Understanding Board Refreshment Part Two – Diversity & New Directors

Earlier this month, I shared insights into what is happening in the arena of board refreshment, particularly in the areas of the latest trends and succession. In this second part of understanding board refreshment, we will look at how the needle is moving in board room diversity and what companies are looking for in new directors.

Although we all see the bold statement with the ‘Fearless Girl’ statue on Wall Street, and there are statements being made about increased levels of transparency and scrutiny, how are corporate boards truly moving the needle when it comes to board room diversity? Aside from diversity, what are corporate boards really seeking in new director candidates?

Diversity

The data shows that there continues to be slow progress in terms of gender diversity on corporate boards.  For minorities, the progress is even slower. In addition, there is the question of defining other areas of diversity. In terms of gender, women hold just over 20% of seats in the Equilar 500, which equates to an incredibly slow pace of one percentage point or less each year. In the Russell Index, there is some progress from just over 12% to 16% of women holding seats.  So, nearly one quarter of all seats in the Russell Index are held by woman.

Over 60% of companies are considering the issues of gender and race diversity on its corporate boards. However, only 45% of companies are providing transparency and disclosing their actual board composition.  We will see this increase year over year because investors are clamoring for and want transparency and action toward building more diverse boards. Compounding this diversity action are institutional investor campaigns with a great emphasis on board room diversity.  Currently, it is high profile companies that have championed the discussion of gender and diversity. Professional services firms, such as KPMG, have really focused on bring the conversation to the forefront. In addition, data underpins the fact that when there is diversity, there are better business results.

With a focus on board room diversity, corporate boards will get the best people and the right composition around the board room table.  This brings diversity of thought and opinion. In terms of ethnicity, there has been increased discussions moving from gender to race and ethnicity, which is increasing over a few years ago.  In addition, sexual orientation will become more part of diversity discussions. Boards should always require that diversity is considered and discussed.  This should be a natural, intentional component of every nominating and governance committee.

Boards need to ensure they are avoiding the token mentality and are not simply checking the box.  It should be first and foremost about the business.  Boards must start with a strategic review, then identify the skills needed and then cast the net. The good news is that there are number of new resources available to tap into diverse talent. If boards do not rest on their laurels but they continue to review, over time they will get great candidates to fill the business needs along with a diverse board composition.

New Directors

The notion of having been or currently are a CEO is on a pretty consistent, downward trend.  Only about 30% of new directors are prior or current CEOs, which is down by approximately 10%. However, that trend is pretty flat in the smaller to mid-cap companies. Corporate boards are expanding to be more inclusive of other executive roles such as corporate leadership and finance. Data shows that more than 50% of new directors include backgrounds in technology, public policy and legal expertise.  Boards are taking a more sophisticated look at technology with cyber being a huge part of it from a risk perspective.

Social media is also playing a part with understanding how people are consuming information from a digital perspective.  Someone who can look at what disruptive technology is doing in other industries and how that impacts a business model is of great value.  Also, government and environmental expertise is needed with directors having a long-term view on what is happening in regulatory environments and how to navigate through that uncertainty. The board topic of culture, such as social responsibility and the relationship between the corporation and society is valuable. Close to 19% of new directors are diverse.

Board chemistry plays a large part of all of this.  Boards needs to evaluate by overlaying the strategic plan against where they see challenges and risk, then address that gap with a particular skillset.  Driving part of this is greater disclosure of a board skills matrix to investors and shareholders. Just under 20% of the Equilar 500 have disclosed a matrix in their proxy, where the number is just under 8% in the Russell Index. Overall, there is an upward trend of disclosure to communicate the skillset of the board.

In summary, more and more companies will continue to disclose their board room diversity more broadly.  This starts with the nominating and governance committee being committed and willing to look beyond traditional sources of talent and making choices that take into account the full board composition and the type of diversity that is needed. So, the needle is moving but of course we would like to see it move more quickly.