Board Composition: Diversity, Experience, and Effectiveness
The Conference Board, in collaboration with KPMG and others, reports on board composition, size, and education at S&P 500 and Russell 3000 companies, finding a decline in the percentage of directors with business strategy experience.
Investor and regulator focus on board composition and practices has evolved significantly over the past 20 years. In the wake of the Enron and WorldCom collapses, these stakeholders initially focused on strengthening board independence and oversight.1 After the financial crisis of 2008, that gave way to a greater focus on whether boards have the right mix of skills and experience to guide business strategy—as well as mechanisms for shareholders to hold boards accountable for business performance.2 More recently, the focus on board diversity has not only accelerated, but also expanded to the broader question of how boards are overseeing environmental, social, and governance (ESG) matters. For example, in early 2022, investors raised the bar for board diversity,3 and the US Securities and Exchange Commission (SEC) proposed rules seeking greater disclosure of the board’s role in climate change and cybersecurity, with rules on human capital management to come.
These trends have significant implications for board composition, size, and education. Companies need boards with directors who have a diversity of backgrounds, as well as the skills and experience to oversee the expanding list of priorities. They also need boards of sufficient size to accommodate these individuals, as well as to populate the (new) board committees that address ESG topics. And they need to have more robust onboarding programs for these new directors, as well as ongoing board education programs to ensure the entire board is not relying on the expertise of a few directors but is fluent in the growing list of issues that boards are expected to oversee.
This report provides insights relating to board composition (including gender, race, and sexual orientation diversity, director qualifications and skills), size, and education at S&P 500 and Russell 3000 companies. Our findings are based on data derived from our live, interactive online dashboard powered by ESGAUGE,4 as well as a Chatham House Rule discussion with leading governance professionals held in April 2022.
Insights for What’s Ahead
- Although boards may want to add functional experience in ESG areas, such as technology, cybersecurity, human capital, and climate, directors can bring meaningful value only if they can make the connection between these functional areas and business strategy. The recent decline in the reported percentage of board members with business strategy experience is worrisome, as board members without broad strategic experience can hinder effective board discussions and will likely be less useful partners for management. Boards should not sacrifice business strategy experience to achieve functional expertise.
- While boards are becoming more gender diverse, many companies will need to further increase their efforts to meet investors’ future demands, which include having a board that is at least 30 percent gender diverse instead of merely having one or two female directors. This means, for example, that a board with nine directors will need at least three women.
- Companies should also anticipate a greater push on racial (ethnic) diversity, which will increasingly spill over into director elections, as investors and proxy advisors alike have started setting targets for the racial composition of boards and will (advise to) vote against directors if those targets are not being met.
- Disclosure on other personal and less visible traits, such as sexual orientation, needs to be carried out with sensitivity to the directors’ individual and collective views. Before adding new questions about personal traits, it’s important to have a conversation with board members about what additional topics should be covered and why. It’s also helpful to discuss whether the company should disclose these characteristics on an individual or aggregate basis.
- While companies have traditionally focused on recruiting directors with “hard skills,” boards need to keep an eye on “soft skills” when vetting new directors. Recent events have made it clear that even though traditional skills and expertise are pivotal, other competencies should be taken into account as well when recruiting new directors, including crisis management, the ability to listen, eagerness to learn, and openness to change.
- Expect boards to increase modestly in size as companies seek to add diversity, new skills and expertise, and board committees providing ESG oversight. This increase is likely to be permanent as a result of the pressure to recruit directors with additional expertise relating to cybersecurity and climate change (proposed SEC rules will require more disclosure on the role of the board and its expertise in these two areas), as well as the need to keep the workload for directors manageable.
- Given the need to ensure directors are able to effectively oversee a growing number of ESG areas, companies will want to adopt a hybrid approach of using internal and external resources for director education. It’s vital for outside providers to offer trusted and objective information, benchmarking, and advice. And as management may also benefit from additional education, companies should consider outside firms that are adept at educating both the C-suite and boards—although the breadth and depth of education for management may be greater.
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[1] See H.R.3763 – Sarbanes-Oxley Act of 2002 (July 2002) and SEC’s adoption of NASD and NYSE’s Rulemaking Relating to Corporate Governance (November 2003).
[2] See H.R.4173 – Dodd-Frank Wall Street Reform and Consumer Protection Act (July 2010) and the SEC’s Final Rule on Facilitating Shareholder Director Nominations (“Proxy Access Rule”) (August 2010).
[3] Merel Spierings and Paul Washington, 2022 Proxy Season Preview and Shareholder Voting Trends, Brief 2: Human Capital Management Proposals, The Conference Board, February 2022.
[4] The Conference Board, in collaboration with ESG data analytics firm ESGAUGE, is keeping track of disclosures made by US public companies with respect to their board composition, director demographics, and governance practices. Our live, interactive online dashboard allows you to access and visualize practices and trends from 2016 to date by market index, business sector, and company size. The dashboard is organized in six parts: (1) Board Organization, (2) Board Leadership, (3) Board Composition, (4) New Directors, (5) Director Election & Removal, and (6) Other Board Policies.