What Changing Director Demographics Tell Us about Board Work
The forces that are shaping business are changing as much as they are intensifying, and with that comes evolving needs for board oversight. Given the extreme turbulence of 2020, NACD partnered with Main Data Group to empirically describe the size, shape, and structure of Russell 3000 boards. MyLogIQ also provided additional data to supplement our work.
The research, which is collected in the forthcoming NACD publication Inside the Public-Company Boardroom, looks at the dimensions of market capitalization and three-plus year market trends to assess how boards are changing. Board turnover in particular illuminates shifts in board demographics, in terms of gender diversity, skill sets, and overall size.
Boards and Committees Are Getting Larger
According to Main Data Group, the average board size has grown steadily between 2017 and 2020. In 2017, the average board size consisted of 9.88 members, and today that figure stands at 10.13; in the Russell 3000, this means the addition of more than 1,000 board seats. Small- and mid-cap companies have largely driven this trend, whereas large- and mega-cap companies have seen, on average, a slight decrease in board size: 12.29 members down to 12.12.
Given this overall trend, it’s to be expected that the average size of committees also increases. But this isn’t the case for all of the standard three board committees. While the average audit committee has held steady at 3.9 directors since 2017, the average compensation committee grew from 3.7 members to 3.9, an increase in the overall Russell 3000 by almost 500 committee members. In that same period, the average nominating and governance committee grew from 3.6 members to 3.9, an increase of over 400 committee members across the Russell 3000.
The nominating and governance and compensation committees going through a growth spurt is not particularly surprising. First, financial expertise is generally viewed as a requirement for serving on the audit committee, and for many new directors, this may not be an ideal committee assignment. Among directors new to board service in 2020, there is a lower level of financial skill than among their predecessors, meaning there could be a steeper learning curve for these directors. Data from MyLogIQ show that only 41 percent of new directors have finance skills, compared to 61 percent of outgoing directors. Another possible conclusion is that audit committees are traditionally where new board responsibilities are sent to reside, so the growth of other committees could be evidence that such new tasks are becoming more evenly distributed and that a wider array of perspectives are needed.
Incremental Progress Toward Gender Parity
The gender balance on corporate boards is slowly evening out. According to Main Data Group, as of the Russell 3000 rebalancing in June 2020, 61 percent of incoming directors were male, while 39 percent were female. Contrasting this with the gender breakdown of outgoing directors—86 percent male and 14 percent female—this has made the overall Russell 3000 gender breakdown 79 percent male and 21 percent female. While this shift won’t get boards to gender parity, it does work to increase the proportion of women on boards.
On a market-weighted basis, our 2020 data confirm the prevailing evidence that larger companies have more women on boards. The data show that 25 percent of large-cap and 30 percent of mega-cap board seats are held by women, whereas 19 percent and 22 percent of small- and mid-cap board seats, respectively, are held by women. This could be for a number of reasons, one of which is that larger companies are held under a larger microscope by shareholders and outside organizations, and therefore face pressure to strive for gender balance in a way that smaller companies may not.
Shifting Skill Sets
According to the data provided by MyLogIQ—360° Public Company Intelligence, 87 percent of overall Russell 3000 directors, as of August 7, 2020, have leadership skills, 60 percent have management and strategic vision skills, 33 percent have technology skills, and 35 percent have investor experience. On the other hand, of directors appointed to their first public company boards in 2020, 93 percent have leadership skills, 41 percent have management and strategic vision skills, 29 percent have technology skills, and 21 percent have investor experience. It should be noted that director skills are determined by MyLogIQ and are pulled from director biographies.
Despite the increasingly complex ways in which technology is reshaping business—and will continue to do so—there is not a significant difference in the average number of incoming directors with technology skills compared to retiring directors. Oddly, incoming first-time public company directors on average have less technology experience, challenging the idea that boards’ desire to have this specialized area of knowledge represented at the table is a driver of board refreshment.
For a broader look at the role of the nominating and governance committee in today’s world, register today for Virtual NACD Summit 2020’s Nominating and Governance Committee Forum, which will take place on November 9 from 11 AM to 2 PM ET.
Andrew Lepczyk is a research analyst at NACD.