Boards of Directors: Composition, Diversity, and Evolution
Introduction to the Board of Directors
The board of directors is the governing body of a corporate entity — whether a for-profit or non-profit corporation. It sets policy; approves the strategic plan; authorizes major initiatives, capital raises, and expenditures; and is legally responsible for the company’s operation and outcomes.
Board of directors is an elected group of individuals that represent stakeholders of the company, introduce and guarantee the execution of the company’s policies, and adherence to SEC guidelines in case it is a public company. The role that the board of directors members play is difficult to explain. It consists of both the group team effort and the individual contribution inside the boardroom and outside of it.
Delaware is home to 64 percent of Fortune 500 businesses. When it comes to managing the companies they represent, corporate board directors have a duty of responsibility and a duty of allegiance, according to Delaware law. Additional credentials aren’t mentioned specifically.
Board of directors usually includes four elected positions: the Chairman, the Vice-Chair, the Secretary and the Treasurer.
The Chairperson is responsible for the following tasks within the Board:
- Being the President of the Board;
- Setting meeting agendas and monthly, quarterly or annual schedules;
- Appointing committees and chairs within the committees;
- Being a primary contact for the board;
- Setting goals and objectives for the board;
- Holding the members accountable for attending and participating on board meetings;
- Being the leader for all volunteer and social responsibility activities of the board.
The Chairperson position is meant for highly qualified individuals with both passion and vision for the company. They also need to have soft skills to be a good listener and be approachable for the rest of the board.
The Vice-Chair assumes that he or she will take the Chairperson position over time, fulfils the Chairperson responsibilities whenever the Chairperson is absent, assists the Chairperson in the performance of duties, and serves on committees to be aware of the board operations. CEOs are also chairmen in 45% of the cases, and in 63% of the board’s CEO is the only non-independent part of the board (Spencer Stuart, 2020).
The Secretary is responsible for the following tasks:
- Distributing every board meeting agenda in advance;
- Preparing the official minutes of the board meetings and approving them with the board members after the meeting;
- Insuring the accessibility and completeness of meeting documentation;
- Holding the assigned board members accountable for executing their tasks after the meeting;
- Scheduling the board meetings and ensuring board members have calendar spots for the upcoming meetings.
The Secretary’s job requires excellent communication skills, being on top of each board meeting, organization skills, detail-orientedness, and being a good administrator. At smaller organizations or non-profits it is usually the most active person with the ability to juggle several things at a time.
The Treasurer of the board prepares the financial statements and company accounts for review, ensures that the legal forms are filed on time, serves as the chair for finance committees, assists in preparing the company’s annual budget, and reviews the annual audit results in order to present to the board. Depending on the size of the company, the Treasurer may have a team to prepare the financial and audit reports or do everything on their own. It is usually a trustworthy board member knowledgeable in finance or with an accounting background.
Major motivation for directors to participate in a board is to “make a difference”, according to a Korn Ferry survey (2020). The role of the board of directors is reshaping step by step every year due to several important trends. First, with the challenging and dynamic environment of the past five years, the opportunities to make a difference have grown in number. 46% of American Board Directors claim that in 2020 they derive greater satisfaction from being as a director now than they did five years ago.
The specifics of the US regulation make board directors concerned with the ethical and legal integrity as the main driver of board success.
The role, scale, structure and characteristics of boards with respect to for-profit companies
Board members should take the interests of a corporation ahead of everything else, including their own interest. In the case of for-profit companies, the main focus are the interests of stakeholders that board members should keep in mind exercising their power and fulfilling their responsibilities. In the last two decades the importance of maximizing profit as the main goal of any corporation has lost some of its weight, setting space for corporate social responsibility, long-term service to the society, and fulfilling higher causes or missions. Board directors spend on average 245 hours a year for each of the positions taken, and this number grew from 191 hours in 2005, according to the National Board of Directors survey (2017).
Most of the basic board duties for nonprofits and for-profits are similar. Many of these duties include:
- Hiring, evaluating (and firing, if necessary) the CEO or executive directors and defining their compensation;
- Setting an operating plan;
- Guaranteeing the accuracy and timeliness of financial statements;
- Management of financial resources;
- Making sure that the actions of management are in the best interests of the company’s stakeholders;
- Making sure that company policies are in compliance with legal and ethical regulations;
- Being a champion for the company’s reputation, especially during crisis times;
- Broadcasting the corporate culture;
- Being the ambassadors of the company outside of board meetings;
- Guiding the CEO of the company;
- Controlling the execution of the strategic plan.
Board meetings occur 8 times a year on average, and the amount of board members is usually around 10 people. Healthcare providers and banking institutions have the higher average number of board members, while smaller organizations (under $3 billion annual turnover) have the smallest average number of members. The majority of members are outsiders as compared to insiders (8:2). This is the optimal balance between governance and management.
