Institutional investors and other stakeholders continue to become more explicit in their demands that boards demonstrate thoughtful attention to who is sitting around the table. Board composition has become an area of intense focus — as has how boards are overseeing ESG issues and prioritizing diversity and technology expertise in their recruitment efforts. These were among the top themes that emerged from our annual survey of nominating/governance chairs, conducted in the first quarter of 2022. The highlights reflect the perspectives of 107 S&P 500 and MidCap 400 nominating/governance chairs who participated in the survey.
ESG tops nominating/governance committee priorities
For the second year in a row, committee chairs said the nom/gov committee’s biggest focus for the next few years is ESG (environmental, social and corporate governance) oversight. This is no surprise, as boards and leadership teams face growing expectations from a variety of stakeholders to increase their oversight of ESG risks and opportunities. Other top priorities include CEO succession, board composition, board diversity, and board performance and effectiveness.
22% of surveyed nom/gov chairs say one or more directors should no longer be on the board. Why? They have doubts about directors whose skills are no longer current, or they believe the director’s skills and expertise are no longer relevant and valuable to the board. Less common reasons were, cultural mismatch, inappropriate behavior overboarding and consistent underperformance.
skills and expertise no longer current
skills and expertise no longer relevant to the board
The quality of boards is under intensifying scrutiny. Investors and governance experts increasingly view meaningful assessments as a preferred tool for evaluating and enhancing board and director performance, assessing board composition, and promoting ongoing boardroom refreshment. Peer and self-assessments are gaining traction among boards. They are considered best practice for providing feedback to directors on their contributions and identifying gaps in boardroom skills and perspectives to feed into boardroom succession planning.
85% of surveyed nom/gov chairs report that their board conducts individual director evaluations. The majority (58%) were conducted by the lead director or chair.
44% of full board evaluations are conducted by the lead director or chair. Followed by in-house counsel and law firm at 16% each.
Board committee evaluations
Individual director evaluations
The most effective assessments objectively elicit candid director feedback about board dynamics, operations, structure, performance and composition. Designing and implementing an effective evaluation process requires the right leadership to ensure the approach allows for honest feedback and that the board follows up on the results. While an independent facilitator may be engaged by the board to assist with evaluations, according to our survey, most are conducted by the lead director/chair.
Director recruiting priorities: What’s driving demand?
In a rapidly changing business environment, nom/gov committees are responsible for making sure that the directors around the board table bring the right set of skills, experiences and perspectives to provide effective oversight and guidance on the key strategic issues facing the business.
Top three board composition priorities over the next three years
Developing a boardroom succession strategy
Enhancing racial/ethnic diversity
Enhancing gender diversity
Boards continue to face pressure from institutional investors and other stakeholders to make progress on increasing boardroom diversity. To enhance diversity and ensure they bring on other needed skills and expertise, boards are thinking more strategically about their composition, making boardroom succession planning a priority on the agenda. A forward-looking board succession plan also allows boards the opportunity to get to know and source candidates from historically underrepresented groups.
What’s driving board refreshment
Adding new skills to the board composition
Enhancing racial/ethnic diversity
Replacing retiring director(s) due to mandatory retirement or term limits
Many boards are prioritizing new skills in the boardroom to align with the overall strategy of the company and to respond to the intense pressure to increase the diversity of the board, yet they largely continue to rely on mandatory retirement to drive refreshment. Nom/gov chairs said board evaluations, legislative mandates, investor pressure and underperformance were the least important drivers of refreshment.
Top recruiting priority: technology
The sheer pace of change happening in business means boards have to respond to changes that are coming at them faster than ever before. Of these changes, the pandemic prompted a massive acceleration in tech adoption and development. So, it’s no surprise that technology savvy directors are at the top of the board-hiring wish list.
Top five nom/gov committee priorities
CEO experience matters again
After a few years outside of the top 5 recruiting profiles, CEO experience reappears, indicating that there is still perceived value in having an active, retired or recently retired CEO on the board.