Directors are increasingly turning from personal networks to nominating/governance committees to fill empty board seats with people who have the most desired skills
The days of cushy board seats are long gone. Thanks to the financial crisis, new regulations mandated by Dodd-Frank and other legislation, and activist shareholders, serving on a board requires a more engaged effort to tackle tough governance and risk issues.
Board members have their hands full. According to the 2013-2014 Public Company Governance survey conducted by the National Association of Corporate Directors, which included input from 1,019 public company directors and drew from the proxy data of more than 2,700 companies, directors’ average annual time spent on board matters jumped significantly over the last year – 235.9 hours per board from 218.6 hours -- the largest time commitment recorded by NACD's annual surveys.
‘Directorship has changed and expanded significantly. Directors are expected to oversee a broader and more complex set of issues and respond by spending more time in all activities, particularly attending board and committee meetings and reviewing reports and materials,’ says Peter Gleason, managing director and CFO of NACD.
Priorities have also changed. Executive talent management/leadership development now ranks fifth among the leading issues, while five years ago it didn’t even make the top 10. This reflects the board's recognition that talent is one of the most critical risks, as well as a source of opportunity for companies. ‘Boards have begun to recognize talent development as a foundation for corporate performance and success,’ says Gleason.’
Talent holds the key not only to the company’s success, but the board's. In years past, board members typically relied on their personal network to find nominees for empty board seats, while the latest survey shows that 72.3 percent left the task to board nominating/governance committees. That change is partly driven by the need to recruit people with the most desired skills. Increasingly that means finding people with track records of handling IT risk, which boards recognize as central to solving a vast array of ever more complex issues coming at a faster pace.
‘The majority of survey respondents acknowledged that both they and their whole board could enhance their knowledge of IT risk,’ says Gleason.
Board turnover has increased dramatically, too. Nearly 60 percent of respondents said their boards replaced or added at least one director in the last 12 months, up from 41 percent last year. Boards are striving to fill seats with directors who can steer the company through future challenges and opportunities, most often recruiting people with financial or industry-specific experience, says Gleason.
The survey also demonstrates the impact that shareholder pressure has had on executive compensation policies. ‘We've seen it in the news, but this year we have the data to back it up,’ he says. At the request of shareholders, 64 percent of respondents said their companies expanded the explanations they provided about compensation in their proxy statements, and 37 percent said their boards revised their executive compensation plans.
Nearly half of the boards represented in survey responses met with institutional investors in the last year, and most of those that did believe increased shareholder engagement improves board effectiveness.
In addition to using the months leading up to proxy season to proactively engage with the largest investors, ‘directors should take a close look at their current board practices, evaluating for any potential red flags -- practices generally not viewed positively by shareholders, like a staggered board or combined chair and CEO with no lead director on the board,’ says Gleason.
A lesson for senior management is the need for dialogue with the board about the quality and quantity of information the C-suite is providing to them. ‘We're hearing that in many cases, boards are simply given the PowerPoint slides and materials from the last quarterly presentations,’ Gleason says. ‘Instead, management should work with the board to determine the information best suited for effective oversight.’