For independent non-employee directors the median compensation is $308,462 (Spencer Stuart, 2020). Stock option program for board members is available only at 11% of boards which means there is opportunity for extension.
Every company should have articles of incorporation, bylaws, and a range of governing policies that define the fiduciary duties and responsibilities of the board of directors. These documents have similar designs across industries, and state the name of the organization, governance principles, and how the bylaws can be amended.
Popular bylaws elements cover the roles and responsibilities of the board as a body, board committees, and individual directors within it; the regulations to give notice for and hold annual and ad hoc meetings; and the regulations defining voting at the board meetings (for example, authority delegation, quorum definition, voting percentages required to pass policies, etc.).
Net earnings, stock price, and dividend rate are all essential to for-profit boards. Earnings per share, EBITDA, quarterly earnings, dividend rate, stock buyback, consensus estimate, buy/hold/sell recommendations from sell-side analysts, and other terms used in the boardrooms of publicly traded firms will never be heard in a nonprofit board meeting (e.g., earnings per share, EBITDA, quarterly earnings, dividend rate, stock buyback, consensus estimate, buy/hold/sell recommendations from sell-side analysts, stock classification, value vs. growth, proxy statement, shareholder proposals, activist risk). Furthermore, during for-profit board committee sessions, particular attention is paid to such external regulations (e.g., Sarbanes-Oxley in the audit committee; proxy advisory firms in the compensation committee; Dodd-Frank in the audit or risk committees; or the Foreign Corrupt Practices Act in the legal committee).
CEOs of for-profit corporations in the United States often, but not always, hold the role of chairman of the board; in Europe, however, the CEO and chairman roles are usually divided. If the CEO is not also the chairman, that role is filled by another member of management (for example, the former CEO during a transition period) or an independent director.
The position and state of the company within crisis also finds reflection in the board of directors. For example, in order to cope with 737 MAX crisis aftermath in Boeing, two board directors are retiring and the immediate replacements are to be hired for “fresh vision” onto the company.
Large corporations see the bodies similar to board of directors evolving: some sales and operational annual planning meetings can serve as a board meeting for a business unit or branch, and the example of Microsoft’s top deal maker proves that personal boardrooms of trustees and experts can also take place for top executives (WSJ, 2018).
The role, scale, structure and characteristics of boards with respect to non-profit companies
While each particular board of directors is a unique case each time, it is important to distinguish the differences between profit and non-profit companies. The similarities between the two prevail but the differences are fundamental.
When board meetings take place, both for-profit and nonprofit boards usually follow the guidelines outlined in Robert’s Rules of Order — the most popular parliamentary manual in the US. Standard board policies cover the independence of directors, conflict of interest, codes of ethics and conduct, and confidentiality. The duty of responsibility and the duty of allegiance are two basic fiduciary obligations that all for-profit and nonprofit boards must fulfill. A violation of any of these responsibilities will result in a board member’s dismissal and possible personal liability. Board members must show “due caution” and behave prudently as a “reasonable person” would under similar situations, according to the duty of care.
Additionally, nonprofit boards also have a fiduciary obligation of loyalty, which requires directors to remain loyal to and respectful of the organization’s mission and objectives.
While most for-profit directors receive this information as part of their onboarding process, it is less common and less specifically stated on many nonprofit boards.
Many nonprofits rely heavily on fundraising and employ a slightly different accounting approach, especially when it comes to valuing pledges and donations. Similarly, in a lot of nonprofit boardrooms, there are words used and subjects explored that would never be heard in a for-profit boardroom (for example, endowment drawdown; donor capacity; limited, temporarily restricted, and unrestricted gifts; statement of activity; operating surplus or net change in net assets.) Although some governance experts claim that nonprofit boards are more concerned with long-term rather than short-term success than for-profit boards, any responsible board should be concerned with both.
Non-profit boards focus on the purpose of the company’s existence which exempts them from taxation every year. Members of the board of directors of charitable nonprofits excluded under Section 501(c)(3) of the Internal Revenue Code must determine whether their activities are solely intended to further the corporation’s charitable purpose. The corporation’s charitable intent (which can be found in its articles of incorporation, bylaws, exemption application, annual information returns, and other documents) imprints a charitable trust on the corporation’s properties As a result, board members must take steps to protect charitable funds from misappropriation and illegal diversion. Although it is rarely enforced, the state’s Attorney General or the Internal Revenue Service may hold board members personally liable for misusing charitable properties, especially in egregious cases and cases in which such misappropriation helped the board members directly (e.g., self-dealing, excess benefit transactions).
Board members should weigh intergenerational equity when acting to better advance a nonprofit’s charitable intent. How will charitable funds be better used to support not just those in urgent need, but also the nonprofit’s long-term beneficiaries? When it comes to investing for the future, there are tough trade-offs to be made, but if a board fails to do so, the corporation’s chances of survival are slim.
