With its commitment to advancing boardroom excellence, the National Association of Corporate Directors kicked off the first of four national events focused on diversity, gathering more than 60 directors and potential directors in San Francisco for a discussion about boardroom diversity—what it means, what it looks like and how to achieve it. PwC and Spencer Stuart were co-hosts for the event.
“For some, diversity means having three or more women on the board. For others it means having a broad mix of skills sets that truly reflect the knowledge needed to address 3.0 and 21st-century challenges. For others it’s both, and for still others it means something completely different,” said Erin Essenmacher, NACD education director, in her opening remarks. These meetings, she added, won’t provide easy or swift answers as to how or why to increase boardroom diversity, but they are meant to spur a conversation that moves the director community closer to a solution.
In her keynote address, Anne Sheehan, director of corporate governance for the California State Teachers’ Retirement System, said CalSTRS mainly looks at diversity as a shareholder value issue, noting that the majority of teachers tend to be women. Having more diverse thinking in the boardroom counteracts the culture of “groupthink,” and more robust discussions ultimately benefit shareholders.
The boardroom is “one of the last bastions where women need to make a difference—and not just women but also minorities and others—and break into the old white-boy network,” Sheehan said. One of the ways in which CalSTRS is able to make an impact on that boardroom network is by filing shareholder resolutions at companies that do not exhibit diversity in their board composition, and asking them to amend the charters or bylaws of their nominating committees to commit to providing more diverse candidates as they are doing their search.
“We don’t ask for quotas, we don’t ask for them to set a goal, but what we say is, as you’re doing the search, you need to pay attention to this and send out the signal that you are looking for individuals of diverse backgrounds as you are filling those [seats],” she explained.
CalSTRS has filed diversity related resolutions for four years. Earlier this year, Sheehan noted, CalSTRS wrote a letter to Facebook objecting to the lack of diversity on its board, which until it appointed COO Sheryl Sandberg as a director in late
June, was comprised of seven men.
“Boards need to look beyond the C-suite to fill seats. “There are many individuals who’ve got the skills requisite to be in the boardroom,” Sheehan said. “They just need to be given the chance to serve on their first board and understand how it’s done.”
Catherine L. Bromilow, a partner at PwC’s Center for Board Governance, led a discussion with two leading directors on how the role of the boardroom leader has changed in the past decade and the unique challenges boards face today.
Gary L. Bloom, a director at MarkLogic and BMC Software, said that given his background in technology, his lens on diversity centers on skills. Age diversity is also a concern, he said, as companies seek board members who are tech-literate and who serve a population that is more technologically savvy than the directors may be.
The volume and breadth of information directors need to ingest, said Deborah Hicks Midanek, director of HCC Insurance Holdings, Signature Group Holdings and Biltmore Cos., is “extremely high, but the format of the board meeting and the intervals at which board meetings are held really haven’t changed commensurately with the amount of information and the need to remain constantly current.” Midanek pointed to Facebook as an example of real-time communication. “How can you be a director of Facebook if you’re old and you’re only male and you’re only meeting once a quarter?” she asked.
Another challenge is the ambiguity of the role of the director. “We are the guardians of the interests of shareholders, but in order to be effective at being the guardian, we need to be credible, predictable and trusted by the CEO and the board members in the room,” Midanek explained. The skill sets needed in the boardrooms of technology companies in particular, which often grow quickly, change just as rapidly, Bloom said.
Switching gears, directors often say they wish they had more time to spend on strategy than on compliance issues, Bromilow said. In response, Bloom said that much of this is being addressed through committee work and that it’s imperative to have a high degree of trust in your fellow board members.
Midanek honed in on what it is board members mean when they say they want to focus on strategy. “Sometimes what that means is they don’t have enough time to talk to each other informally about what the company is trying to do. Sometimes that means that because of the compression of having to get so much information into such a small period of time, everything is presented to the board—and the committees— in PowerPoint, where there is a [small amount] of white space left over to ask questions and to talk,” she said. “In fact, the better the PowerPoint is, the less the encouragement is to even ask a question. So sometimes ‘strategy focus’ means ‘Hey, stop controlling us.’”
