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What makes the best boards different

Fortune released its inaugural Modern Board 25 this week, identifying the most innovative boards in the S&P 500 based on board effectiveness data and ESG scores. In doing so, we identified several ways board makeup is connected to high performance and what the best companies are doing to separate themselves from the pack.

My colleagues across Fortune have dissected the rankings along many dimensions, including gender equalityracial diversity, the implications for CFOs (who are filling fewer new board seats), and how CEOs and boards can best collaborate on corporate guidance. Sister newsletter Term Sheet also explored what these findings mean for the startup and VC worlds.

For those filling board roles in the near future, here are several factors to consider: 

Push for board independence

Board members should have few other governance obligations or ties to the company. Per Fortune’s Modern Board 25 ranking, companies that scored higher on board effectiveness have an independent board chair, board leaders who are not active company executives, and directors who are not already board members at other companies. This not only prevents possible conflicts of interest but also takes into account the increased workload associated with directorship today, leading to better business performance. Companies should also shy away from tapping CEOs to be board chairmen.

Diversity with purpose

It’s not enough to seek out a Black or female board member. While critical, board diversity should also serve a purpose and extend beyond typical racial, ethnic, and gender metrics.

Diligent’s data assessed the mix of gender, racial, nationality, and age dispersion on boards, along with expertise and independence. First-time board members are ideal because they have the time to commit to the role, and are often more diverse than those who have historically served on boards.

New members can also bring a wider set of expertise, such as talent strategy, cybersecurity, or specific industry knowledge that aligns with a company’s market activity. For example, a marketing software company may look to add a former CMO to its board; a company expanding internationally may add a former regional executive; a company looking to grow its government revenue could add a former federal leader.

New expertise needed

The growing importance of ESG, corporate participation in solving social justice issues, emerging talent, supply chain, and cybersecurity challenges have forced boards to seek out a broader range of executives, besides CEOs and CFOs, who have long dominated boards.  Companies are also adding directors with backgrounds in academia, government, and the nonprofit space. 

Every top-25 company scored highly in board expertise relative to its S&P 500 peers.

How to differentiate

Board independence, gender diversity, nationality dispersion, and age dispersion were the board effectiveness attributes with the greatest variation across the Modern Board 25. To wit, they represent the best opportunities for board differentiation and competitiveness.

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