While corporate boards are focused on delivering value to their stakeholders as they are accountable to them, non-profit boards serve the organization members and the communities they are a part of, as well as the cause. Both profit and non-profit companies have a mission, are dedicated to their purpose and desire to follow good governance practice.
Non-profit boards are more focused on making an impact on the community than the bottom line. Nevertheless, disorganized boards are just as dangerous for non-profits as for profit companies as they can disrupt operations. Non-profit boards also target at fulfilling their missions in the most effective way possible. Just like for-profit companies, nonprofits’ efficiency depends on a clear mission and objectives, set of long-lasting core values, stable governance principles, desire to adapt and change when necessary, and respect for employees, consumers and the public in general. Mission plays an especially crucial role in non-profits as it is the only reason why the company exists (since the profit incentive is gone).
Among non-profit companies, the champions using the benefits of boards are hospitals. A good portion of non-profit hospitals (46%) had board members with business ties inside the hospital. The average non-profit rate across industries is, however, only 7%, which means hospitals are prone to potential risk of the conflicting interests. Whenever possible, the best practice is to avoid doing business with board members directly, and to keep the board independent. Even though there is no official rule or legislation against this setup with the appropriate disclosure and market rates for deals, public trust can be violated if private interest overtakes. The vagueness of IRS guidance makes space for opportunities to make deals within the comfort of a shared boardroom.
The differences in how boards operate with respect to public versus private for-profit companies
In publicly traded firms, it is standard practice to appoint a lead director if the CEO is also the chairman. Some large privately owned corporations combine the titles of CEO and chairman, but lack a lead director (e.g., Cargill). The most senior executives in some law firms, investment firms, private equity firms, and venture capital firms may hold the title of CEO (for example, Goldman Sachs’ chairman and CEO; KKR’s co-chairman and co-CEO) or not (for instance, founder & managing partner at Madison Dearborn Partners; managing partner at Oak Hill Capital Partners; executive committee chair at Sidley Austin; executive partner at Skadden, Arps, Slate, Mengher & Flom, etc.).
Private corporations come in a range of sizes. You could sit on the board of a private corporation that makes $2 million a year or one that makes $120.4 billion a year, such as Cargill, a food and agricultural conglomerate, a social media video giant like TikTok, or a snacks, confectionery and pet food producer like Mars. Sometimes, private companies begin as family-owned enterprises, which can have a significant impact on the composition of the board of directors and how it functions.
In a family-owned company, for example, the CEO might also be a major shareholder. In such a case, the board would serve more as a consultative body, as dismissing the CEO would be virtually impossible.
The most significant distinction between these two forms of board service is in the manner in which information is disclosed. Public corporations must comply with a slew of financial reporting standards, transparency, disclosure of sensitive information, and many more.
Mark Wrinkler, a seasoned board member for both for-profit and nonprofit boards, comments on public vs. private boards: “Public company boards have quarterly reports that have higher sense of awareness, are sensitive to quarter-to-quarter changes, with expectations of Earnings per share. For private companies it is not as critical, there are fewer press releases and not as much scrutiny from outside.”
The Sarbanes-Oxley Act of 2002 (also referred to as the “Corporate and Auditing Accountability, Responsibility, and Transparency Act”) was enacted in response to a series of high-profile corporate and accounting controversies. It is the piece of law that has had the most impact on the roles and duties of current corporate boards of directors.
Sarbanes-Oxley is divided into eleven parts that detail different standards and obligations, as well as penalties for non-compliance. Any public corporations have implemented SOX-developed policies to ensure that they are running a more ethical and financially stable business. However, they are not subject to the same level of regulation as public corporations. Boards in public corporations are often usually subject to a particular form of ownership, since they are typically responsible to tens of thousands of shareholders. This has an effect on public board policies, which would be more risk-averse than private organizations that are smaller and more flexible.
Private firms are usually family enterprises or partnerships, and the ethos of the firm is shaped by these intimate relationships. Private companies may issue stock or bonds even though they are not listed on a stock exchange. The CEO is frequently the promoter or the majority shareholder.
Since the CEO is a big shareholder, the board of directors is unable to veto decisions or fire the CEO. In a private company, the board of directors normally serves as a consultant. Managers will decide the details they exchange with the board of directors because private corporations are excluded from the Sarbanes-Oxley (SOX) regulations. The biggest distinction between public and private corporations is information transparency. The financial accounts of public entities must be publicly disclosed, and their arrangements with other organisations and individuals must be completely transparent. For private company boards of directors, having full knowledge is often a problem. It happens as a result of outdated financial reporting, management’s undue information access, the lack of internal systems capability, and other causes.
Also if they don’t sell securities on the stock market, private corporations will offer stock or shares. The CEO may be a co-founder or a large shareholder. The CEO and the board chair typically have separate tasks, positions, and goals. When the CEO is a significant shareholder, the board is unable to override board decisions or dismiss the CEO. Typically, the board of directors only acts as a sounding board.
