Why Expanding Your Board Might Make Sense

Directors have seen their responsibilities expand significantly as scrutiny of board decision making has increased—as has the amount of work board members must do to keep the company running efficiently. It might just pay to add seats.

At its annual meeting this month, Kohl’s Corp. officially expanded its board of directors from 12 to 15 members as part of an agreement made with an investor group that waged a months-long effort to take control of the board. While an investor group being the catalyst for an expansion of the board is not ideal, adding board members may actually be a decision that helps Kohl’s in the long run.

Over the last decade corporate directors have seen the responsibilities of the board expand significantly as scrutiny of board decision making by regulators, proxy advisors and investors has increased. At the same time, the amount of work board members must do to keep the company running efficiently has grown as well. As boards evaluate their performance year-to-year, it might be helpful to consider adding board members who can help with the added workload. Expansion of the board could actually be helpful as directors prepare for the challenges of the next decade. In fact, there are a number of reasons board expanding might be the right thing for some companies.

• What is the right board composition needed for the next decade? If boards honestly address this question they may see a need to add skillsets in a number of areas. While adding skillsets might be achieved by replacing one board member with another, that might not be the case in all instances. For example, cybersecurity is an area that many companies have not adequately addressed, so adding a board member with experience in that area may be advantageous to companies in a number of industries.

Additionally, many companies are going through significant transformations. The pandemic has forced many companies to transition to a hybrid work environment while also having to create a stronger online presence to serve customers. Companies are also learning to use customer data more efficiently in their efforts to increase revenues. It may be necessary to bring in new board members who can help facilitate these types of transitions if current directors are resistant or unaware how these types of changes can benefit the business.

• Growing emphasis on ESG and stakeholder issues.  Environmental, Social and Governance issues have become more important to shareholders recently, so directors have had to pay much more attention to those issues. Adding board members with a higher degree of ESG experience could help the board understand these issues better and find better solutions faster. For example, adding a board member with experience dealing with climate change issues might make sense for companies that expect to deal with legislation involving carbon emissions over the next decade.

Additionally, stakeholder issues are beginning to drive more board decisions. Bringing in a director who understands investors and has experience dealing with takeover attempts and other stakeholder issues could be useful for some boards. Determining whether the board needs to react to political issues like the recent changes in voter registration laws or social issues like abortion may be more important in the next decade than it has been in the past.

• Adding diversity to the board. For boards that are still trying to add women or underrepresented groups, adding a board seat might be helpful. Proxy advisors and institutional investors have begun threatening to vote against the reelection of boards that resist diversifying their members. Adding women, minorities and other underrepresented groups to the board can broaden the approaches used to solve problems and add insight into reaching different groups of customers.

Additionally, since some states have passed legislation mandating diversity on corporate boards and the Nasdaq stock exchange is proposing all listed companies diversify their boards, adding a board seat might be a way to comply with the growing movement toward diversity and add new skills and perspectives to the board.