Corporate Governance Blog

Board Demographics: Compare your board’s composition in terms of age, gender, and ethnicity

How do your board’s demographics in terms of age, gender and ethnicity compare with those reported by (i) public companies in the Society of Corporate Secretaries and Governance Professionals’ "2011 Board Practices Report" (the "Society’s 2011 Report") and (ii) the Standard & Poor's (S&P) 500 as shown in Spencer Stuart’s "2011 Board Index" ("Spencer Stuart’s 2011 Index")?

Age

The Society’s 2011 Report shows the percentage of directors in each of the following age ranges for all companies in its survey:

Age 23 to 30 years	0%
Age 31 to 40 years	1%
Age 41 to 50 years	6%
Age 51 to 60 years	35%
Age 61 to 70 years	48%
Age 71+	10%

Spencer Stuart’s 2011 Index shows that the average age of S&P 500 board members is 62.4 years. This is higher than in the 2001 Index, which showed an average age of 60.2 years. This aging of corporate board members is due in part to less turnover. In fact, according to Spencer Stuart’s 2011 Index, the number of new appointees has dropped 25 percent over the same period.

The age of boards should decrease because 70 percent of public companies and 43 percent of private companies have a mandatory retirement age with 72 years being the most common age. At least 10 percent of directors of these public companies are reaching this mandatory retirement age.

Gender

The Society’s 2011 Report shows that 19 percent of all directors for all companies in its survey are women. Spencer Stuart’s 2011 Index reports that 16 percent of all directors for S&P 500 are women. The difference between the two surveys may be that Spencer Stuart’s 2011 Index included more companies engaged in the retail, health care and banking industries, which appear to have a greater composition of women on their boards.

After announcing that we would be reporting on board demographics, we were asked to compare the average percentage composition of women on boards of S&P 500 companies headquartered in Ohio with the average percentage of women on boards of all S&P 500 companies. The average percentage composition of women on Ohio S&P 500 companies is 20 percent, which is higher than the 16 percent average composition on all S&P 500 companies, but insignificantly higher than the 19 percent shown for all companies in the Society’s 2011 Report. Ohio companies having a statistically greater percentage composition of women are Key Corp, Limited Brands, Macy's and Proctor & Gamble (listed alphabetically).

As noted above, women appear to have greater presence on boards of companies engaged in, or vendors to, the retail industry and boards of hospitals and banks.

Ethnicity

The Society’s 2011 Report shows the following composition of directors for all companies in its survey among the following ethnicities:

White	83%
Asian	3%
Black	7%
American Indian or Native American	1%
Hispanic or Latino	4%
Two or more races	3%

The Society’s 2011 Report shows that boards of small-cap companies tend to have a greater percentage composition of white people (91%) than boards of mid- and large-cap companies (80% – 83%).

Comment and Personal Observation

Acredula has been a leading advocate for an "expertise" board composed of persons each having particular experience, skills or expertise needed for the board to have as a whole all of the experience, skills and expertise necessary to achieve its future objectives. This is in contrast to a "constituency" board, which is composed of persons who represent the view of a particular constituency (such as the U.S. Congress or a state legislature).

Even though we are not generally an advocate of constituency boards, we agree with the Society’s 2011 Report that a "director’s ethnicity, gender, and age could have an impact on a board’s composition similar to the effect of the directors’ technical and professional expertise. Directors with differing ethnicity, gender and age bring about a unique experience and perspective to the boardroom."

My observation from years of representing or participating on boards is that directors of a gender or ethnicity other than a white male tend to focus more on the process of making decisions, ensuring that ideas are vetted and risks are discussed from the viewpoint of all. Perhaps because they have traditionally composed less than a majority of the decision makers, they are more likely to ask, "what do you think?" than to demand "get to the point."

This completes both of our series on board benchmarks: our eight-part series on board practices and our three-part series on board composition, including this article on board demographics.

The Society’s 2011 Report is available at the Deloitte Center for Corporate Governance at http://www.corpgov.deloitte.com/site/us/ as the "2011 Board Practices Report" under the page "Board Governance," and Spencer Stuart’s 2011 Index is available at http://www.spencerstuart.com/research/articles/1538/

Board Composition: Compare your board’s composition in terms of professional career and work experience with this benchmark

How does your board’s composition, in terms of professional career and work experience, compare with the career and work experience reported by pubic companies in the Society of Corporate Secretaries and Governance Professionals’ "2011 Board Practices Report?"