When a company hits a degree of viability that requires it to trade stock on the open market, it must begin the process of transitioning the board of directors to comply with public company regulations. Boards will take the positive first steps by implementing best practices in corporate governance and publishing long before their initial public offering.
If they haven’t done so before, boards should set up annual performance reviews for individual board directors and the entire board. Boards of CEOs on the board would need to draw specific boundaries between board and management roles, as well as create a succession strategy for the CEO.
A minimum of three committees would be required of transitioning boards, including an audit committee, a pay committee, and a governance/nominating committee. At least one committee should be represented by each board member.
The differences in how boards operate with respect to for-profit versus non-profit companies
In general, corporate directors of public companies focus on growth strategies and generating profits to return to shareholders in the form of stock equity and dividends. Nonprofit board members do not seek to maximize and disperse profits but are focused on raising funds for programs and services to constituents. For-profit board members are often paid; non-profit board members usually are not. The structure and role of non-profit boards are similar to for-profit companies, while the scale and characteristics depend on the nature of the non-profit and the size of the organization.
In nonprofit organizations, the CEO may or may not be the senior member of management (e.g., American Red Cross, Nature Conservancy, Chicago Botanic Garden) (e.g., president and director at the Art Institute of Chicago; executive director at the Walker Art Center; director at the J. Paul Getty Museum). In this case, a charitable organization almost always has a non-management, elected board chair, and it is best practice for the nonprofit’s CEO to serve only as an ex officio member of the board of directors.
For-profit board directors are often former senior executives. For-profit board directors are compensated in a variety of ways, including cash, corporate shares, stock options, or a combination of these. Nonprofit board members are normally volunteers who are asked to donate a certain sum of personal giving. One of the differences between nonprofits and for-profits is that for-profit boards have fewer committees, while nonprofit boards have more. Although for-profit companies can have one or two additional board committees outside of the standing committees, charitable organizations, particularly large ones, often have several more — this is usually done to help involve board members in a range of mission-related topics. For example, there are 18 standing board committees at the Metropolitan Museum of Art, 11 standing board committees at Harvard University, and 21 standing board committees at Memorial Sloan Kettering Cancer Center.
Board directors of both charitable and for-profit organizations are normally reimbursed for travel and personal expenses, but in small nonprofits, board directors can cover their own expenses and claim them as a tax deduction.
Epstein and Macfarlain (2011) distinguish several cohesive differences between for-profit and nonprofit boards:
Funding is one of the major differences between corporate and non-profit companies in general and in case of boards too. While both for-profit and nonprofit board members are responsible for approving, keeping up with, and overseeing the implementation of the organization’s strategic plan, nonprofit board members and early-stage companies typically have a higher degree of involvement in the plan’s development, frequently serving on one or more strategic planning committees. The further active board members are in designing and refining a strategic plan for a nonprofit or early-stage company, the more interested they are in financially engaging in or promoting the plan’s implementation.
A for-profit board of directors is made up of directors who represent the interests of the entity’s shareholders (i.e., the owners). Since it is not owned, a charitable institution does not have shareholders; however, it does have a board of trustees, directors, or governors (these terms that are used interchangeably). Although the title of the senior executive of a for-profit company is always the CEO, it is not a major factor in the governance of for-profit and charitable organizations.
For-profit boards meet five to seven times a year on average, with three or four additional meetings held via teleconference. With few exceptions, for-profit board directors are required to attend all board meetings. In reality, public corporations are required by law to report whether any of their board directors attend fewer than 75 percent of board meetings. Nonprofit committees, on the other hand, will meet as regularly or as infrequently as they need to get their work done. Since nonprofit board directors are not paid for their time, there are no attendance requirements or pressure if they skip meetings.
Nonprofit boards have a much broader number of directors (generally between 10 and 15, with an average of about 11 or 12) than for-profit boards (generally between 10 and 15, with an average of about 11 or 12). Although nonprofit boards vary in size, it is not unusual for museums, colleges, and hospitals to have boards that are four to five times the size of a traditional nonprofit board. The Museum of Science and Industry in Chicago, for example, has 80 trustees, 30 of whom are life trustees, while the Museum of Modern Art in New York has over 60 trustees, including about 30 life and honorary trustees. There are approximately 70 trustees at Northwestern University, approximately 60 trustees at the University of Pennsylvania, approximately 40 trustees at Stanford University, and over 70 trustees and trustee emeriti at Wellesley College. Foundation boards, on the other hand, which oversee charities that give money away rather than raising it, are usually much smaller and have a similar number of directors to corporate boards. The MacArthur Foundation and the Bill & Melinda Gates Foundation, for example, each have 11 directors, the Rockefeller and Ford Foundations each have 14 trustees, and the Pew Charitable Trusts each have 14 trustees.
