Understanding Board Refreshment – Trends & Succession

Melissa Henderson February 21, 2018

In an earlier post, Navigating Board Timing, I shared insights into how most corporate boards, particularly publicly traded, go about appointing new directors. Although it is not an exact science, it is a pretty solid view into how it works in alignment with proxy season.  So, what is happening in the world of board refreshment and how can that lead to board directorship opportunities?  In this first of a two-part post, I will share insights into the latest trends in board refreshment, turnover and how corporate boards should approach board succession.

Latest Trends

I am more consistently finding that corporate boards are not adding new seats to their boards. For large-cap companies, the number of seats are approximately eleven members, while small and mid-cap companies range between seven and nine members. Typically, smaller companies will have a much smaller board. So, board size is not really changing. Therefore, for those of you seeking corporate board seats, the number of board opportunities out in the market are not changing beyond the existing pool either.  In fact, I am seeing a number of board size reductions.

In the Russell 3000 Index, there are several new directors joining those boards. It is at a rate of approximately 10% per year for the entire index, but it is still slightly down from 2015 and 2016.  As far as sectors, the sectors in financial, materials and utilities are quite possibly the only sectors that are adding new board directors. New director additions are on a downward trend or essentially flat.

There is not a lot of change in reference to board terms. I find that the board term median is at seven years but there are eight-year tenures.  There is increased focus on the mandatory retirement age policy. Approximately 40% of large-cap companies have a mandatory board retirement policy.  In the Russell 3000 Index, the mandatory retirement policy is at about 20%.  Most often, in 35% of the cases, the retirement age is 75 years old.  We have also seen age ranges between 72 and 75 years old. At the very highest, and at only 1.5%, we see 80 years old as the mandatory retirement age. So, tracking mandatory retirements in publicly traded companies is a great way to identify potential board opportunities.  Also, tracking that against the proxy date provides enough time to drive the opportunity.

Board Succession – Best Practices

Succession can be seen as a problem in management when someone is suddenly leaving. However, when looking at board succession it should be viewed as an evolution. Board succession should be tied to strategic planning – three to five years and five to ten years. Boards need to look at the strategy and determine how board composition and succession is going to assist the company in achieving that strategy. Tying board succession planning to corporate strategy is a key ingredient to the company’s success.

Boards must have a transition and succession planning process in place. One of the best ways to use succession planning is as an asset. The asset should be diversified.  Using a skills matrix helps to fill in the gaps so what results is a diversity of thought, domain experience and skill sets that can be brought into the board room.  To achieve this, there must be a disciplined process.

Board turnover is at about 10% per year. With that turnover rate in mind, boards need to ensure that talent planning and performance management is more involved at the board room level. There needs to be more candid conversations about whether board member skill sets are in alignment with the corporate strategy. This should be done as part of the annual plan and a natural part of the way things work.

There is a level of scrutiny by investors regarding board skill set versus strategy. The small and mid-sized companies have been slower to track trends, disclose them and follow the diversity trends. This will change as we experience more board retirements, although some will also be driven by investors wanting more transparency. The small and mid-sized companies can learn from the large-cap companies, which help them to be more proactive.

Overall, it is viewed that there is a pipeline of all sorts of great candidates available, but it is more a matter of how to tap into them beyond typical recruiters and advisory relationships. Boards are looking for new and innovative ways to tap into that talent.  Boards must do the gap analysis and then be very clear about what they are looking for and then try to tap into that pipeline.  Most boards believe that traditional executive search recruiters are not looking broadly enough.  In turn, the nominating and governance committee needs to push them, because most believe that recruiters will not push themselves.

In our next post of this two-part piece, I will discuss how the needle is moving in board room diversity and what companies are looking for in new directors. Meanwhile, please also feel free to download our Board Guide, “The Essential Guide to Today’s Corporate Boards.

 

 

 

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