Bromilow asked the panelists what skill sets boards have difficulty locating, citing a PwC survey that ranked technology and international expertise in the top two positions. Midanek recounted an experience in which a board thought those exact skill sets indeed were what was needed, but when it came down to the final selection, the board eliminated the technology candidates because they were “very different thinkers.” She recalled the comment of a fellow board member that “the way the trends are going now in governance, people are understanding they don’t really need the technology expertise on the board—that’s something you hire.”
Board candidates with international experience elicited an equally stunted response: “We have plenty of people… who have worked overseas and have had responsibility for overseas activities so we really don’t need people from far off.”
Many directors also think it’s important that boards have diversity of thought. “Boards should be comprised of wise and varied individuals who can function as a well-integrated team, can play devil’s advocate in a positive voice, and who constantly reflect on the company’s position to assure there are 360 degrees of probing,” Midanek said. She went on to note that this is one of the most difficult things to talk about, and one of the most important, raising the question: How can a director be heard in the boardroom without being perceived as contributing to negative boardroom dynamics?
Bromilow cautioned that there is a danger in having people continuously fall into prescribed roles—having one director always take a negative approach and another always being positive, for example. “How do you develop the dynamics so that alternate points of view or the pushback are at different times coming from different directors around the table?” she asked.
Building an Effective Board
What are the traits of the ideal board member? Nayla Rizk, partner and member of Spencer Stuart’s technology, communications and media and board services practices, suggested that one of the baselines boards often look for is broad-based business experience. Industry experience, being financially savvy and having prior board experience are also desirable traits, but Rizk said intangible qualities play a pivotal role in selection.
“Some of the most important qualities boards are looking for aren’t on someone’s résumé,” she said. “It’s your ability to listen… to speak out and to give your perspective in a respectful way. You have to be able to get along, but getting along doesn’t mean not putting your perspective through. It’s a kind of courage that’s important.”
Having prior board experience is often still a key component of landing a new directorship. Rizk suggested starting on the board of a small public company.
Mary Ann Cloyd, leader of PwC’s Center for Board Governance, who moderated this particular discussion, suggested that board members must be willing to respectfully challenge their colleagues and the C-suite—and that that particular task may be more difficult for someone who is in their 30s.
An important contributor to managing the risk profile of a company is the nominating committee, said Denise K. Fletcher, a director at Unisys and Mazars Group. “That is the committee where the decision is made about who to interview, who to nominate and who will contribute to evaluating risk,” she said. She noted that it is essential to have board members who are focused on understanding risk and who have “risk receptors.”
“Different people are trained to have different antennae,” Fletcher said. “I have to confess that I have never found a dramatic difference between how men and women approach solving problems. I think human beings are differently wired, and they arrive at a solution in different ways.”
Fletcher sits on the board of a French company that has actively sought American directors. “French companies say, ‘We sell to the U.S., we sell to China, we want to have people from those countries on our boards.’” Rizk noted that that trend is starting to take hold in other countries too. “We are getting requests for more international members to join boards, particularly in the BRIC countries [Brazil, Russia, India and China], where there is a lot of growth,” Rizk said.
Not only are there opportunities for diversity in international experience, but also in technological skills sets, which Rizk refers to as the “digital director.” She suggested that many older directors aren’t steeped in how the digital world is changing their business, and that directors with an in-depth understanding of the trends and technologies shaping the digital landscape need to be considered. These candidates are often younger and more likely to have nontraditional backgrounds.
While youth can provide some diversity, Fletcher cautioned that there may be better qualifications to consider. “I think it’s critical, as we bring on new board members, not to bring on board members whose experience is so narrow that they will not be able to stretch,” she said. “I think it’s wonderful to have a 25-year-old who knows social media, but the most important question in my mind is, ‘Does that person have the ability to be able to deal with the company’s issues that are sometimes survival issues?’”
Sara Martinez Tucker, a director at Xerox and American Electric Power, cited advice she received early on from Leslie Luttgens, one of the first women in the San Francisco Bay area to serve on a public company board. Luttgens told Tucker that one of the most important attributes for a director is the ability to “say something and be heard.” She also told Tucker that once you are on a board, you should never feel like you have to audition for it; instead, assume you are part of the team.