Public companies’ boards have been focusing on board composition as a result of SEC proxy rules adopted in 2010, requiring disclosures explaining what qualifications boards take into account in nominating candidates for election as directors and what working experience the existing directors offer to the company.

As discussed in last week’s posting, Acredula has been a leading advocate for an "expertise" board that is composed of persons each having particular experience, skills, or expertise needed for the board to have, as a whole, all of the experience, skills, and expertise necessary to achieve its future objectives. This is in contrast to a "constituency" board which is composed of persons who represent the view of a particular constituency (such as the US Congress or a state legislature).

An "expertise" board is a concept described by Peter Larson, former chairperson of Brunswick and member of Compac's board, as part of a conference held at the Fisher College of Business of The Ohio State University on "Building Better Boards" in September 2000. Unlike a constituency board, assembling an expertise board requires an organization to assess the core competencies present among the members of its board and management team; to prioritize the additional competencies necessary for its future strategic direction; and to recruit persons having those competencies for nomination as board members.

Simply stated, an expertise board is chosen based upon the collective competencies of the board members to act in the best interests of the organization, as a whole, rather than upon the basis of the views or interests of any of its separate constituencies in particular.

Below are the professional career and work experience present among board members reported by public companies in the Society’s survey:

Percent of companies having the following professional career and working experience present on their board

% of companies

Professional career and working experience

25%

Outside non-profit board service

24%

Outside public company experience

20%

Strategic planning

24%

Current CEO experience

20%

Strategic planning

19%

Retired CEO experience

17%

Audit committee experience

17%

Nominating and corporate governance committee experience

16%

Compensation committee experience

15%

Business development

13%

Outside private company board experience

10%

Entrepreneurial experience

9%

Finance committee experience

4%

Chief operating officer experience

4%

Chief financial officer experience

4%

Environmental experience

3%

Community affiliation or access

3%

Government relations regulatory agency experience

2%

Lobbying

1%

Risk committee experience

1%

Military service

1%

Labor union

1%

Chief technology officer experience

1%

Chief information officer experience

We are surprised of that 25 percent of reporting companies reported "outside nonprofit board service" as a professional career and working experienced that they measure. The Society’s survey shows larger boards are more likely to measure non-profit experience as a needed experience, but this reflects the respect that for-profit companies have for the incorporation of independent directors on non-profit boards. Largely because of Intermediate Sanctions under federal tax laws and the need for raising charitable donations, a substantial majority of the members of non-profit boards are composed of independent or at least outside directors.

Executive experience; however, remains the most sought after experience with companies reporting that 53 percent of their boards are composed of persons with current or retired CEO experience, chief operating officer experience, chief financial officer experience, chief technology officer experience, and chief information officer experience. Professionals such as lawyer, accountants, and actuaries aggregated together composed less than one percent of public company board members.

Next week, our posting will be on board demographics in terms of age, gender, and ethnicity.

Board Composition: Compare the technical skills and expertise of the members of your board with this benchmark

How do the technical skills and expertise present among your board’s members compare with the skills and expertise reported by public companies in the Society of Corporate Secretaries and Governance Professionals’ “2011 Board Practices Report”?

Public companies’ boards have been focusing on board composition as a result of SEC proxy rules adopted in 2010, requiring disclosures explaining what qualifications boards take into account in nominating candidates for election as directors and what skills and expertise the existing directors offer to the company.

Acredula has been a leading advocate for an “expertise” board. An “expertise” board is composed of persons each having particular experience, skills, or expertise needed for the board to have, as a whole, all of the experience, skills, and expertise necessary to achieve its future objectives. This is in contrast to a “constituency” board, which is composed of persons who represent the view of a particular constituency (such as the US Congress or a state legislature). We endorsed the 2010 SEC proxy rules increasing disclosures about board composition and are encouraged with the results on technical skills and expertise being reported by public companies in the Society’s survey.

