In collaboration with The Conference Board, RRA recently undertook an in-depth study of corporate board practices among the Russell 3000 and S&P 500, looking at board organization, director profiles, director elections and removals, and other board policies, producing one of the most detailed looks ever into who governs these companies, and how.
Despite the demand for refreshment and more diversity, the makeup of many public company boards remains unchanged.
Corporate governance has undergone a profound transformation in the last two decades, as a result of the legislative and regulatory changes that have expanded director responsibilities as well as the rise of more vocal shareholders. Yet the composition of the board of directors has not changed as rapidly as other governance practices, and to this day many public company boards do not see any turnover that is not the result of retirement at the end of a fairly long tenure.
According to a comprehensive review of SEC filings made in 2018, 50.4 percent of Russell 3000 companies and 42.5 percent of S&P 500 companies disclosed no change whatsoever in the composition of their board of directors. More specifically, they neither added a new member nor replaced an existing one. In those cases where a replacement or addition did happen, it rarely affected more than one board seat; and only one-quarter of boards elected a first-time director who had never served on a public company board before.
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- Directors are in for a long ride: their average tenure exceeds 10 years. About one-fourth of Russell 3000 directors who step down do so after more than 15 years of service. The longest average board member tenures are seen in the financials (13.2 years), consumer staples (11.1 years), and real estate (11 years) industries.
- Despite the demand for more inclusiveness and a diverse array of skills, companies continue to value prior board experience in their director selection. Only a quarter of organizations elect a director who has never served on a public company board before. Companies with annual revenue of $20 billion or higher are twice as likely to elect two first-time directors as those with an annual turnover of under $1 billion (7.3 percent versus 3.2 percent).
- Corporate boards remain inaccessible to younger generations of business leaders, with the highest number of directors under age 60 seen in new-economy sectors such as IT and communication services. Only 10 percent of Russell 3000 directors and 6.3 percent of S&P 500 directors are aged 50 or younger, and in both indexes about one-fifth of board members are more than 70 years of age. These numbers show no change from those registered two years ago; nor do the numbers on the adoption of retirement policies based on age: only about one-fourth of Russell 3000 companies choose to use such policies to foster director turnover.
- While progress on gender diversity of corporate directors is being reported, a staggering 20 percent of firms in the Russell 3000 still have no female representatives on their board. Moreover, even though women are elected as corporate directors in larger numbers than before, almost all board chair positions remain held by men (only 4.1 percent of Russell 3000 companies have a female board chair).
- Periodically evaluating director performance is critical to a more meritocratic and dynamic boardroom. However, even though many board members consider the performance of at least one fellow director as suboptimal, in the Russell 3000, only 14.2 percent of companies disclose that the contribution of individual directors is reviewed annually.
- Among smaller companies, staggered board structures also stand in the way of change. Almost 60 percent of firms with revenue under $1 billion continue to retain a classified board and hold annual elections only for one class of their directors, not all. And while just 9.5 percent of financial institutions with asset value of $100 billion or higher have director classes, the percentage rises to 44.1 for those with asset value under $10 billion.
- Though declining in popularity, a simple plurality voting standard remains prevalent. This voting standard allows incumbents in uncontested elections to be reelected to the board even if a majority of the shares were voted against them. In the Russell 3000, 51.5 percent of directors retain plurality voting.
- Only 15.5 percent of the Russell 3000 companies have adopted some type of proxy access bylaws. Such bylaws allow qualified shareholders to include their own director nominees on the proxy ballot, alongside candidates proposed by management. In all other companies, shareholders that want to bring forward a different slate of nominees need to incur the expense of circulating their own proxy materials.
These findings provide some important context to the current debate on board refreshment and on the diversification of director skills and backgrounds, underscoring the main reasons why progress remains slow: average director tenure continues to be quite extensive, board seats rarely become vacant and, when a spot is available, it is often taken by a seasoned director rather than a newcomer with no prior board experience.