Investor attention to board performance and governance continues to escalate, and,
increasingly, it’s large institutional investors — so-called “passive” investors — who are
making known their expectations in areas such as board composition, disclosure and
shareholder engagement. Long-term investors have shifted their posture to taking positions
on good governance, and are increasingly demonstrating common ground with
activists on governance topics.
Board composition is a particular area of focus, as traditional institutional investors have
become more explicit in demanding that boards demonstrate that they are being thoughtful
about who is sitting around the board table and that directors are contributing. They
are looking more closely at disclosures related to board refreshment, board performance
and assessment practices, in some cases establishing voting policies on governance.
Boards are taking notice. Directors want to ensure that their boards contribute at the
highest level, aligning with shareholder interests and expectations. In response, boards
are enhancing their disclosures on board composition and leadership, reviewing
governance practices and establishing protocols for engaging with investors. Here
are some of the trends we are seeing in the key areas of investor concern.
The composition of the board — who the directors are, the skills and expertise they
bring, and how they interact — is critical for long-term value creation, and an area of
governance where investors increasingly expect greater transparency. Shareholders are
looking for a well-explained rationale for why the group of people sitting around the board
table are the right ones based on the strategic priorities of the business. They want to
know that the board has the processes in place to review and evolve board composition
in light of emerging needs, and that the board regularly evaluates the contributions and
tenure of current board members and the relevance of their experience.
Acknowledging investor interest in their composition, more boards are
reviewing how to best communicate their thinking about the types of
expertise needed in the board — and how individual directors provide
that expertise. More than one-third of the 96 corporate secretaries
responding to our annual governance survey, conducted each year as
part of the research for the Spencer Stuart Board Index, said their board
has changed the way it reports director bios/qualifications; among those
that have not yet made changes, 15% expect the board to change how they
present director qualifications in the future.
What’s happening to board composition in practice after all of the talk
about increasing board turnover? In 2016, we actually saw a small decline
in the number of new independent directors elected to S&P 500 boards.
S&P 500 boards included in our index elected 345 new independent
directors during the 2016 proxy year — averaging 0.72 new directors
per board. Last year, S&P 500 boards added a total of 376 new directors
(0.78 new directors per board).
Nearly one-third (32%) of the new independent directors on S&P 500
boards are serving on their first outside corporate board. Women account
for 32% of new directors, the highest rate of female representation since
we began tracking this data for the S&P 500. This year’s class of new
directors, however, includes fewer minority directors (defined as African-
American, Hispanic/Latino and Asian); 15% of the 345 new independent
directors are minorities, a decrease from 18% in 2015.
With the rise of shareholder activism, we’ve also seen an increase in
investors and investment managers on boards. This year, 12% of new independent
directors are investors, compared with 4% in 2011 and 6% in 2006.
Independent board leadership
Boards continue to feel pressure from some shareholders to separate the
chair and CEO roles and name an independent chairman. And, indeed,
27% of S&P 500 boards, versus 21% in 2011, have an independent chair.
An independent chair is defined as an independent director or a former
executive who has met applicable NYSE or NASDAQ rules for independence
over time. This actually represents a small decline from 29% last year.
Meanwhile, naming a lead director remains the most common form
of independent board leadership: 87% of S&P 500 boards report having
a lead or presiding director, nearly all of whom (98%) are identified
by name in the proxy.
In our governance survey, 12% of respondents said their board has
recently separated the roles of chairman and CEO, while 33% said their
board has discussed whether to split the roles within the next five years.
Among boards that expect to or have recently separated the chair and
CEO roles, 72% cite a CEO transition as the reason, while 20% believe
the chair/CEO split represents the best governance.
In response to investor interest in board leadership structure — and
sometimes demands for an independent chairman — more boards
are discussing their leadership structure in their proxies, for example,
explaining the rationale for maintaining a combined chair/CEO role
and delineating the responsibilities of the lead director. Among the lead
director responsibilities boards highlight: approving the agenda for
board meetings, calling meetings and executive sessions of independent
directors, presiding over executive sessions, providing board feedback
to the CEO following executive sessions, leading the performance evaluation
of the CEO and the board assessment, and meeting with major shareholders
or other external parties, when necessary. Some proxies include a letter
to shareholders from the lead independent director.