Below are the skills and expertise present among board members reported by public companies in the Society’s survey:

Percent of companies reporting they have the following technical skills and expertise present on their boards:

% of companies		Technical skills and expertise reported
17%		Operations
16%		International business exposure
15%		Risk management
14%		Mergers and acquisitions
14%		Industry experience
13%		Corporate governance
9%		Business restructuring
9%		Marketing
7%		Other financial services
7%		Compensation and benefits
6%		Investment banking
6%		Juris doctor (lawyer)
5%		Certified public accountant
5%		Human resources
5%		Commercial banking
4%		Engineering
4%		Public relations
4%		Management consulting
3%		Technology or IT
3%		Research and development
3%		Environmental and sustainability
2%		Medical profession
1%		Certified financial analyst
1%		Medical doctor (e.g., MD, DO, DDS)

The Society’s survey reported little distinction between boards with more than 10 directors and those less than 10 in terms of technical skills and expertise. However, the survey did find that non-financial services boards were more likely to have directors with skills and expertise in areas of operations, international business exposure, mergers and acquisitions, risk management, and corporate governance. This is a bit contrary to our experience with financial services boards with respect to risk-management and corporate-governance skills and expertise.

The Society’s 2011 Report is available at the Deloitte Center for Corporate Governance at http://www.corpgov.deloitte.com/site/us/ as the “2011 Board Practices Report” under the page “Board Governance.”

Next week, we will focus on board composition by reviewing board composition in terms of professional career and work experience.

Part 8: Compare your board’s practices regarding CEO succession planning with this benchmark

How do your board practices compare with other private and public companies in planning for CEO succession?

This is the eighth and final posting in our series on the results of the Society of Corporate Secretaries and Governance Professionals’ “2011 Board Practices Report”, which we have used as a benchmark to compare your board’s governance practices.

CEO Succession Planning

Below are the results of the Society’s survey of the following questions regarding CEO succession planning:

Survey Questions by Area of Governance

Public Companies

Private Companies

1. How often does your company’s full board review the CEO succession plan?

90% once a year or more

3% less than once a year (e.g., every two years)

6% only when a change in circumstance requires

1% never

65% once a year or more

5% less than once a year (e.g., every two years)

25% only when a change in circumstance requires

5% never

2. Who has primary responsibility over the CEO success planning process?

37% entire board

24% compensation committee

28% nominating or governance committee

4% independent chair or lead outside director

1% CEO

48% entire board

24% compensation committee

10% nominating or governance committee

5% independent chair or lead outside director

14% CEO

3. Who has lead responsibility over the CEO performance evaluation process?

13% entire board

63% compensation committee

12% nominating or governance committee

19% independent chair or lead outside director

2% other

21% entire board

53% compensation committee

5% nominating or governance committee

11% independent chair or lead outside director

11% other

4. How often does the full board review the CEO’s performance?

87% once a year or more

0% less than once a year (e.g., every two years)

2% only when a change in circumstance requires

0% never

80% once a year or more

0% less than once a year (e.g., every two years)

10% only when a change in circumstance requires

10% never

Generally speaking, the most important responsibility of a board of any organization is its selection of the CEO: Assuring, in the word of Robert Joyce, recently retired CEO of Ohio Farmers Insurance Company, that the “right person is in the right job.”

That responsibility; however, should not stop after selecting a CEO. The board has a continuing responsibility to assure that both the board and management know who is in charge if the CEO is unable or no longer available to serve in that position. This requires both a short-term plan for what happens if the CEO becomes ill or is otherwise out of day-to-day communication with the organization as well as a long-term plan for the CEO’s training, or helping the board to find, the CEO’s ultimate successor.

Not surprisingly, all public and private companies reporting in the Society survey report their companies have CEO succession plans.

Public company boards are more likely to have the full board review the succession plan at least annually, with 93 percent of public-company directors reporting doing so as compared to 70 percent of private-company directors reporting doing so.

The responsibility for assuring that a plan exists generally rests with the board as whole, with 37 percent of public company directors, and 48 percent of private-company directors, reporting this is the responsibility of the entire board. Nevertheless, 24 percent of both public-company and private-company directors report that this is a responsibility of the compensation committee.

Finally, only 21 percent of public-company directors and 22 percent of private-company directors report that their succession plan is the responsibility of their board chair (or lead outside director) or their CEO. Our experience has been that, before the year 2000, a greater percentage of companies would have reported that the succession plan was the responsibility of the board chair and CEO.

Although this completes our eight-part series of blogs on the board practices reflected by the Society’s Report, we will have two more postings based upon the Society’s survey: one reflecting the types of expertise and training present among the directors of the board of the reporting companies and the other reflecting the career and working experience present among the directors of those same boards.

Part 7: Compare your board’s practices regarding setting strategic direction and overseeing its associated risks with this benchmark

Compare your board’s practices regarding setting strategic direction and overseeing its associated risks with this benchmark

How do your board practices compare with other private and public companies in setting strategic direction and overseeing the risks associated with that direction?

