The Diligent team

GRC trends and insights

S&P 500 trend report: Board composition, diversity and beyond

In today's age of digital transformation, it's no secret that board composition matters more than ever. But are boards keeping up with demands for diversity?

In a recent report titled, Increasing Boardroom Diversity: S&P 500 Review, CGLytics examined trends across S&P 500 boardrooms, which revealed some mixed results. On the one hand, today's boards are recruiting candidates from more diverse talent pools — a positive trend partly attributable to investors putting pressure on boards to improve composition. However, at the same time, overall progress around board diversity is barely inching forward.

The CGLytics report sheds light on trends, challenges, and growth regarding S&P 500 board composition. Here are a few key takeaways we've pulled from the report:

1. Board size is increasing.

The average number of board members has increased from 10 to 11'a significant jump in just a year's time. While the reason for the increase is likely multiplex, one assumption is that many boards are answering the call for board diversity by adding additional board seats. In our webinar with PwC's Governance Insights Center, next-gen board member Erin Lantz gave a glimpse into this thinking:

“In the case of my prior board, there wasn’t an open seat — there wasn’t an active search happening,” explained Lantz. “But when the stars aligned such that I connected with the board, they were opportunistic and opened a board seat with the expectation that they would reduce the size when someone rolled off.”

Adding a board seat, explains Lantz around minute mark 16:30, can be a practical way for boards to diversify quickly and take advantage of a good candidate when the opportunity is presented.

Of course, the primary concern with increasing board size is whether boards are avoiding the difficult task of board refreshment. Are boards adding a seat to avoid rotating off a director who is no longer adding value?

2. One-third of new appointments in 2018 were women.

Encouragingly, women made up 33% of all new appointments in 2018, up from 25% in 2017. Six of the seven companies that were lacking at least one woman director in 2017 corrected this in 2018. This increasing gender parity among new directors is likely due to a combination of (a) investor pressure and (b) boards recognizing that diversity really can lead to enhanced performance.

Recent studies by McKinsey & Company have demonstrated that companies with diverse boards bring in higher profits than those without. The benefits of board diversity apply to gender, age, nationality, tenure, and board independence levels. While investors want to see diverse boards as a means for increasing returns, they also feel as though diversity leads to fewer reputational risks.

State Street Global Advisors (SSGA) stated that companies must have at least one woman board director or it will recommend voting against any nominating & governance committee members up for election. Other investors, like BlackRock, set the standard at two women per board. And states such as California have begun legislating board diversity requirements backed by quotas and benchmarks.

Despite the progress among new directors, it's important to recognize that the rise in overall female representation was marginal. Total representation of women on S&P 500 boards increased by just 1% between 2017 and 2018, suggesting that diversification is perhaps not the reason behind larger boards.

3. Average board member age continues to rise.

The average age among S&P 500 boards increased by six months to 63.5 in 2018, with the majority of new S&P 500 board appointments occurring between the ages of 60 to 69 years. Average age has continued a slow and steady climb over the last several years. More notable, however, is that the proportion of new appointments in the 30-49 age range decreased by 21% from 2017 to 2018; the CGLytics report suggests that the decrease may indicate increased scrutiny of younger director candidates.

While many boards may dismiss this younger cohort of directors as inexperienced, the CGLytics report identified an interesting relationship between age diversity and performance:

Because younger candidates are typically labeled as unpracticed or unseasoned, companies tend to scrutinize their potential too extensively. But younger directors bring fresh perspectives, ideas, and strategies'invaluable insight in an increasingly digital world.

Regarding age diversity, one positive note is that this cohort of younger directors is significantly more diverse when compared to the full S&P 500 board member population. For example, more than half of the under-50 board members who were appointed between 2017 and 2018 were women. Hopefully this signals a more diverse pipeline for board talent in the years ahead.

4. Average tenure rises to 10.7 years.

S&P 500 companies' average tenure increased from 10.2 in 2017 to 10.7 in 2018. All industries reported in increase with the exception of Utilities and Consumer Staples.

As tenures increase, the primary concern is best captured by the recurring statistic in PwC's Annual Corporate Directors Survey, which states that 45% of board members feel that someone on their board should be replaced. Is tenure climbing because boards are avoiding the tough conversations?

Board refreshment is generally understood to generate creative thinking and promote good governance. Furthermore, stale boards — by virtue of the length of shared service — are often seen as turning formerly independent directors into rubber stamps for management's agenda. Only a small number of S&P 500 boards (5%) have tenure limits, and it's debatable whether these would even address the real problem at hand: How can boards use the board assessment process more effectively to drive refreshment?

The push for diversity must continue

With the threat of disruption bearing down on today's companies, diversity of skills, perspectives and experience will continue to underpin board performance. Will board composition be able to keep up with demand? While the CGLytics report reveals progress toward diversity, the current pace is most certainly too slow.

How can today's boards keep their finger on the pulse of board composition?

What kind of data are their investors looking at ''' and what red flags could proxy advisors be raising? Diligent's new Nomination & Governance module is designed to equip boards with better data and information to make better decisions around board composition and diversity. See how this module in the Diligent software enables boards to track composition metrics, benchmark against peers, and search through director databases.