©Drazen Zigic/iStock/Getty Images Plus
As the business world continues to change, the role of the corporate board is shifting along with it. Boards are devoting time to increasingly important aspects of company strategy like employee diversity and inclusion, talent management, and other environmental, social, and governance (ESG) matters. They are examining ways to improve board culture and make their boards more effective. And they face increasing pressure to address the lack of diversity in the boardroom.
Many corporate directors know that not all of their peers are well equipped to meet these emerging challenges. Year after year, PwC’s Annual Corporate Director Survey finds that a significant share of directors think one or more members of their board should be replaced. In 2021, almost half (47%) felt this way. As eye-catching as that figure may be, what is even more surprising is the number of executives who agree. According to our recent survey of the C-suite, 89% say that at least one director on their board needs replacing.
Even though executives and directors believe that greater board refreshment is needed, the pace of change is slow. Almost half of Russell 3000 companies and 37% of those in the S&P 500 didn’t make a single change to their boards during the 2021 director election season, according to an analysis by The Conference Board. Part of the reason for the disconnect between desire for change and real action may be because these honest conversations aren’t easy to have. It’s rare for corporate directors to receive candid feedback from their company’s management teams.
The good news is that boards and executive teams looking to improve board composition already have the tools they need at their disposal. Here are a few suggestions for how boards and executive teams can work together to make sure that sitting and new directors are the right fit for their company's future.
Establish a rigorous board assessment process
Overall, executives believe that directors understand their company quite well, according to our survey. Many say their boards have a firm grasp of areas like strategy and key risks. Yet many executives see directors’ preparation and time spent in their role as insufficient. Fewer than one in four executives (23%) said their board is fully prepared for meetings, and only 27% said directors spend enough time on their duties. Against this backdrop, it’s little wonder that just 29% of C-suite respondents rated their board’s overall effectiveness as excellent or good.
Rigorous board assessments can help identify the problem areas that give rise to these sentiments. In many ways, directors are giving their board’s assessment process high marks, but they still face limitations. On the one hand, 88% of directors who responded to our Annual Corporate Directors Survey say their board effectively integrates board assessments into their annual review process. Yet, more than half (52%) say it is too much of a “check the box” exercise. This disconnect seems to stem largely from an inability to provide candid feedback about underperforming and/or unfit directors, as 67% of directors say it is difficult to be frank in the process.
To be effective, it’s imperative that a board’s assessment process is honest, thorough, and leads to change. That change could mean embracing continuous learning, staying connected with management on the rapidly evolving priorities for the business, or simply staying prepared and devoting enough time to the role. Take full advantage of annual board and committee self-assessments, along with adopting a robust process for individual director self-assessments. These assessments can help members reflect on the impact of the board as a whole and empower directors to think about what they have personally contributed to drive change.
Success starts with succession planning
The board should evolve along with the company’s strategy. Proactive succession planning can keep the board agile, and introduce new, diverse voices into the boardroom. The challenge is that not only are some directors serving on boards too long, but the search for a new director often starts too late, after a board member decides not to stand for re-election. If the board lacks a pipeline of high potential and diverse candidates, this may be a perfect storm that compromises board diversity efforts all together.
Boards should try to look over the horizon, past their companies’ next annual meeting and to the boardroom vacancies that may occur in the coming years. Not only does this give directors the tools they need to start thinking about sponsoring future board candidates, it also gives them an important role in forming the future of the board. This proactive approach allows sitting directors to hold themselves accountable, and for veteran members to have a role in mentoring incoming candidates so they are set up for success.
Succession planning may be what executives are looking for. Currently over half (60%) of executives view long-serving directors’ unwillingness to retire as preventing the board from bringing on directors with different skills, experiences, and identities. This was the most frequently cited impediment to increased boardroom diversity throughout the survey. Racial/ethnic diversity was also listed as the single most important attribute being prioritized by directors in the board’s next candidate search (25%)—ranking higher than industry expertise (20%) and operational expertise (14%)—demonstrating that finding ways to bring in more diverse voices into the boardroom will continue to be a priority.
Do the work now to build a pipeline of qualified, diverse board candidates. Having a long term plan will help make it easier to find prospective directors with the skills and perspectives your board may be missing.
Don’t be afraid to have difficult conversations
One of the biggest impediments to board refreshment is that collegiality is highly prized in boardrooms and can often get in the way of having candid conversations about performance. Frank conversations about performance can be extremely uncomfortable, especially when a member has served on the board for a long time or is highly respected in the business community. However, they are necessary and can pay dividends in the long run.
Board and nominating and governance committee chairs should make a plan to address individual director performance issues if one doesn’t already exist. Make sure expectations are clear and know what the next steps will be if they continue to go unmet. This should be implemented regardless of tenure. While experience can be an asset in the boardroom, more than half (53%) of executives say their board includes members whose long tenure has led to diminished performance.
Keep in mind that being “fit for purpose” comes down to how dialed-in directors are with the company’s strategy and broader business impact and how committed they are to their role. Although changes in board composition take time, both boards and executives can take steps today to make sure they’re better positioned to take the strategic vision for their company to the next level.
Maria Moats is PwC’s Governance Insights Center Leader.