Increasingly assertive institutional investors, aggressive hedge fund activists, empowered ESG experts, and powerful proxy advisors are ramping up their demands on public company boards. These and other influential stakeholders are scrutinizing corporate boards to see if they have the right people to succeed—and that they are committed to effective refreshment, board succession, and board evaluation practices. For these reasons, Russell Reynolds is updating its prior advice to directors and boards on how to successful navigate these heightened expectations. Those found wanting are more likely than ever to face meaningful consequences, including losing for support incumbent directors in both contested and uncontested elections.
Part of the reason for this enhanced attention is simple: the work of boards has never been more difficult and important. From the unprecedented challenges of the COVID-19 pandemic, economic volatility, geopolitical instability, and board agendas bursting at the seams with topics new and old, boards and their members are being tested like never before. Many boards have risen to the occasion, providing steady and thoughtful leadership; others have struggled, failing to add (or eroding) value.
Against this backdrop, many boards and leadership teams have taken a step back to evaluate their composition and effectiveness, asking themselves tough questions:
- What skills, backgrounds, and experiences are absent?
- What skillsets are relevant for the company of yesterday but not tomorrow?
- Are our board, committees, and individual directors all effectively contributing?
- Are there any board leadership or committee roles we could not replace if an incumbent left?
- Will our board refreshment and effectiveness activities withstand stakeholder scrutiny?
To answer those challenging questions, enhance risk management, and support governance best practices, boards can start with a board composition analysis, a strategic planning process that consists of four primary activities led by the Nominating and Corporate Governance Committee (“the Committee”):
- Confirm Agreement on Company Strategy: Designing the right board for the future requires knowing where the Company is headed. The first step is to confirm agreement on the company’s strategy, including key strategic risks to the company. This is the foundation on which all successful board composition analyses rest.
- Align on the Skills and Experiences Required: The strategy is the foundation on which the committee develops a clear and agreed-upon set of definitions for the key backgrounds, skills, and experiences (including diversity) that will be needed at the board level. A successful process will be transparent and rigorous, incorporating both feedback from each director and an unbiased evaluation of existing skills and experiences against the agreed-upon definitions.
- Forecast Board Changes: Some board vacancies can be anticipated, such as those driven by mandatory board refreshment policies or the stated plans of directors. Boards should be aware of those expected changes so that they can plan ahead—recognizing, of course, that some departures will not be so predictable.
- Disclose More: Investors are seeking more information in an easily digestible format to enable them to understand how board composition links to the company’s strategy. Having completed the prior steps, board leaders and the legal team can determine should be disclosed to investors about the board’s approach to refreshment, board composition, and related board effectiveness activities.
As we have written about in recent years, we have seen four common errors that derail this important work:
- Putting Strategy and Purpose Second: We often see boards undertake these efforts without explicitly connecting them to the overall strategy or purpose of the company. Other times strategy is recognized as critical, but a failure to agree on what the strategy is makes it impossible to agree on the key qualifications needed in a new director.
- Not Looking at the Changing Landscape and Competitors: Boards often fail to benchmark themselves against their peer group, missing a key indicator of what competitors have determined is essential to success in the future. Failing to compare to peers can create challenges when engaging with investors, who often evaluate boards and corporate governance practices sector by sector.
- Neglecting Departures: Movement of directors is a natural occurrence—whether due to age or tenure limits, over boarding, or individual director desires and life changes. Failing to plan ahead for these changes can hamper the Committee’s work, leaving it with less time to effect a successful transition.
- Forgetting About Committees and Leadership Positions: Board composition changes have ripple effects in committee composition and in who occupies various board and committee leadership roles. All of these variables should be considered when identifying key traits for an open board position.
Once the board undertakes thoughtful composition analysis, it is important that it is an inclusive and transparent process involving every single director. This can’t simply be managed by the general counsel or another executive from afar.
Part of the reason that the process must be inclusive and transparent is that sometimes the process will identify redundancies, skills gaps, or other issues that cause a board to have a hard conversation with an existing director who may not have a role on tomorrow’s board. While the board has to own the process and the results, using a seasoned outside advisor can ensure there is the necessary objectivity and rigor in the process, and that any tough conversations are handled deftly.
The Benefits of Action
Rigorous refreshment activities create value in numerous ways:
- Sets the Board up for Longer-term Success: A well-run board succession effort prevents a transactional approach to director recruitment. Similarly, it enables thoughtful board rotation, including for committee chairs and the independent board leader, and therefore could be used to improve diversity efforts in board leadership roles.
- Provides the Board or the Committee Chair a Neutral, Data-based Tool for Assessing Individual Contributions to the Board: It’s difficult for any chair to sit down and address issues of personal contribution with a fellow director, but a board composition analysis creates tools and opportunity to have a more neutral, fact-based discussion about skills and qualifications. Likewise, it can provide a foundation for talking about director retirement, leadership changes,
and committee rotation—all things a healthy, well-performing board ought to address.
- Earns Credit from Outside Stakeholders: A rigorous board composition analysis is further evidence that a board is taking its responsibilities seriously, is thinking about the future direction of the Company, and is prepared to help steward the organization over the long term. The board, if it so chooses, can disclose the analysis to outside investors.
Thoughtful refreshment and succession planning are critical to an effective and high-performing board. This is essential for boards that hope to avoid costly and time-consuming scrutiny from shareholders and other key stakeholders—and who don’t want to risk leaving a door open for activists.