S&P 1500 Benchmark Analysis Finds Progress on Board Renewal, But That Investor Concerns on Tenure and Diversity Are Warranted
Webinar on Thursday, February 23rd at 1 PM ET to Review Findings
NEW YORK, NY (January 24, 2017) – The intense focus that investors and others have placed on board refreshment has begun to pay off. But, structural trends and governance practices that encourage longer tenures could slow, or even reverse this progress over the next decade, according to a new study.
Board Refreshment Trends at S&P 1500 Firms: 2008 To 2016, commissioned by the Investor Responsibility Research Center Institute (IRRCi) and conducted by Institutional Shareholder Services Inc. (ISS), shows that boards are adding fresh faces following a multi-year period of board roster stagnation in the wake of the financial crisis. Nearly one out of every ten directors was new to their boards in 2016. At a corporate level, more than one-half of S&P 1500 boards added one or more new directors to their rosters in 2016.
As a result, the average tenure of an S&P 1500 board member declined to 8.7 years in 2016 from nine years three years earlier, although median tenure held steady at seven years.
However, that recent surge in renewal obscures some longer-term trends towards longer-serving and older directors. Directors with at least ten years of board service now occupy an eye-catching 38 percent of board seats and about half of those are held by directors with 15 or more years of tenure. Also, directors in their seventies and eighties have increased their share of directorships to more than 20 percent of all directorships; the average director age rose two years for the study period, from 60.5 years in 2008 to 62.5 years 2016; and the proportion of directors aged less than 50 declined, despite much corporate, media and investor discussion of the need for millennial- and technology-focused directors.
The pace of change with respect to diversity in the boardroom has been sluggish. As of 2016, women held only 17.8 percent of S&P 1500 board seats, and minority directors held slightly more than ten percent of board seats. Those directorships are far from uniformly distributed. For example, larger cap firms in the S&P 500 are likely to have more than one minority director, while the typical headcount of minority directors at small cap companies in the S&P 600 is zero.
One positive change with respect to diversity was a surge in refreshment in 2016. This included 24.4 percent female and 13 percent ethnic or racial minority director nominees, more than the historic norms.
“Who sits around the board table matters,” said Jon Lukomnik, IRRCi executive director. “The directors of a company are responsible for selecting the CEO, the corporate strategy and the capital structure. So it’s no wonder that board composition and refreshment are among the hottest topics for investors and issuers. The good news is that boards seem to be listening and increased refreshment recently, but it’s off a very sluggish trend line.”
“This report provides hard data – not just about age, tenure, and refreshment – but also about the effectiveness of mechanisms such as age limits, tenure limits and board evaluations. That is valuable. For example, it may be intuitive that boards that do not perform board evaluations are older and staler than other companies – and this report proves it,” Lukomnik explained.
“Our institutional investor clients put their faith in corporate directors to oversee their long-term investments, so assessing refreshment is critical to their oversight of boards,” said ISS Head of Strategic Research and Studies Patrick McGurn. “While there is no quick fix, we hope that benchmarking refreshment practices will fuel constructive engagement on the topic between shareholders and directors.”
Looking forward, S&P 1500 boards face a potential explosion in the ranks of directors with double-digit tenures as these large recent incoming classes—led by nominees in the fifties—could serve for decades and limit turnover. Rising ‘mandatory’ retirement ages (75 appears to be the new 72), the rarity of term/tenure limits (found at less than five percent of study firms), opaque board/director evaluations and the widespread retention of experienced directors to serve on key board committees all signs point toward a chronic boardroom logjam in a few years. Notably, investors may tacitly encourage such ‘staying and greying’ by rarely addressing ‘excessive’ tenure in their voting policies or when they assess nominees’ ‘independence.’”
The 145-page study can be considered the most comprehensive examination of board composition at public companies in the U.S. IRRCi and ISS will host a webinar to review the findings on Thursday, February 23, 2017, at 1:00 PM ET. Register here. The full study is available here.
The report examines three key areas:
- Demographic trends in the boardroom, including tenure, age, gender and ethnicity/race.
- The impact of the three most common refreshment tools—retirement ages, term limits, and boardroom evaluations.
- Structural issues that appear to have a significant impact on board refreshment rates including director independence, the growing importance of committees and board size shifts.
Additional key findings include:
- Board tenure trends may reverse. Average boardroom tenure steadily rose from 8.4 years in 2008 to a peak of nine years in 2013 before slowly reversing course from 2014 to 2016. As a result, average director tenure at S&P 1500 firms stands at a level—8.7 years—last recorded in 2010. However, structural issues—especially rising mandatory retirement ages—could cause tenures to climb again. The report notes that “75 is the new 72,” as a 75-year age limit appears to be replacing 72 years as the new norm.
- There’s a bumper crop of new directors in recent years. The pace of adding new directors to S&P 1500 boards accelerated in the latter half of the 2008-2016 study period, as the focus on “refreshment” grew. New nominees claimed less than six percent of total directorships prior to 2012, but their prevalence steadily rose over the remainder of the study period. By 2016, 9.5 percent of directors serving on S&P 1500 boards were new.
- Board diversity has been sluggishly increasing. The share of S&P 1500 board seats held by women crept up to 17.8 percent in 2016 from 11.9 percent in 2008. Minority directors now fill slightly more than ten percent of the total directorships at S&P 1500 firms, but the typical minority director headcount at small cap firms is zero.
- Boards have limited tools to drive refreshment. The three primary refreshment mechanisms focus on an individual director’s age (retirement policies), length of service (term limits) or absolute or relative performance (board evaluations). Each of the popular refreshment mechanisms has benefits and potential costs. Retirement ages and term limits force periodic refreshment by creating vacancies, but both may cause some directors to leave boards at a time when they are still highly-effective contributors. Reliance on these mechanical devices may allow some less productive directors to remain on boards until they reach the term or age limit. Evaluations aim to assess directors’ contributions and competence in real time, but may be ineffective in fostering the replenishment of directors’ skill sets in the absence of true boardroom succession planning.
- Board independence levels continue to rise despite the growing ranks of directors with double-digit tenures. Independence levels at companies in the S&P 1500 continue to rise. The proportion of independent directors has increased by almost five percentage points to 81.5 percent over the study period.
The study examined the boardroom attributes for firms in the S&P 1500 Composite Index as of January 1, 2016, and includes director data for index constituents with annual general meeting dates through to October 12, 2016.