Earlier this year, Equilar released its report Board Composition and Director Recruiting Trends, featuring commentary from KPMG’s Board Leadership Center and Georgeson. The report explores trends related to board and committee composition, as well as strategies for recruiting purposes within the Equilar 500—a sample of the largest U.S. companies by revenue. This segment features highlights from the report.
Now more than ever, women have an increasing presence on boards across the Equilar 500. From 2015 to 2019, the percentage of female directors increased from 18.9% to 25.9% (Figure 1). This overall increase of 12.1% has shifted the average number of women on an Equilar 500 board from 2.5 in 2018 to 2.8 in 2019.
More and more shareholders are calling for the disclosure of gender-related data in proxy statements, which may have had an impact on the rise in female directors. Similarly, legislation is aiding the push for more women in the boardroom. In California, public companies must have at least one woman on board. In states like Illinois and Massachusetts, similar legislation is in the works.
However, despite more women joining boards, they may find it harder to climb the ranks or garner additional responsibilities. From 2015 to 2019, although more women in total were joining boards, there were fewer female CEO-chairs, dropping from 5.1% to 3.2%. This 37.3% decline may be attributed to several factors. Due to the hurdles to the CEO seat, there are fewer female CEOs than there are male CEOs. Therefore, there is a smaller pool of female CEOs who can also be on the board. Nonetheless, the percentage of women has increased for nonexecutive chairs, rising from 6.5% in 2015 to 13.2% in 2019. Once a woman is on a board, however, gaining entry into a committee or leadership position is even more difficult. In the same time frame, women in board leadership positions only increased by 1.4%. This is indicative that while more women are joining boards, they are having a hard time moving into leadership roles within the board.
All in all, whether it be due to legislation, investor interests or simply progress in Corporate America, women are gaining more ground in the boardroom. With an average of 2.8 women on Equilar 500 boards in 2019, up from 2.0 in 2015, this trend can be expected to continue (Figure 2). But as companies pay more attention to board size, each appointment is carefully deliberate. Women will need to continue to push for their spots in boardrooms.
As shareholders demand more transparency in the boardroom, activism is a trend that will only continue to increase.”
– Brigid Rosati, Director of Business Development at Georgeson
Throughout the Russell 3000, boards in 2019 most frequently had fewer than eight members. In the Equilar 500, average board size was closer to 11 members in 2019 (Figure 3).
Therefore, smaller companies may have smaller boards. With such a small number of directors, companies must pay special attention to who is representing the investors. Apart from gender diversity on board, companies may encounter activists.
Brigid Rosati, Director of Business Development at Georgeson, provided additional insight into the possibility of activist investors. “As shareholders demand more transparency in the boardroom, activism is a trend that will only continue to increase,” said Rosati. With a rise in interest in ESG and board composition, activists may become more and more involved in their board representation. “The best way to work with activists is to move the organization in the direction that investors are satisfied with,” explained Rosati. One technique, Rosati noted, is to include more information in disclosures. Disclosures that are detailed in ESG initiatives, diversity data and more are more likely to keep activist investors at bay.
As boards represent the shareholders, board composition must reflect investor interests. Each board appointment must be carefully and thoroughly vetted to fit both new regulations, such as diversity initiatives, and to ensure they will represent shareholders’ top priorities. As new desirable skill sets emerge for directors, board recruitment will continue to be a challenge. With smaller board sizes, no appointment can be taken lightly.
With changing director expectations, boards may be refreshing more often. The median director tenure across the Equilar 500 dropped from 7.8 years to 5.8 years from 2015 to 2019. As median tenure drops, it may be that boards are increasingly seeking directors that will move the company strategically in new directions.
Similarly, apart from diversity changes in board structure, boards may be moving toward younger directors. In 2019, the youngest director on a board in the Equilar 500 was Dexter Goei of Altice USA, who was 49 years old at the time of a study analyzing the youngest U.S. directors. On a list of the 20 youngest directors in the Equilar 500, Erik Nordstrom of Nordstrom rounded out the list at age 55. With younger directors, new perspectives and ideas can arise that are valuable to the organization.
“An understanding of technology and how it can be leveraged into business strategy is crucial for board members, and a younger generation may be more adept at this.”
– Susan Angele, Senior Advisor of Board Governance at KPMG
Susan Angele, Senior Advisor of Board Governance at KPMG, provided additional insight into why boards may be refreshing more often. “An understanding of technology and how it can be leveraged into business strategy is crucial for board members, and a younger generation may be more adept at this,” Angele explained. “Furthermore, a healthy turnover is needed for boards to remain relevant to external forces and company strategy. This, coupled with the need for more diversity, has led to a decrease in board tenure and a rise in newer directors joining boards.”
All in all, boards today face more pressure than ever before. Legislation mandates board makeup, and the private sector is pushing for increased diversity. Smaller boards must learn to juggle strategy and investor interests. Younger directors are needed to bridge the gap between strategy and innovation. And most importantly, experience, either as a CEO or a previous board member, is a requirement to break into the boardroom. More than ever, board composition is in the spotlight, as corporations and the community alike look to see more transparency in the boardroom.
Daniella Gama-Diaz is Associate Editor of C-Suite.