One board director should be replaced, say almost half of directors

The percentage of directors that are unsatisfied with their fellow board directors is on the rise, with 46 percent saying that one or more of their colleagues should replaced, according to new research from PwC.

In past years, around one-third of respondents (between 31 and 39 percent) have said at least one director should be replaced. This year, 16 percent said that two directors should be replaced, while 5 percent said more than two directors should go.

The research, published by PwC’s Governance Insights Center, draws parallels between board tenure and dissatisfaction with fellow board directors. More than half (53 percent) of directors with two years of board service or less say at least one board member should be replaced, while only 39 percent of directors with more than 10 years of board service agree.

The top three criticisms of fellow board members are that they overstep the boundaries of their role, are reluctant to challenge management and that their interaction style negatively affects board dynamics.

These findings raise questions about whether there is an issue with board refreshment and evaluation in the US. The top three methods for promoting board refreshment, according to PwC’s research, are a strong focus from the board chair or lead director, full board and committee self-assessments and individual director assessments.

Respondents to PwC’s survey were less supportive of using term limits or seeking input from investors about board composition.

Paula Loop, leader of PwC’s Governance Insights Center, tells Corporate Secretary that she expects disclosures about board refreshment to improve, providing specific details about the type of assessment that was done and what the findings were.

In addition, she explains that once an assessment has been conducted, the flow of information back to the directors needs to be improved.

‘The boards that are doing a robust job of this are focused on getting feedback about what do they as a board or individual board member do well and what they could do differently,’ Loop says. ‘But if you don’t provide any feedback, it’s difficult for boards to act on it and improve.’  

Loop adds that this will be particularly important as boards continue to become more diverse and look to add a broader range of skills and backgrounds – including cyber-security, digital, and emerging markets – to the boardroom.

MEN LESS CONVINCED ABOUT VALUE OF BOARD DIVERSITY

Board diversity is increasingly becoming a focus for investors in North America, with institutional investors writing to companies with no women on boards and singing up to groups like The 30 Percent Club.

Almost two thirds of respondents (59 percent) feel that their board is sufficiently diverse – the gender breakdown of respondent was 84:16 male and female.

PwC asked directors which factors – gender, tenure, age, race, nationality, and socioeconomic background – are most important for achieving diversity of thought.

Gender, tenure and age are considered to be the top three most important factors. But it’s also notable that the female respondents see more value in all of the factors – suggesting that there is still a gender split on what diversity of thought actually means.

BOX OUT: How important are the following factors in achieving diversity of thought in the boardroom? (respondents answered ‘very important’)

Source: PwC

MIXED FEELINGS ON SHAREHOLDER ENGAGEMENT

This year’s proxy season showed that investors are willing to vote against directors more willingly than in the past, placing a burden of responsibility on directors to engage with shareholders.

But PwC’s research reveals mixed feelings from board directors towards shareholder engagement.

Two out of five boards, excluding the CEO, have had direct engagement with their investors during the last 12 months. But 23 percent of respondents say that directors, other than the CEO, should not meet with shareholders.

The top three instances that should lead to shareholder engagement are when an activist investor takes a position in the company, if there’s a significant crisis at the company, and if there’s a negative say on pay recommendation by a proxy advisory firm, according to PwC’s research.

Engagement between boards and investors is still a relatively new concept, PwC points out, and as a result both parties are improving. Investors are getting better are making sure the right representatives are at a meeting, are more prepared for meetings than in the past and are more likely to give valuable insights to board directors, according to PwC’s survey.

‘Directors are getting better at it and more open-minded about engagement,’ Loop tells Corporate Secretary. ‘Investors are also getting better at the engagement process. They’re more thoughtful about their agendas, getting the right people in the room and communicating what they’re looking for.’