SEC Proposed Rules and Investor Pressures Continue to Impact Board Composition

The proposed rules by the SEC seeking greater disclosures around human capital metrics, cybersecurity and climate as well as increased pressure from institutional investors and proxy advisory firms to demonstrate greater board diversity will continue to have significant implications for board composition, size, and talent.  

The 2022 Conference Board/ESGAUGE report highlights several considerations to help ensure Boards are well positioned to navigate the exceedingly complex issues that directors are expected to oversee. 

• A decline in the reported percentage of board members with broad business strategy experience may be due to boards adding members with deep functional expertise. S&P 500 companies report a decrease from 69.7% in 2018 to 67.5% in 2021, while Russell 3000 organizations report a larger decrease from 67.7% to 62.9% in the same period.  While functional knowledge is important, business strategy must remain the board’s focus as they effectively integrate the functional areas in the strategic discussions.
  
  
• As boards expand their oversight into ESG, global economic and social issues, companies will need to recruit not only for the traditional skills, but also for members that demonstrate critical competencies and “soft skills” such as crisis management, growth mindset, and willingness to listen and change.
  
  
• Education programs for directors and senior leadership are increasingly taking a hybrid approach consisting of internal resources and external providers that offer objective information and are skilled at interacting at the Board level to address the new and expanded responsibilities.
  
  
• Although gender and racial diversity of Boards are increasing for large companies and in certain industries, many companies will need to continue to increase their efforts around board representation as specific targets are being set by some investors and proxy advisory firms which will impact director elections with some firms pledging to vote against directors. Beginning in 2023, State Street Global Advisors and Glass Lewis have pledged to vote against the Chair of the Nominating Committee if the Board is not 30% gender diverse; yet in the Russell 3000, only 37.1% of companies meet this threshold.
  
  
• Board size slightly increased in 2022 and will likely continue to expand as new committees may be formed to provide ESG oversight, directors with unique skills are added and companies strive to include more women and people of color.