1. Optimize board composition for an increasingly complex and changing business environment
Today’s businesses face no shortage of emerging risks, new and renewed: emerging technologies such as artificial intelligence; increasing and persistent inflation; growing geopolitical instability and uncertainty; rising costs of capital; and changing workforce expectations. The challenge for nominating/governance committees is seeing around the corner, objectively analyzing the board’s current composition and future needs and developing a boardroom succession plan that best fits the company’s needs.
In our experience, leading nominating and governance committees are looking forward three to five years, evaluating difficult issues, asking tough questions, and developing a strategic plan to optimize boardroom composition.
2. Consider how best to oversee new and changing risks and opportunities (AI, geopolitical, etc.) relevant to business and sector
As companies and boards face issues that continually evolve in terms of variety, complexity and relevance, nominating/governance committees are wrestling with how best to structure board composition and governance practices in order to most effectively govern.
S&P 500 board size has remained largely unchanged over the past decade at 10.8 directors. In our experience, while boards are seeking specialized knowledge areas on their boards, they generally want directors to be “best athletes” who can contribute to boardroom discussions on many fronts beyond their areas of expertise.
Directors with operational or financial experience are highly valued. Just over 70% of independent directors joining S&P 500 boards last year were either active/retired CEOs, other top C-suite executives, financial professionals or division/subsidiary executives. And according to our survey of nominating/governance committee chairs, these profiles are top recruiting profiles for the upcoming year.
We also aren’t seeing much change in boards’ governance structures. The number of standing board committees has held steady for a decade at 4.2 committees. Technology committees are in place at only 15% of S&P 500 boards, unchanged from the prior year.
3. Ensure robust oversight of CEO succession
A board’s most important responsibilities revolve around oversight of the chief executive officer, including the CEO’s appointment, performance, compensation and succession. CEO succession planning — generally a responsibility of either the compensation committee or the nominating/governance committee — is consistently cited as a top priority in our annual survey of nominating/governance committee chairs.
CEO succession is inevitable, and perhaps even more likely in the near future. The average tenure of an S&P 1500 CEO is 9.4 years. In 2023, 136 companies in the S&P 1500 changed CEOs, a decline from 2022 and well behind pre-pandemic transition levels (when 160 new CEOs were appointed, on average, each year from 2018-2020). With these facts in mind, best-in-class CEO succession planning involves starting early and regularly overseeing both emergency and ongoing succession plans.
The CEO’s job, meanwhile, is harder than ever — which means getting CEO succession right is harder as well. Given the amount of change and complexity in the external environment, boards need to develop and maintain a pipeline of possible CEO succession scenarios for a variety of situations, considering both a range of possible timelines and different states of the business, which would require different future CEO profiles.