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PwC recently released results from its Annual Corporate Directors Survey, a survey of more than 800 U.S. board directors. This year, almost half of directors (46 percent) said they believe one or more of their fellow board members should be replaced.
FEI Daily spoke with Assurance Partner and Leader, PwC's Governance Insights Center Paula Loop on the results of the survey and what they mean for today’s decision-makers.
FEI Daily: Are more tenured directors more likely than “fresher” directors to push for other members of the board to be replaced?
Paula Loop: We've been asking a question along these lines for the last five years or so and the responses have always been in the 30 percent range. Frankly, I was very surprised that it jumped up to 46 percent for this year.
In the past, we've seen more of an uptick on the less tenured directors commenting that somebody on their board needs to go. We're still hearing that new board members, in the first couple of years, are somewhat critical of some of the other board members in the room.
This last year, however, we actually saw a downtick on that, and an uptick for the more tenured directors. We're seeing that some of the more tenured, more experienced board members are getting a little bit more critical, while we don't know exactly who they're critical of. It could be that they are more critical of some of the new folks that are joining boards. There's more diversity in those individuals. They're no longer the typical retired CEO-type background. In order to find certain skills, you're looking in different places, right? You might be finding the divisional CFO, or the divisional CEO. You might find somebody that has very deep cyber or technology experience, but they don't look like the board member necessarily of 10 years ago.
We ask the question, "Is it because the individuals are advanced age? Are they overstepping their boundaries? Or they don't understand the oversight role?" We try to get a myriad of answers, none of which really stand out more than another. The one thing that does stand out a lot is that leadership of the board definitely plays a critical role in board performance.
FEI Daily: The survey showed that one-fifth of directors say their board leadership is not very or not at all effective at shareholder communications – which may be contributing to disconnects between boards and shareholders. Can you explain how that disconnect affects a company and its reputation?
Loop: Diversity is a very hot topic with the large institutional investors. As you can see in our results, we saw progress from the board, talking about the value of diversity to the company's performance, but they're still not all the way there.
The other one that we saw, that we asked about was the focus on thinking about environmental issues. Again, a significant focus of institutional investors, and one that we didn't see the same unanimous focus from the directors that were surveyed.
FEI Daily: A large percentage (40 percent) of respondents thought that some really important issues – like climate change and income inequality shouldn’t affect the overall strategy. Do you think this sentiment is changing?
Loop: I do. I think we are on a bit of a journey related to some of these topics. What I think we're seeing here is probably a little bit of a narrowness of some directors saying, "Look, that's not part of our strategy conversation today. Our company, whatever the product is that our company makes, or whatever we're focused on, we don't think will be impacted by those."
I think where institutional investors are trying to go is to really broaden the thinking and think about the potential impact and risk to a company just based on these issues, because these societal issues are becoming more and more important, not only in the U.S. but certainly around the world.
FEI Daily: Another point that I thought was interesting is the fact that 70 percent of the directors said that they felt that the CEOs of the U.S. were overpaid. But the board sets the pay for the CEO. What did you think of that?
Loop: I think that the operative point there is that when we asked the question, we said, "To what extent do you agree with the following regarding executive pay in the U.S.?" What these directors told us was that 70 percent of them feel that executives in the U.S. are either very much or somewhat overpaid.
I think what that's telling us is they may not necessarily be thinking about their own company, I'm assuming they don't since they're setting that conversation on their own boards. Maybe they feel that way about all the other companies. 70 percent is a pretty big number to hear from the group of individuals that actually does the pay setting.