Many public service and charitable boards fall somewhere in the centre, as shown by the American Cancer Society’s 16 directors, United Way of America’s 19 trustees or directors, and Feeding America’s 19 trustees or directors. It’s worth remembering, however, that many pan-American organizations with small national boards often have large state or regional boards. When a charitable board is very large, the executive committee also acts in a decision-making capacity close to that of a for-profit company’s full board of directors.
Jon Simon, Lehigh University President and the Board member at Nasdaq Entrepreneurial Center comments: “People have passion inside of nonprofits, and are greatly diversified individuals, supporting boards to the CEO. I find our board discussions are generative, rather than looking at plans, or looking at budgets”. Board structure of non-profits often follows the best practices from other boards. For example, NASDAQ Entrepreneurial Center has the following split: NASDAQ directors with a relationship to the company, a mix of global strategists (no relation/“arms length” to the management), entrepreneurs with no relation, and NASDAQ insiders (very close to the board).
For-profit directors are paid in cash, company shares, stock options, or a combination of these, while nonprofit directors are paid nothing for their work. In reality, nonprofit directors are usually required to invest in (make contributions to) the organizations they oversee (e.g., funding the annual fund, galas and other social activities, and occasional capital and endowment campaigns) or to assist in fundraising (with the adage “give, get, or get off” being a popular refrain). Furthermore, for-profit directors are reimbursed for all board-related costs, while nonprofit directors are responsible for their own travel and lodging. These disparities in financial practices are the foundation for a variety of other more apparent or subtle discrepancies between for-profit and charitable boards.
Nonprofit boards have a different committee structure than their for-profit counterparts. Standing committees, such as a selection committee, executive committee, technology committee, and public relations committee, are popular in medium and large nonprofits. They frequently have a number of standing or ad hoc committees dedicated to specific issues.
For-profit companies are more likely to finance their initial activities with bank loans, local donors, and sales income. If a company’s product or service is thought to have a high potential market value, national or international investors, such as angel investors and venture capitalists, may be interested in financing it.
Although individual board member performance reviews are conducted in a variety of ways on for-profit boards and are definitely not the rule, they are virtually non-existent on nonprofit boards. It’s never easy to ask a board member to resign or not run for reelection due to poor results, but it does happen on for-profit boards. A board member is rarely asked to withdraw from a nonprofit board that depends on financial contributions unless that director has failed to meet minimum financial giving requirements.
Marc Wrinkler, an experienced member for banking non-profit boards, comments on some weaknesses and narrow areas: “Inside the board room there are many people that don’t understand banking because of responsibilities in front of the FDIC, “protect ourselves” kind of people. Bank boards have attorneys, doctors, local people, well-known business people. Bankers are frequently put on some outside non-profit boards. The question to them is: Can you bring money to the table? It is a community network of wealthier people. Non-profit boards are larger because they’re looking for money from the board members. Non-profit boards can also be less effective because they only want money from their members, and are overpopulated because of that too, there are just too many board members.”
Trends in board leadership and board composition
For decades it has been a hard-fought battle to achieve the balance between governance and management, forming a board of directors that is independent and does not have interlocking boards. Today’s composition is 79% outsider CEOs’ presence in the board, as compared to 82% in 1995. Business arena saw similar growth for the investor participation in the board. The most drastic changes of the last quarter of a decade happened for women and ethnic minority members: women jumped up to 100% representation (at least one member on board) compared to 85% in 1995, and ethnic minority members are a part of 76% boards (with the following split: 46% African-American, 19% Latino and 10% Asian), according to the Korn Ferry report.
The academic, commercial banker and former government official representation remained stable for the past 25 years (55%, 27% and 53% correspondingly). Nevertheless, the percentage of retired CEOs sitting on the board of directors grew from 75% in 1996, to 95% in 2016. Non-US citizens percentage fell from 17% in 1995 down to 14% now.
85% of directors are independent, and the newly elected directors spend 7.9 years as a board member. Current average age of board members is 63 years but for the newly elected ones this number goes down to 57.8 years (Spencer Stuart, 2020). 70% of boards have a retirement age requirement (decrease from 74% in 2010). Out of them, 48% retire board members at the age of 75, and 96% retire members at 72 years of age. Age diversity is less of a trend for the board: only 17% of members are 50 years or younger. Apparently, the younger average age of newly chosen directors is not enough to shift the age trend of 60+ in the board rooms as they constitute only 8% of the total count. More than a half of board directors wait until their retirement at 70 or older, and 37% serve on board for at least 15 years. 48% of S&P 500 companies with the retirement age set it at 75 years old or more compared to only 19% just 10 years ago. The majority of board retirements are connected with age restrictions.
The downside of recruiting retired professionals is that it is more difficult for them to keep up with things as they are not fully involved in the real business arena. On the other hand, a full-time job is a big commitment that comes into place when there is a board of directors commitment too.
