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With board composition and renewal under increasing scrutiny, this recent EY report summarizing views of institutional investors, investor associations and advisors about board composition and board composition disclosure is instructive.

Among the key findings are that most investors don’t believe companies are doing a good job of explaining why they have the right directors in the boardroom. And the vast majority of investors believe that rigorous board evaluations – not, e.g., director term limits, retirement ages – are the most effective way to stimulate board refreshment.

Based on insights gleaned from the interviews, the report suggests these three ways companies can enhance board composition disclosures:

1. Make disclosures company-specific and tie qualifications to strategy and risk — Be explicit about why the director brings value to the board based on the company’s specific circumstances. Companies should not assume that the connection between a director’s expertise and the company’s strategic and risk oversight needs is obvious. Also, explaining how the board, as a whole, is the right fit can be valuable, particularly given that most investors are evaluating boards holistically.

2. Provide more disclosure around the director recruitment process and how candidates are sourced and vetted — Disclosing more information around the nomination process — how directors were identified (e.g., through a search firm), what the vetting process entailed, etc. — can mitigate concerns about the recruitment process being insular and informal.

3. Discuss efforts to enhance gender, racial and ethnic diversity — Many companies — nearly 60% of S&P 500 companies — say they specifically identify gender and ethnicity as a consideration when identifying director nominees, but that is not always reflected in the gender, racial and ethnic makeup of the board. Disclosing a formal process to support board diversity, including providing clarity around what is considered an appropriate level of diversity, can highlight efforts to recruit diverse directors.

The report also identifies potential disclosure tools, which may include a strategy-based skills matrix, a lead director/chair letter discussing board succession planning/refreshment/composition, and/or shareholder engagement.

Board Skills Matrix Considerations

This recent guidance from the Goverance Institute of Australia provides a thoughtful approach to creating or refreshing a board skills matrix – which (regardless of geography) is an effective tool for identifying existing and desired competencies and skills on the board.

Among other things, the guidance addresses:

• Potential alternative approaches to identifying existing skills – which may entail involvement by the board chair, corporate secretary, each director individually, the board as a whole and/or the nominating committee
• Non-exhaustive list of competencies the board may wish to consider which – aside from the standard fare – may include, e.g., geographic experience, diversity, tenure
• Board’s consideration of a deeper dive ratings system to weight each competency (e.g., high, medium, low), as well as perhaps identifying whether the experience was attained in a management or non-management context  
• Other thoughtful considerations such as whether identified gaps need to be addressed now and – if so, how. Depending on the circumstances, gaps may be satisfactorily addressed via an external subject matter expert, new director(s), management input and/or education/training

This is a good read  – even for matrix veterans.

More on “The Mentor Blog”

We continue to post new items daily on our blog – “The Mentor Blog” – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

– Survey: Disclosure Committee Insights
– Successful Whistleblower Profile Revealed
– Audit Committee Disclosure: SEC’s Chief Accountant Talks Concept Release
– Waiver of IPO Lock-Ups: Delaware Declines to Dismiss Board, But Dismisses Underwriter Aiding & Abetting
– Making the Case for Fee-Shifting Bylaws

– by Randi Val Morrison