Composition of the board in corporate governance
Whether or not you play chess, it isn't difficult to appreciate that the game requires strategic thought. As opposing players contemplate whether a zwischenzug or a knight fork might be in order, they ideally will take care in choosing which pieces to move across the board ' and when. If you're unversed in chess terminology, that's fair; many chess players are likely unfamiliar with a governance professional's vocabulary. Even to those like me, who passed on chess lessons, though, it's readily apparent that each of the six different types of pieces has its own role to play in striving for the win.
The same kind of strategic thought applies on the basketball court. Were you among the tens of millions of people who tuned in for the 2019 NBA Finals between the Golden State Warriors and the Toronto Raptors? Anyone who watched the series can appreciate the planning (and budgets) reflected in the talent selection, training and coaching that got these two teams to the finals. Ultimately, the two coaches made calls on how best to use the available talent on their respective benches as they developed their starting lineups and made substitutions throughout the series.
As with athletic teams' talent scouts and recruiters, you and your board are thoughtful and strategic in identifying the qualified talent that you need to recruit. Just as a chess player will scan the board and consider which piece to deploy at any given time, you will want to consider the upcoming vacancy in the context of the board as a whole. You and your board will want to determine which qualified candidates best meet both the current and the upcoming needs of the organization itself. Your assessment will reflect a review of committee, board and organizational considerations that are all part of corporate governance.
Board Composition & Corporate Governance
Simply defined, corporate governance refers to the practices, rules and processes through which the business or organization is directed. Beyond relevant external legislation or regulations, there's an internal framework of policies and by-laws to manage conduct within the organization ' and to ensure that its leaders are effective and responsible in meeting stakeholders' needs.
The board's role in governance goes far beyond CEO selection and performance management. Governance also requires directors to consider, approve and monitor performance against strategic plans, risk appetite and management, compliance reporting, executive compensation and much more. Board composition impacts an organization's values and culture, and it certainly impacts the “tone at the top.”
For all these reasons, it's important to ensure that your board has the appropriate bench strength. With the rise of stakeholder activism and influence, that bench strength will increasingly need to reflect a readiness for boards themselves to evolve. If the past decade of their governance careers has been characterized by attention to transparency and disclosure, astute boards of the decade at hand are characterized by also committing to diversity and enterprise and social governance (ESG).
Importance of Board Diversity
Let's begin with boardroom diversity. In 2019, this implies more than gender and ethnic diversity; it can also reflect a prospective nominee's age, type of expertise, tenure with your board and level of governance experience. Thus, some board cultures may be in for a shakeup. While some directors accept that diversity within a board is important, not everyone is in agreement and some directors have expressed concern that board diversity is driven by political correctness.
Consider the results of PwC's 2018 Annual Corporate Directors' Survey. In summer 2018, the firm surveyed 714 directors of American public companies from more than 12 industries and a cross-section of companies, 76% of which report annual revenues exceeding $1 billion. PwC's October 2018 report, The evolving boardroom: Signs of change revealed that 67% of the surveyed female directors and 41% of the surveyed male directors said that diversity on their respective boards is 'very important.' When it came to racial/ethnic diversity, in particular, the percentages in agreement declined to 50% of female directors and 31% of male directors. Age diversity proved to be the least compelling to those surveyed. Thirty percent of the female directors and 19% of the male directors said that age diversity was very important on their boards.
Overall, 52% of those surveyed agreed that board diversity efforts were driven by political correctness. Almost as many, 48%, agreed that shareholders are too preoccupied with board diversity. Just over a quarter of those surveyed, 26%, believed that this results in boards nominating candidates who are unqualified.
On the other hand, 94% of those surveyed by PwC agreed that diversity brings unique perspectives to the boardroom. A full 84% said that diversity enhances board performance, while 72% said that diversity enhances company performance. Almost three-quarters, 72%, agreed that diversity improves strategy/risk oversight. A majority, 81%, also said that diversity improved relationships with investors.
Whatever individual directors and boards think of diversity, investors are increasingly inclined to be proactive about their convictions. Institutional shareholders have voiced concerns, and some have voted against directors of boards that do not promote diversity. In Fall 2017, New York City Comptroller Scott Stringer wrote to 151 companies, requesting that they publicly disclose matrices reflecting the skills, gender and race of their respective directors. At the same time, New York City Pension Funds (NYC Funds), which oversees (as of April 2019) $203.4 billion in civic employees' pension funds, also called on those boards to discuss their board refreshment processes, meaning the processes used in replacing and adding directors.
Board Recruitment Best Practices
When it comes to corporate governance, does your board disclose its matrix and skill sets, or its evaluation and recruitment processes? They may not do so at this time, but you will want to ensure that your matrix reflects the capacity to provide effective oversight of environmental, social and governance (ESG) issues. Your board composition also needs to reflect preparedness for shareholder or stakeholder activism and expectations. Expanding board composition to include directors with technological, ESG or social media qualifications may well also bring greater age and cultural diversity to your board. While that's healthy, there are implications. Existing directors need to be prepared to accept and support younger directors, and you, as a governance professional, will want to source and budget for development opportunities for novice directors.
As you and your board assess its current composition, it's helpful to contemplate upcoming needs. Will the CEO be with the organization for the foreseeable future, or does a planned departure have ramifications for your board composition? Is the board adequately resourced to oversee emerging, as well as traditional, risks? Has your board instituted a mandatory retirement age? It's important, as well, to undertake and then act upon routine board and director evaluations that can identify opportunities for not just board development, but also board refreshment.
Any of these factors can impact composition needs, and board composition supports good corporate governance. The board will continue to need expertise reflecting corporate leadership, finance, business development and operational experience. Other traditional entries, including government, HR, international, legal, public policy, regulatory, risk management, strategy, tenure and industry/sector experience, will continue to appear on matrices alongside ESG and other criteria that reflect diversity. If your board hasn't updated its matrix recently, look at publicly accessible templates, including one published by the NYC Funds, to explore criteria that can support effective corporate governance.
It can sometimes be challenging to identify qualified candidates who meet a board's specific needs. If your board wants to deepen and broaden its candidate pool, that may imply turning to new, additional parties as well as relying on traditional resources. Just as a chess player requires a range of different pieces to execute a winning game, your board composition should reflect a balance of traditional and emergent skills, experience and demographics.
