Data from the most recent PwC and The Conference Board annual study, Board effectiveness: A survey of the C-Suite, suggests that many corporate board members and management executives are unhappy with their company’s current board composition. According to the study, 92 percent of the more than 600 executives surveyed advocated for one or more directors on their board being replaced. Additionally, 62 percent of the CEOs in the survey said one or more directors on their board should be replaced.
While this data is concerning, it does suggest that corporate boards are showing greater awareness that the increased risks and responsibilities boards have been challenged with in the past decade require directors with skills that some corporate boards lack. According to the study, only 28 percent of executives felt their board members have the appropriate combination of skills and expertise to make them effective. Executives preferred adding directors with industry, regulatory and sustainability experience, while corporate board members prioritized adding directors with finance, risk management and operations expertise. The consensus is that improving board composition should be a priority for most companies. However, the characteristics that any new board members should possess will be different for each company.
Board refreshment can have several benefits including:
Strengthening relationship with management and shareholders. Adding highly qualified and respected candidates to the board of directors sends several positive messages to stakeholders and financial markets. It signals that the board is practicing good governance by bringing on needed skills and experience that will increase its ability to create shareholder value. It also demonstrates to shareholders that the board is open to improvement. Upgrading board members might discourage activist investors from taking action against the board. Board refreshment might also help improve cooperation with management by bringing in directors that possess skills that can help the CEO’s plans succeed faster.
Remaking the board for the future. There are risks that will need to be dealt with in the next 10 years that will pose unprecedented challenges for many companies. Boards will need to recruit new directors who are able to anticipate how risk associated with climate change, cyber security threats, artificial intelligence, digital currencies, geopolitical crises and ESG might impact their company in the future. The earlier companies begin developing strategies to deal with how these risks might affect their organization, the better.
Maintain needed diversity on the board. While some have frowned on the word diversity in recent months, many others understand the value of having a diverse corporate board. The governance of most companies will improve when there is a diversity of skills, experience and point of view on corporate boards, as well as diversity of age, race and gender. Boards must have a composition that allows for rapid change and adaptability. A diverse board would likely more capable of that type of flexibility.
