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Institutional Investor Focus 2020: Board Composition

Board and executive team diversity, board assessments are likely priorities for investors this year
February 2020

The job of corporate director continues to increase in complexity and expectations. To be successful, boards must be composed of individuals providing a diversity of perspectives and experiences. Boardroom diversity is not a new issue. Investors have long called on boards to be composed of directors offering a diverse mix of skills, experiences, perspectives, geographic experiences, ages, tenures, gender, race and ethnicity.

Boards have been responding and reshaping, though slowly. But pressure for change will continue. Our conversations with dozens of institutional investors identified four composition-focused issues for board attention in 2020.

The spotlight on boardroom gender diversity will continue to shine

In recent years, investors have been laser-focused on the issue of gender diversity in the boardroom. Boards have responded, appointing a record number of female directors. But due to the persistent low rate of turnover in the boardroom, the pace of change has been slow. Women now represent 26% of all directors on S&P 500 boards, up from 24% a year ago and 16% in 2009. Today all S&P 500 companies have at least one female director, and most (92%) have at least two women on the board.

However, one or two women directors won’t suffice for investors. We expect investor interest in the issue of boardroom gender diversity will continue until statistics approach parity. Pressure for change will intensify as investors increasingly vote against directors (particularly nominating/governance committee chairs and members) of boards with no or few women directors, and investors urge nominating/governance committees to adopt policies such as the NFL’s Rooney Rule to require consideration of diverse candidates for director searches.

Attention to boardroom diversity of race and ethnicity will grow

While women are making strides in U.S. corporate boardrooms, progress has been much slower for people of color. Today, 19% of all directors of the top 200 companies are male or female minorities (defined as African-American/Black, Asian or Hispanic/Latinx), up modestly from 17% last year and 15% in 2009.

In contrast to evaluating gender diversity, assessing the racial/ethnic composition of U.S. boardrooms is challenging and imperfect at best. Current rules do not require companies to disclose the self-identified racial/ethnic attributes of individual directors or the full board.

Pressure is mounting for changes to disclosure requirements. In 2015, nine public pension funds submitted a rulemaking petition to the U.S. Securities and Exchange Commission calling for expanded disclosure of boardroom diversity attributes. In recent years, members of U.S. Congress have introduced various bills mandating disclosure enhancements. An Illinois law enacted in 2019 requires companies with principal executive offices in the state to report on their board composition, including the self-identified gender and minority/ethnic attributes of each director.

We expect investors will expand their diversity lens to examine racial/ethnic attributes of boards and will press for progress at boards with low or no racial/ethnic diversity. Regardless of disclosure requirements, we expect investors will urge companies to voluntarily expand their disclosures to include individual director and/or board self-identified diversity attributes. One challenge for boards is defining these attributes. At this time, investors do not have formal definitions of racial/ethnic diversity. As a result, boards will have the flexibility to consider definitional issues, and one approach may be to enable directors to self-identify.

Boards will be expected to enhance their oversight of executive team diversity

Human capital has always been a critical component of corporate value and success. But for many years, board oversight of human capital was generally limited to the CEO and the most senior corporate executives. No longer. A range of challenges, risks and imperatives — including the war for talent, the #MeToo movement, gender pay equity and succession planning — have necessitated heightened board oversight of human capital.

Investors are encouraging this enhanced oversight, pointing to decades of studies showing a correlation between effective human capital management (HCM) and corporate performance. Vanguard’s Investment Stewardship 2019 Report notes, “Human capital management is of utmost importance for many companies. We have high expectations of boards when it comes to their own composition and succession plans, as well as for their oversight of these matters at the company.” BlackRock’s 2019 Investment Stewardship Annual Report says, “In a talent-constrained environment, we view a company’s approach to HCM as a potential competitive advantage. We expect disclosure around a company’s approach to ensuring the adoption of sound business practices that would likely create an engaged and stable workforce.”

We expect investors will increasingly hold boards accountable for their oversight of human capital management in general and overall workforce diversity — the executive team — in particular. To help them assess the board’s oversight effectiveness, we expect investors will press boards and companies for enhanced voluntary disclosures of a range of human capital metrics, including the diversity attributes of the workforce, with breakdowns by employee groups, such as executive officers and managers.

The reasons for the focus on executive team and workforce diversity? Not only do investors see workforce diversity as a competitive advantage, they consider diversity in the executive ranks as critical for building a pipeline of diverse talent for the boardroom.

Board and individual director assessments will be under the microscope

When it comes to optimizing the composition of the boardroom, a disconnect persists between investor views of best practices and board practices in the “real world.” Rather than relying on mandatory retirement policies and tenure limits for refreshment, investors generally prefer that boards engage in robust assessments (of the board and individual directors) to determine optimal board composition. However, in sharp contrast, most boards have adopted mandatory retirement policies, and they keep raising the age caps.

One thing is clear: mandatory retirement policies are influencing boardroom refreshment. More than three-quarters of the independent directors who left S&P 500 boards in the past year served on boards with mandatory retirement ages. The age limits influenced the majority of these departures, with 41% either exceeding or reaching the age cap and another 14% leaving within three years of the retirement age.

We expect investors will increasingly hold boards accountable for the quality of their evaluation processes. To assess the robustness of board and director evaluations, investors will call on boards to voluntarily provide enhanced disclosures of the process, scope and key takeaways of annual assessments. There has been a significant increase in boards’ voluntary disclosures in this area and we expect it to continue. We also anticipate that periodic use of third parties for evaluations — mandated in the UK — will emerge as a best practice in the U.S.


The best boards recognize the strategic imperative for new perspectives and experiences in the boardroom. Investor pressure for change will persist and may serve as a catalyst to accelerate shifts in boardroom composition and diversity.