Corinne Post describes the following differences for female representation on board:
“Career trajectory and experiences are often different from men,
A female director is often the only female in the room. No mistakes, fewer risky proposals, but need to distinguish themselves as well.
Risk aversion is the norm with females due to underlying sexism.
Societal roles, women are care-givers. Attentive to harm of others. Concern for stake-holders, employees and everything beyond the bottom line.”
About a third of board members have financial backgrounds (27%) with less focus on accounting or banking degrees but more attention on previous CFO or professional investment experiences. Looking at the committees, Korn Ferry found out that the biggest trends are the growth of stock options (84% from 56% in 1995) and corporate governance committees (94% from 35% in 1995).
Recent regulations have decreased the incentive for risk-taking and inspire the atmosphere of conservatism, according to the 2020 Korn Ferry survey. 70% of US Board Directors claim that the Sarbanes-Oxley act has made their board more cautious. Nevertheless, boards are also more independent, committed, focused and diligent, like never before. There is more interest among the board of directors to participate in the strategic tasks of a company — the percentage grew from 56% to 73%.
2020 also became the first year when every single board in the US had at least one female representative among S&P 500 companies — first time in history since 1998 when this tracking started. Spencer Stuart reported that 59% of all new board appointments in 2020 were assigned to women and minority men. After the MeToo movement in 2017, S&P 500 made sufficient steps towards gender diversity in boardrooms. California has become the first state to oblige all public company boards to have at least one female representative. Goldman Sachs committed to not working with businesses worldwide unless there is at least one diversity candidate, preferably a woman, on their board. In December 2020, Nasdaq offered a mandate on diversity that will oblige public companies through the SEC to have or at least to explain why they don’t have at least one woman and one LGBTQ+ representative on their board. 28% of companies increased the number of women as board members by expanding their boards, 20% increased the number of women proportionally without increasing the overall size of the board.
Corinne Post, a seasoned academic researcher of the field, names the following obstacles that female candidates or board members have:
“Obstacles include less female experience in the upper echelon of business, the majority of boards are men, and men nominate men. When on the board, if it is a sole woman, concerns may get overlooked if it is only the concern of one female board member. Gender discomfort of men and women’s opinions.”
More female diversity will bring these benefits:
- Diversified opinions/perspectives
- Wider source of resources
- Forces the beneficial slowing of decision making
- Insights into more shareholders (implying females).
The progress in ethnic/racial minority inclusion in the past year is less optimistic: there has been a slight percentage decrease in the new appointments. Minority men appointments accounted for 13% (down from 12%), minority women were 10% (no change since 2019), making 23% in general. Following the Black Lives Matter movement, at least 25% of S&P 500 companies are planning to look for diversity candidates for recruiting. Part of the reason for this is the relatively low board member turnover.
Another important trend is the decreasing amount of ‘overboarded’ directors. The conflict of interest and the lack of time to attend several board of directors are the reasons why directors with 5 average seats are a dying breed. The Wall Street executives’ research showed that even though directors with multiple outside board memberships earn more, their shareholders see lower returns from them than those who have zero or one outside board membership. Investors are influential money managers and get higher leverage in voting against the ‘overboarded’ directors. The reason is not the performance but rather the time they have to invest into each company. 77% of companies put limits on board directorships outside the company, according to Spencer Stuart survey.
On the other hand, the example of Ann Mather who would sit on the boards at Alphabet, Netflix, Glu Mobile, Shutterfly and Arista Networks got re-elected as a board member in spite of withheld support from investors like BlackRock Group. Since all the companies operate in crossing industries, directors like this can offer strategic views on the trends and vectors. Experienced and well-rounded directors do get multiple directorship or board membership invitations because of their qualification, so there is no definite answer for every company — each individual case needs separate investigation.
As for current board director evaluation, 98% of companies rely on annual performance evaluation of a group, and 44% introduced some form of individual contribution evaluation (growth from 29%).
The question of directors independence and the influence of the CEO and other top management on the board of directors is a controversial issue, primarily in for-profit companies where the conflict of interests may be more significant and has a monetary aspect to it.
The top concentration of power within a Board of Directors are committees: nominating new members, choosing the compensation structure, and making strategic decisions on the budget allocation.
An anonymous former board member shares his opinion on the issue. “On paper, the CEO does not have any real power over the Board as all of the directors have to be completely independent. In practice, the Board is frequently overinfluenced by the CEO, and the task of overseeing the company independently is not fulfilled. CEO cannot have real power unless the directors on the board allow it to happen”.
The cases of when the founder becomes a co-chair of the board in private for-profits or even small public companies, is not rare. The reasons for this phenomenon are multiple: technically, independent directors do not have a direct connection to the company. However, they frequently have an interpersonal relationship with the management, especially if the director has been in service for more than 5 years, as “the longer on board, the friendlier directors become with the CEO”. This creates the dangerous emotional connection and an atmosphere of harmful agreeableness when directors stop trying to challenge the management. It can result in overlooking problems and missing opportunities due to the lack of independent thinking.
