October 28, 2021

Board Composition: New Directors Are More Diverse, But Turnover Still Rare

This WSJ article recaps findings from the annual Spencer Stuart Board Index and The Conference Board’s annual Corporate Board Practices analysis. The big takeaway from both surveys is that large US companies are adding directors from underrepresented racial & ethnic backgrounds. Here’s an excerpt from Spencer Stuart’s findings:

The new class of S&P 500 directors is the most diverse ever. Directors from historically underrepresented groups — including women and Black/African American, Asian, Hispanic/Latino/a, American Indian/Alaska native or multiracial men — account for 72% of all new directors, compared with 59% last year. Nearly half — 47% — of the 456 new independent director class are from historically underrepresented racial and ethnic groups, and 43% are women, including 18% female Black/African American, Asian, Hispanic/Latina, American Indian/Alaska native or multiracial directors.

But as the WSJ article points out, people who identify as white and/or male are far from getting squeezed out:

With the new arrivals, a little over three-quarters of S&P 500 board members were white and 70% were men, according to Spencer Stuart.

The Conference Board’s findings show that the demographics of smaller companies’ boards are slower to change. Yet, companies of all sizes are adding more disclosure to their proxy statements about board composition, which makes it easier to track data. 59% of the S&P 500 now disclose demographics info (compared to 24% last year), and 27% of the Russell 3000 (compared to 8% last year).

There’s mixed data on director tenure:

– According to Spencer Stuart, the average tenure of S&P 500 directors is 7.7 years, which is a year less on average than in 2011.

– According to The Conference Board, the longest average sitting director tenure was recorded in the Russell 3000, at 34.1 years; in comparison, the longest average tenure found in the S&P 500 was 22.4. (Median tenure is much shorter and more aligned with Spencer Stuart’s findings.)

So, for anyone who wants to join a board or change director demographics, it appears that the lack of turnover is one of the biggest ongoing barriers. Spencer Stuart continues to advocate for board refreshment based on meaningful director evaluations as the way to get a variety of valuable backgrounds, experiences & skills – versus relying on a mandatory retirement age or tenure policy, or expanding the size of the board. This Russell Reynolds blog gives additional thoughts on how to improve the board refreshment process.

Similarly, The Conference Board recommends the boards prioritize diversity by taking these steps:

– Revisit director performance assessment processes to ensure they promote skill renewal and the injection of new ideas and perspectives. Directors should appreciate the importance of maintaining diversity of tenures across the board and commit to a healthy rate of refreshment.

– Develop a multi-year board succession plan where the need for strategic skills and expertise is evaluated through the lens of diversity and inclusion. The long-term plan should include developing relationships with diverse junior executives who may one day become attractive director candidates for boards of other companies. Rather than an episodic exercise, director succession should align with an ongoing board development program and be rigorously informed by an emphasis on diversity.

– Investigate best practices on the integration of DEI metrics into senior executives’ incentive plans. Recent studies illustrate how more and more companies, including large ones, have started to set executive targets meant to raise minority representation in managerial positions. Many companies that are still lagging in the promotion of diversity, equity, and inclusion have much to learn from peer experiences. Moreover, setting DEI objectives can help to develop a diverse pool of senior managers who could one day aspire to become board nominees. To support these endeavors, in July 2021, The Conference Board has introduced a new screening tool to its ESG Advantage Benchmarking Platform that allows access to granular information on the use of ESG-related metrics of performance across the Russell 3000 index.

– Consider adopting a Board Diversity Matrix disclosure model that complies with the guidelines recently published by the NASDAQ Listing Center. The information provided (whether in the proxy statement or the company’s corporate website) must be based on the self-identification of each member of the board of directors. For a US incorporated company, any director who chooses not to disclose a gender should be included under “Did Not Disclose Gender” and any director who chooses not to identify as any race or not to identify as LGBTQ+ should be included in the “Did Not Disclose Demographic Background” category. Following the first year of adoption of the matrix, to allow readers to appreciate the progress made, the guidelines establish that all companies must include in their disclosure the current year and immediately prior year diversity statistics.

– Some commentators have observed that the new California law, other similar new state laws, and the NASDAQ listing rule have missed the opportunity to extend the notion of board diversity to executives with disabilities. In a press release following the approval of the NASDAQ rule, in particular, Disability:IN (a global organization driving disability inclusion and equality in business) and the American Association of People with Disabilities (AAPD) expressed their deep disappointment with the SEC’s decision, which took place despite the vigorous lobbying campaigns by a wide group of stake-holders — including New York State Comptroller Thomas P. DiNapoli, the Leadership Council on Civil and Human Rights, the National LGBT Chamber of Commerce, the US Black Chamber and Women Impacting Public Policy.

Boards of directors committed to a more diverse and inclusive leadership development and board recruitment program can remedy this omission. They can learn from experiences such as the Valuable 500, a global disability network launched at the annual Davos gathering of business leaders hosted by the World Economic Forum in 2019: the organization recently announced having reached its target of 500 major companies that officially put disability inclusion on their boardroom agenda—including Microsoft, Unilever, Google, and Coca-Cola.

Liz Dunshee