Board composition has been under intense scrutiny since the dotcom bubble burst at the turn of the century. Shareholders, the media and the general public have been pressing for change and enhanced diversity in boardrooms. There’s no doubt that the good ol’ white boys club is being dismantled, but a new report suggests there’s still a long way to go before U.S. boards can shine as an example of equality.
The newly released 10th annual Board Monitor, an annual analysis of the composition of board appointments in Fortune 500 companies conducted by Heidrick & Struggles, shows that boards are making considerable headway in appointing more women to their ranks. The number of women who filled new board seats in 2018 grew to 40 percent, up from 18 percent ten years ago when the executive search firm started monitoring board trends. Nevertheless, according to a report by Deloitte and the Alliance for Board Diversity, the total share of women on Fortune 500 boards is still very much below the parity level, at 23 percent.
There’s also been sustained progress in the appointments of African American, Hispanic and Asian/Asian-American candidates onto Fortune 500 boards over the past decade, reaching a record high in 2017. But at 23 percent representation, that’s also still quite low.
According to Bonnie Gwin, vice chairman and co-managing partner of the global CEO & Board Practice at Heidrick & Struggles, one of the challenges with diversity is the specific set of criteria boards use to conduct their searches to fill seats.
“Companies need to broaden their focus and really think about the skills and experiences they truly need strategically,” she says. “For instance, do you have to have a CEO from a specific industry? Because if you do, by definition it’s going to be a much less diverse group. Women, for instance, aren’t likely to be on the shortlist.”
She says the first thing to consider when looking at a board’s overall composition is how it aligns with its strategic initiatives. “What challenges do you foresee over the coming years, and what skill sets does that mean you need to have around the table? Do I have what I need now? Are these the right people to carry us into the future and advise the CEO and the management team and represent the shareholders? Would we truly benefit the most from a CEO or are there other experiences that will lend themselves to the strategy that might be more impactful?”
Answering those first considerations will allow you to determine whether the ever-popular idea of bringing a CEO to the boardroom is necessary after all. Gwin says CEO criteria tends to be very top of mind in searches because directors, who are risk-averse by nature, believe CEOs not only understand the business better than anyone else, but also that they will understand what it actually takes to deliver value to shareholders, deal with activists and tackle all the other issues that come up for boards. “There’s a comfort level,” she says, adding that CEOs also tend to be well-known figures, which makes it easy to find out more about them before bringing them on.
Demand for CEO experience from board director appointees hit an all-time high of 60 percent in 2018. That’s not likely to change anytime soon unless boards start looking at the skill sets they really need in greater detail. In that regard, however, consumer experience outpaced financial experience for the first time in 2018, albeit slightly, with 23 percent of the newly appointed directors coming from the consumer sector and 21 percent from the financial sector.
“This may speak to the trend around digital and disruption because a lot of boards, as they’re thinking about adding a director, are very interested in adding executives who are maybe a little earlier in their career and understand the digital world and technology. A lot of that is coming from consumer and consumer technology, sectors that have been on the leading edge of a number of interesting disruption trends,” says Gwin.
Another trend gaining traction in the boardroom is the growing interest in CHROs. Chief human resource officers add tremendous value to the discussions about culture, CEO succession and a slew of topics in boards’ purview, such as compensation and talent development. There’s no doubt that boards are becoming increasingly aware of the risks related to culture. After all, talent is the most important asset companies have, no matter the business, and having someone whose livelihood and experience is all about talent—developing talent, succeeding talent, changing cultures, embracing good cultures, transformation and change—sit at the table is really powerful. “In many cases, nobody’s better positioned than a CHRO to have those conversations,” says Gwin.
Among other criteria on the rise in board searches, Gwin says she’s noticed greater demand for military backgrounds.
“[Military leaders] bring global experience, discipline and rigor,” she says. “Many times, they also bring supply chain experience. Certainly leadership experience. There’s been renewed interest in military experience, not for every industry but for many where it’s relevant.”
And while the average age hasn’t changed much in the past decade, hovering around 58, as boards move away from the traditional CEO/CFO background to add people with digital backgrounds, a culture focus or no boardroom experience at all, for instance, diversity is likely to increase.
For now, however, the number of new directors with no prior experience has been relatively stagnant, averaging approximately one third, since 2011. While this is still a pretty good number, bringing fresh thinking, inspirational ideas and new perspectives into boardrooms, in 2018, 53 percent of those first timers were men and 73 percent were Caucasian.
So much for progress on diversity.
But we can’t judge too harshly. Progress has and is being made. In our talks with directors, there is genuine interest to increase diversity. And boards are planning on a longer-term horizon today, developing a skills matrix, running it against the strategy, evaluating the gaps around the table now and over the coming years. They’re talking more frequently about refreshment and assessment. More and more of them are considering implementing age or term limits. The world is changing at a much faster pace, and directors are cognizant of that fact. In this era of disruption, it’s a real challenge to plan for the long term, but the best-performing boards are stepping up to the plate and onboarding those who can put them at the forefront of this transformation.
“There’s been a significant change,” says Gwin. “Ten years ago, diversity certainly would’ve been a topic, but now, in many cases, it’s a mandate.”
So, let’s appreciate how far we’ve come… while keeping an eye on all the opportunities left to grab. Because it’s not just about gender and ethnic diversity, it’s passport diversity, life experience diversity, age diversity… There are a lot of elements.
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