This ties into the issue of board efficiency: if the board of independent directors are too connected and agreeable, the board cannot fulfil its tasks with high efficiency. On the other hand, it is also valuable to make sure the board is not overpopulated with disagreeing directors that continue debate with no sufficient follow-up action.
Anonymous former member of the board comments: “If there are too many cooks in the kitchen, the process can get too complicated, and you can see it from the overly long press releases It is generally enough to have two activists on the board offering new initiatives or raising important questions, while the rest of directors tend to agree more with one another”.
John Simon, Lehigh University President and the current member of NASDAQ Entrepreneurial Center board, comments: “Boards need to know they aren’t running the company. Best boards are the ones that don’t always agree. No question you need a diverse board, but beyond race, gender and ethnicity we need a wide age distribution”.
Investors as a group within the board generally bring positive expertise in finance and are more keen on following fiduciary requirements. The impact of investors is by vote, and at the same time investors don’t necessarily comply with traditional business judgment.
The amount of paperwork and reports sent to the board of directors on a consistent basis can be overwhelming. Starting from budget and down to strategy presentations, it becomes nearly impossible for directors to familiarize themselves , especially if they have a full-time job in another company. “Cutting down the noise to the essential facts is one of the key skills of an effective board member, and should be followed by high-quality selection of admitted materials by the secretary and the assisting team”.
The differences among the for-profit boards across industries are becoming less visible: there are some businesses that require specific degrees of expertise for highly regulated segments such as pharmaceutical or financial institutions but the regulation of the board is consistent and does not offer a lot of variety. The goal is not compromised depending on the industry.
Public companies currently have heavy regulation that prevents independence of thinking and pushes board members to a highly conservative strategy every time, according to an experienced board member. “Investors should make more decisions based on their own observations”. Active shareholders who get more voting will help to prevent passive decisions in the bull market. Some examples of the degree of mediocrity that non-diverse passive and agreeable boards can be Uber, Travis, and Softpank. Insufficient curiosity for challenge sets the tone from the top to the entire organization.
Marc Wrinkler comments on this problem: “A lot of CEO’s don’t want a board that challenges, they want a rubber stamp board. There needs to be a fine balance between boards and executive management. The Wells Fargo debacle proves this is becoming unbalanced. Directors are still heavily influenced by CEO and management, but that is changing. CEOs select boards they can control, but the best run companies are with boards that are independent because they challenge management. Diversified opinions are important. Good board member is informed about the industry, is prepared for meetings, has read the materials from the bank/business(or competitors), and is willing to ask questions/debate about strategy/performance.”
Board recruitment process and peculiarities
Employees, family members, and colleagues used to make up boards many years ago. However, due to shareholder pressure and government legislation, boards must now include independent directors who are not aligned with the company or its executive team. Many shareholder proposals also encourage corporations to diversify their boards of directors and select directors from a range of backgrounds, genders, and races.
There is a never-ending debate about board director responsibilities and the best combination of skills and experiences for each board. And they stretch well beyond the obligations of care and loyalty.
The credentials of a board member range from CEO expertise to advanced knowledge of cyber security and data analytics. Some have regulatory experience, while others have worked in foreign and emerging markets.
Apart from the positive trends in gender and ethnic diversity among board members, there have been some other important changes in the qualifications of the candidates. The US 2020 Spencer Stuart Board Index reveals that boards are appointing members with non-traditional skills and expertise: CEO experience is no longer a requirement in 65% of the new member cases, 23% of new board members have division or functional unit leaders, and 28% serve on their first board ever.
The newly elected diversity board members form a new image for the S&P 500 companies. They belong to functional leadership teams more frequently (23% as a contrast to 5% of non-diverse male board members), 18% are 50 or younger, only 17% have CEO experience (compared to 46% non-diverse), and have more hands-on financial experience. The majority of them bring experience from three business segments: IT/Software/Tech (33%), investment/private equity (17%) and consumer goods (14%).
The principles of effective board recruitment are to balance available resources with existing needs. How does a board decide what it requires? It has to find out what it already has. It uses a strategic board composition matrix, which is a recruiting tool that helps it to map out the new board’s composition. This map shows the ingredients that are lacking, allowing the board to narrow down its quest.
A board composition matrix allows the board to express the attributes, features, abilities, knowledge, experiences, and diverse points of view that make a good board. The board’s governance committee is one step closer to addressing the board’s needs after being responsive to these attributes and checking which of them are already present.
The nominating committee establishes guidelines for selecting directors for public companies. The majority of new directors are selected for their experience in crucial areas that support the organization. CEOs and board chairs also choose directors that are familiar to them. They will use executive search firms to locate eligible candidates who meet their requirements. As the demand to provide gender equality on boards increases, directors are broadening their quest and searching for eligible women outside of their personal networks.
