Internal discontent on corporate boards has jumped even as external factors such as growth in the U.S. and global economies, and stock-market highs, have made it easier for directors to operate.
A whopping 46 percent of directors surveyed by PwC recently said that someone on their board should be replaced, and 21 percent said two or more fellow directors should be given the boot. The 46-percent figure is a new high-water mark for a measure of director discontent that has been in the 30-percent range for a few years, according to Paula Loop, leader of the PwC Governance Insights Center.
“The bar has been raised on board performance,” Loop told Corporate Board Member. “They’re seeing increased emphasis on their performance in the media, and by activists and institutional investors. Board members are feeling those pressures generally, and the bar is rising.”
At the same time, Loop said, more boards are using results from internal soul-searching to improving the body, either through the nomination process or other actions.
“The bar has been raised on board performance.”
Specifically, PwC found that these 4 pressure areas were prompting more board members to finger their peers for improvement or replacement:
1. Activist shareholders. “They’re picking on boards” now more than ever, Loop noted. “They’re saying that the company should be performing better, and we want a seat on the board, and maybe two or three of those who are directors now should move on.”
2. Institutional investors. Loop said that “they are starting to be much more outspoken in voting ‘no’ against directors if they don’t like governance policies for the board, especially around diversity and broader governance issues.”
3. Media coverage. This is a challenge because “things are very public now. When something big happens, there are a lot more questions in the media about, ‘Where was the board on this?’ Board members are feeling that pressure generally. There’s increased public emphasis on their performance.”
4. Board demographics. Interestingly, longer-tenured directors instead of newer board members were the critical swing factor in rising internal discontent, Loop said. Typically, this survey has shown shorter-tenured directors being critical of more-tenured members.
“A little bit of that now is that longer-tenured directors are looking around at some of the newer directors and seeing that they have very different backgrounds and experiences than most of them have,” Loop said. “A lot of the longer-tenured directors are retired CEOs and have lots of experience. New directors haven’t had a lot of that same experience. They may have deep technology expertise or be a divisional president.”
But, Loop noted, the survey also produced the “encouraging” result of “a much higher response of boards taking action because of their assessment process. The bar is being raised but the board is taking it seriously and working on making improvements.”
Only 15 percent of directors surveyed said that their board leadership didn’t renominate a fellow director or provided counsel to a fellow board member. But more said that their boards are taking other actions to improve performance, including changing the composition of committees.
“So they’re doing things and not just saying, ‘We’ve got discontent but we’re not going to act on it,” Loop said. “They’re doing some things to elevate the performance of their board.”