Board diversity improves in US firms, reveals new survey

Board diversity in the S&P 500 is continuing to improve as 59% of new independent directors are women or minority men, according to Spencer Stuart’s latest US Board Index. 

Additionally, all S&P 500 boards have at least one woman for the first time, according to the executive search and leadership firm’s latest study. S&P 500 boards appointed 413 new independent directors in the 2020 proxy year. Of that number, 59% were women and minority men, tying the 2019 record for most diverse new independent directors. 

The 2020 US Spencer Stuart Board Index found that companies are listening to calls from shareholders and other stakeholders for increased diversity in their boardrooms, from gender to age, race/ethnicity and professional background. While a majority of new directors are women and minority men, changes to overall board composition is happening slowly due to persistent low boardroom turnover. New directors represent only 8% of all S&P 500 directors, which is consistent with previous years. 

BOARD DIVERSITY UNDER SCRUTINY

“Board composition is being scrutinised as never before, as investors and other stakeholders press boards to ensure director qualifications align with company strategy and increase the diversity of perspectives around the board table,” stated Julie Hembrock Daum, who leads Spencer Stuart’s North American Board Practice. “Boards that embrace regular change are in the best position to have the skills and expertise for the company’s forward-looking challenges, opportunities and strategies.”

Female representation hits two new milestones, according to the study. According to this year’s Index, all boards have at least one woman for the first time since Spencer Stuart began tracking this data in 1998. Among the incoming class of S&P 500 directors, 47% are women – also the highest since Spencer Stuart began tracking. Overall, representation of women on boards is increasing, accounting for 28% of all S&P 500 directors in 2020, up from 26% last year.  

FIRMS COMMITTED TO INCREASE BOARD DIVERSITY

That said, diversity among boards plateaued slightly this year, but companies remain committed to hiring diverse directors, revealed the study. Around 22% of new S&P 500 directors are minorities (defined as Black/African American, Hispanic/Latinx or Asian), down from 23% last year. Minority women represent 10% of the incoming class, consistent with last year, and minority men represent 12% of the new directors – a slight decrease from last year’s 13%. Of the top S&P 200 companies, minorities represent 20% of all directors, up from 19% last year. Despite the small decrease in minority representation, one-quarter (24%) of S&P 500 companies report having a commitment to recruiting from a diverse slate of candidates when considering new directors. 

Boards are also seeing more and more non-CEO members. The lion’s share (64%) of the incoming class of new board members comes from outside the ranks of CEO, chair/vice chair, president, and COO. The most common profiles are CFOs and other financial executives (27% of new directors) or division/subsidiary heads or top executives of functional units (23% of new directors). 

Women and minority men tend to have different backgrounds than the traditional director profile. Only 17% of the women and minority men joining S&P 500 boards are current or former CEOs, compared to 46% of other directors. Just 5% of the non-minority men of the incoming class are current or former line or functional leaders, compared to 23% of the women and minority directors. Just under one-third (32%) of new women or minority men directors are first-timers, versus 18% of non-minority directors. 

BOARD COMPENSATION & TURNOVER RATES

Board compensation increased also increased in 2020, confirmed the executive search firm. One reason that retention remains high might be compensation, which is on the rise. The average total pay for non-employee directors of S&P 500 companies (excluding independent chair compensation) is around $308,000. The four sectors with the highest average director compensation are healthcare, technology, communications services and energy. 

So, low board turnover rates are likely to persist, according to Spencer Stuart. Mandatory retirement policies are in place at 70% of S&P 500 boards, and these policies impact turnover. However, a small percentage of sitting independent directors are approaching retirement age. Only 16% of the independent directors on boards with age caps are within three years of mandatory retirement. With independent directors averaging 63 years of age, most S&P 500 directors have years of potential service before reaching mandatory retirement. 

More than three-quarters (77%) of the 425 independent directors who left S&P 500 boards in the past year served on boards with mandatory retirement ages. More than half – 54% – retired at 70 or older, and 37% served on the board for 15 or more years. 

MAKING MEANINGFUL PROGRESS

“Looking ahead to next year, it will be difficult for boards to make meaningful progress in improving diversity unless they embrace more frequent turnover. It should be noted that year over year, we find that companies with new, independent directors and more significant diversity in the boardroom benefit from a business performance standpoint, as well,” explained Daum. For more information about the 2020 US Spencer Stuart Board Index, click here.

Globally, however, board diversity progress is ‘slow and insufficient’. Click here to read more.