Some of the top desired personality and professional traits of the potential board candidates include the independence of thought, good decision-making ability, aversion to rest on one’s accomplishments of the past (Forbes, 2019). Marc Wrinkler notices there are shifts in the board recruitment process: “It used to be finding a mix of directors who could bring business in the past, but over past 10 to 15 years, community banks are finding they do need directors who have expertise in some specific areas (technology, customer data, IT, auditing)”. Community banks sometimes don’t have resources to fill certain roles because the talent is not locally available, as where larger banks do.
Companies can also use board recruitment for additional purposes such as media coverage, PR campaigns and celebrity connections. As an example, WeightWatchers have Oprah Whinfrey as a part of their board, and Palantir invited a Wall Street Journal reporter to their boardroom prior to their IPO in 2020. Investors do have a strong say in board recruitment too, just as the recent example of Kohl shows (Reuters, 2021). Other examples include Elon Musk for Endeavour or Prince Harry for a wellness startup. “It is important to look into the value and accept the notoriety that a celebrity brings”, an experienced board member comments.
For-profit board members are chosen based on their executive, business, and functional expertise, but their net worth or ability to financially support the company is not taken into account. It’s also normal for privately owned family-controlled companies to have a combination of family members and independent directors on their boards.
Budget management on a quarterly basis is one of the tasks that the board needs to accomplish. However, in practice it is the approval of the budget allocation strategy presented by the finance department. The trend to hire more financial experts onto the board allows modern boards to have a better insight into the paperwork.
Family-member directors can span many generations, and it’s not unusual for some or all of the younger generation’s family-member directors to work for a competitor (e.g., none of the six family-member directors on the 17-member Cargill board work for the company, and they span two generations). Board member diversity (e.g., gender, socioeconomic context, ethnicity, religion, nationality) has become a hot topic in recent years, with the aim of broadening and enriching for-profit and charitable board discussions, better representing the demographics of the consumers served, and meeting the needs of regulators and stakeholders.
Despite the fact that many nonprofit board members are chosen for their professional achievements, subject-matter experience, and civic leadership, the ability to provide financial support (both directly and through their companies or foundations) is a major factor, particularly if the nonprofit organization depends on donations to finance its operating budget and capital expenditures. In this regard, it is not unusual for certain nonprofit organizations to invite a member of a well-known or affluent family to serve on their board of directors; however, this does not happen on public company boards.
Independent directors usually have either a full-time position in another unassociated company, or expertise and background in the field of interest, Due to the high commitment of the board members, younger candidates with full-time jobs have a smaller chance of getting on board due to other responsibilities. That is why the issue of age disbalance on board appears; most of the members are retired business executives and professionals that finish their full-time commitments at the ages of 60 or even 70.
Some of the suggestions to improve the board efficiency, according to a former board member, is to engage part-time directors who have experience in the field, limit the amount of service years on a board to minimum, ensure there is “continuous new blood” and fresh thinking attracted to the board. John Simon comments: “I think the best boards figure out how to give all directors a voice.” Corinne Post suggests the following actions to improve the gender balance in boardrooms: “Avoiding shortcuts like “we want only CEOs” which naturally curtails the amount of women on board. Taking into account expertise more than in the previous years. Add more women to a pool of candidates. Employing more watchdog groups.”
Key Research findings
Recommendations for further research
This research can be supplemented by a quantitative analysis based on a survey among current and past board members about their experiences and outlooks on the board role, diversification trends. The list of questions can be formed based on the contents of this descriptive analysis.
Conclusion
Non-profits and for-profits are the most different bodies of regulation with their peculiarities and goals. Non-profits tend to be much larger and seek for financial support from their members (which may impact their efficiency in a negative way), while for-profit boards have more scrutiny in the recruitment and should look out for diversification of expertise, gender, age, ethnicity, sexual orientation, and many more, to achieve less “toxically agreeable” environment in the boardroom.
Public and private company boards are different due to the heavy regulations set on the public ones. The main controversy is the level of conservatism the board of directors has to follow in order to comply with SEC guidelines and demands, and also to be under the highest level of scrutiny by the publicity and multiple shareholders. On the other hand, private boards are often misguided by the high influence of the CEO and management upon the performance of the board. Both need to find a happy balance to fulfil the board tasks efficiently.
While there are positive movements in the diversification of the board in terms of gender, ethnical and sexual minorities representation, as well as backgrounds (more finance and IT professionals invited), the question of age is the most burning. Right now the board is trapped into hiring retired business executives that pushes the age bar to an average 63 years old. Potential candidates below 50 years old are committed to their full-time jobs and do not always have the same exposure to the top positions as preferred by the recruitment committee.
There are several changes that can impact the efficiency of board performance, including the individual versus group contributions, performance reviews, preparation and follow-up actions, cutting down the years of service for the same company, independent thinking and challenging managerial decisions whenever relevant.
References
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