An attendee noted that data show the average age of board members is increasing while the size of boards is decreasing. Asked about the effect of these trends, Fletcher said that boards often have the ability under their bylaws to increase the number of board seats, but managing size is important.
Diversity in the Boardroom: A Recruiter’s Perspective
In the last session of the day, Judy Havas, partner and member of Spencer Stuart’s technology, communications and media practice, shared some of the firm’s experiences with board diversity recruitment. She cited research showing that while 50 percent of boards say they want to bring in minority candidates, in fact only 14 percent of new directors were minorities, and while 49 percent of companies say they want more women directors, only 21 percent of new directors were women.
“There is so much evidence that points to the fact that diversity on boards makes for successful companies,” Havas said, adding that numerous studies have shown that companies achieve better financial results along a number of different dimensions. She highlighted one study from the University of Leeds that reported that companies with at least one woman on their board had a 20 percent lower or lesser chance of folding. Other studies have revealed that mixed-gender boards are typically more attentive to the audit and risk issues facing the company. Among the trends Spencer Stuart’s annual board index has identified is declining board turnover, which has resulted in a decrease in overall board recruiting and affects the number of seats available for recruiting diversity candidates.
Boards today are smaller and older than in years past. Twenty percent of boards report having a mandatory retirement age of 75 or older, whereas only 3 percent of companies in 2001 had this same limit. The average age of independent directors has risen to about 62.4, while in 37 percent of S&P 500 companies the average age of directors is 64 or older.
Havas cited two possible explanations for the decline in board turnover: that the “bubble” created by Sarbanes-Oxley increased the need for directors with specific skill sets and qualifications, but as those needs were met, boards emerged as more effective and efficient leadership bodies. She also noted a developing trend in which more members are turning board service into a retirement career, serving on three to four boards.
While the number of women or ethnically diverse board members has remained somewhat steady over the past five years, there is some momentum in efforts to increase diversity on boards, Havas said. The number of women and minorities on boards is growing: in 2011, 58 percent of S&P 500 companies had two or more women serving on their boards, up from 51 percent in 2006, and 18 percent had three or more women, up from 14 percent in 2006.
Although this is evidence of some progress, many diversity advocates believe there is still work to be done to include more women and minorities on boards. Havas discussed a number of factors for the limited progress, including the fact that boards have traditionally focused on previous board experience and that CEO service is the preferred criterion for new directors. Among the reactions and efforts to deal with the low penetration of diverse candidates among public boards, Havas pointed to the activities of a number of European Union countries; a controversial debate has been going on in recent years regarding a number of countries that are exploring or imposing mandates to ensure there are more women on company boards. She added that Spencer Stuart has taken a proactive approach to serve boards in their quest to add diverse candidates.
For example, Havas said, when Spencer Stuart’s European consultants were faced a number of years ago with mandate pronouncements to increase gender diversity on boards, the firm’s co-leader of the North American Board and CEO Practice, Julie Hembrock Daum, mobilized its U.S. consultant staff to assist their European colleagues by offering up names of qualified women in the United States who would bring board service qualifications as well as international and language capabilities and have interest in serving on a European company board. This effort was important to help address a business need, while it also opened up opportunities for qualified U.S.- based candidates.
Spencer Stuart also has made efforts to track promising “board-ready” individuals who may not have prior public company board experience but who are prime candidates to meet some specific requirements, such as digital and social media awareness, international mind-set and customer knowledge. In Europe, the firm is experimenting with an evaluation tool called Board Intrinsics, which quantifies an individual’s aptitude beyond the traditional criteria. The firm’s board practice consultants routinely communicate with one another about these promising individuals in order to have a pipeline of talent available to showcase as the needs arise.
Despite Spencer Stuart’s various consultants’ efforts to raise the profile of diverse candidates, ultimately it is an ongoing effort that requires continued attention and monitoring. “We make sure that every best effort is made to present ‘long lists’ of candidates with a diverse slate. However, the board is responsible for making the final decision on whom to elect,” Havas explained. “While the firm presents an array of choices, ultimately we find that the selection is often for the stereotypical candidate.”