This is the seventh of eight postings of the results of the Society of Corporate Secretaries and Governance Professionals’ “2011 Board Practices Report” to be used as a benchmark to compare your board’s governance practices.

Strategy and Risk Oversight

Below are the results of the Society’s survey of the following questions regarding strategy and risk oversight:

Survey Questions by Area of Governance	Public Companies	Private Companies
Strategy and Risk Oversight
1. How often are strategic objectives discussed with the board?	19% annually 18% quarterly 52% at every meeting	33% annually 29% quarterly 38% at every meeting
2. How is strategy set at your company?	92% management develops and board advises and approves 6% board and management develop strategy together 0% board develops strategy	95% management develops and board advises and approves 5% board and management develop strategy together 0% board develops strategy
3. Who is primarily responsible for oversight of risks for your company (select all that apply)?	13% special board risk committee 48% audit committee 48% spread over more than one board committee 57% full board is responsible 0% no formal policy for board oversight or risk	10% special board risk committee 57% audit committee 19% spread over more than one board committee 48% full board is responsible 0% no formal policy for board oversight or risk
4. Does your company align risk management with the company’s strategy (so that setting strategy takes into account risks, and managing risks takes into account strategy)?	88% yes 10% no 2% don’t know	81% yes 5% no 14% don’t know

One of the most important responsibilities of a board of any organization is assuring that the organization has an “understood” strategic direction that takes into account risks. In 2009, the faculty of Harvard Business School’s Corporate Governance Initiative interviewed 45 board members of financial institutions and similar complex organizations contributing to, or affected by, the credit crisis and subsequent recession. The results of the interviews are reflected in the paper, “Perspectives from the Boardroom – 2009,” written by Jay Lorsch of Harvard’s faculty.

According to the paper, the two contributing causes most frequently cited by the interviewed board members were:

• The lack of guidance given to the boards and its members as to the role of the board and each of its members with respect to management of the organizations

• The lack of understanding by the board of the business model and strategic direction of the organization

The paper uses the term “understanding” because it expresses what the directors seemed to be seeking. The paper’s most definitive statement is a quote from one of the interviewed board members:

“My experience is that it’s of utmost importance that the board has a full understanding of the business model . . . entry barriers, competitors, technological changes and so on. A full understanding of the business model — which includes, of course, what are competitors doing, what are the trends in the market and so on.”

So, the Society’s 2011 Report may reflect greater involvement by the board in “understanding” the organization’s strategic direction so that it can consider risks in light of that direction and vice versa. 88 percent of directors of public companies and 81 percent of directors of private companies reported that their companies align risk management with the company’s strategy so that setting strategy takes into account risks, and managing risks takes into account strategy.

The survey reflects that boards rely upon management in setting the strategic direction with 92 percent of directors of public companies and 95 percent of director of private companies reporting that management develops and the board advises and approves the direction.

The survey reflects that boards assume more initiative in risk oversight than they may in setting strategic direction. Accordingly, the responsibility for risk oversight is spread among (i) the board as a whole (as reported by 57 percent of public-company directors and 48 percent of private-company directors) and (ii) more than one of the board’s committees (as reported by 48 percent of public-company directors and 19 percent of private-company directors). Of board committees, the audit committee remains the principal risk oversight committee (as reported by 48 percent of public-company directors and 57 percent of private-company directors).

The Society’s 2011 Report is available at the Deloitte Center for Corporate Governance website at http://www.corpgov.deloitte.com/site/us/ as the “2011 Board Practices Report” under the page “Board Governance.”

Our next and final posting in this series will focus on board involvement with CEO succession planning.

% of companies		Professional career and working experience
25%		Outside non-profit board service
24%		Outside public company experience
20%		Strategic planning
24%		Current CEO experience
20%		Strategic planning
19%		Retired CEO experience
17%		Audit committee experience
17%		Nominating and corporate governance committee experience
16%		Compensation committee experience
15%		Business development
13%		Outside private company board experience
10%		Entrepreneurial experience
9%		Finance committee experience
4%		Chief operating officer experience
4%		Chief financial officer experience
4%		Environmental experience
3%		Community affiliation or access
3%		Government relations regulatory agency experience
2%		Lobbying
1%		Risk committee experience
1%		Military service
1%		Labor union
1%		Chief technology officer experience
1%		Chief information officer experience