Tenure and term limits
Director tenure continues to be a hot topic for some shareholders. While
some rating agencies and investors have questioned the independence
of directors with “excessive” tenure, there are no specific regulations or
listing standards in the U.S. that speak to director independence based on
tenure. And, in fact, most companies do not have governance rules limiting
tenure; only 19 S&P 500 boards (4%) set an explicit term limit for nonexecutive
directors, a modest increase from 2015 when 13 boards (3%)
had director term limits.
Just 3% of survey respondents said their boards are considering establishing
director term limits, but many boards are disclosing more in their proxies
about director tenure. Specifically, boards are describing their efforts to
ensure a balance between short-tenured and long-tenured directors. And
several companies have included a short summary of the board’s average
tenure accompanied by a pie chart breaking down the tenure of directors
on the board (e.g., directors with less than five years tenure, between five
and 10 years, and more than 10 years tenure on the board).
Among S&P 500 boards overall, the average board tenure is 8.3 years,
a slight decrease from 8.7 five years ago. The median tenure has declined
as well in that time, from 8.4 to 8.0. The majority of boards, 63%, have an
average tenure between six and 10 years, but 19% of boards have an average
tenure of 11 or more years.
We also looked this year at the tenure of individual directors: 35% of independent
directors have served on their boards for five years or less, 28%
have served for six to 10 years, and 22% for 11 to 15 years. Fifteen percent
of independent directors have served on their boards for 16 years or more.
In the absence of term or tenure limits, most S&P 500 boards rely on
mandatory retirement ages to promote turnover. About three-quarters (73%)
of S&P 500 boards report having a mandatory retirement age for directors.
Eleven percent report that they do not have a mandatory retirement age,
and 16% do not discuss mandatory retirement in their proxies.
Retirement ages have crept up in recent years, as boards have raised
them to allow experienced directors to serve longer. Thirty-nine percent
of boards have mandatory retirement ages of 75 or older, compared with
20% in 2011 and just 9% in 2006. Four boards have a retirement age of 80.
The most common mandatory retirement age is 72, set by 45% of
S&P 500 boards.
As retirement ages have increased, so has the average age of independent
directors. The average age of S&P 500 independent directors is 63 today,
two years older than a decade ago. In that same period, the median age rose
from 61 to 64. Meanwhile, the number of older boards has increased; 37%
of S&P 500 boards have an average age of 64 or older, compared with 19%
a decade ago, and 15 of today’s boards (3%) have an average age of 70 or
greater, versus four (1%) a decade ago.
Another topic on which large institutional investors have become more
vocal is board performance evaluations. Shareholders are seeking greater
transparency about how boards address their own performance and the
suitability of individual directors — and whether they are using assessments
as a catalyst for refreshing the board as new needs arise.
We have seen a growing trend in support of individual director assessments
as part of the board effectiveness assessment — not to grade directors,
but to provide constructive feedback that can improve performance. Yet the
pace of adoption of individual director assessments has been measured.
Today, roughly one-third (32%) of S&P 500 boards evaluate the full
board, committees and individual directors annually, an increase from
29% in 2011.
In our survey of corporate secretaries, respondents said evaluations are
most often conducted by a director, typically the chairman, lead director
or a committee chair. A wide range of internal and external parties are also
tapped to conduct board assessments, including in-house and external legal
counsel, the corporate secretary and board consulting firms. Thirty-five
percent use director self-assessments, and 15% include peer reviews.
According to proxies, a small number of boards, but more than in the past,
disclose that they used an outside consultant to facilitate all or a portion
of the evaluation process.
In light of investors’ growing desire for direct engagement with directors,
more boards have established frameworks for shareholders to raise questions
and engage in meaningful, two-way discussions with the board.
In addition to improving disclosures about board composition, assessment
and other key governance areas, some boards include in their proxies
a summary of their shareholder outreach efforts. For example, they detail
the number of investors the board met with, the issues discussed and how
the company and board responded. A few boards facilitate direct access
to the board by providing contact information for individual directors,
including the lead director and audit committee chair.
Going further, many boards now proactively reach out to their company’s
largest shareholders. In our survey, 83% of respondents said management
or the board contacted the company’s large institutional investors
or largest shareholders, an increase from 70% the year prior. The most
common topic about which companies engaged with shareholders was
proxy access (52%), an increase from 33% in 2015. Other topics included
“say on pay” (51%), CEO compensation (40%), director tenure (30%),
board refreshment (27%), shareholder engagement approach (27%) and
chairman independence (24%). Survey respondents also wrote in
more than a dozen additional topics, including majority/cumulative voting,
disclosure enhancements, environmental issues and gender pay equity.