The 2019 U.S. Spencer Stuart Board Index (Index) reflects the board practices and trends of S&P 500 companies. According to the Index, boards are responding to investors’ increasing calls for greater diversity of “gender, age, race/ethnicity and professional backgrounds.” Spencer Stuart found that “boards are accelerating the addition of women and minority directors,” which in turn is driving notable changes in board composition. Spencer Stuart predicts that the biggest drivers of board refreshment will be replacing retiring directors and adding new skills to the board.
The Index covers public companies in the S&P 500 as of May 15, 2019 and the proxy statements released between May 30, 2018 and May 15, 2019. The Index also includes results from surveys administered by Spencer Stuart as well as other selected sources.
I. Selected Spencer Stuart Perspectives
- The number of new diverse directors continues to rise. 2019 had a record-breaking number of new diverse directors (defined as women and minority men): 59%, compared with half the incoming class in 2018.
- The profile of the new director class is shifting. CEO and board experience are less required; financial talent remains a priority; broader professional experience (e.g., academia, not-for-profits) and broader corporate leadership skills (e.g., division/subsidiary heads and SVPs) are represented; and age diversity is less a priority. Spencer Stuart attributes the profile change to the growing number of new diverse directors.
- Low board turnover continues. Boards are still reluctant to impose term limits. While mandatory retirement policies are more prevalent, mandatory retirement ages continue to inch up. Spencer Stuart predicts that low turnover is likely to continue.
- “Most formal overboarding policies were inconsistent with Vanguard and BlackRock” proxy voting guidelines.
- Independent chairs are more prevalent and on average their compensation rose.
II. Highlights by Category
1. Composition of new directors.
a. Independence. 432 new independent directors joined 492 boards, the most since 2004. Boards on average have roughly 9 independent directors and the percentage of S&P 500 board directors who are independent remains at 85%, consistent with the past several years.
b. Experience. Almost one-third of the independent directors are serving on their first outside corporate board. The percentage of new directors who are active or retired executives has decreased in the last decade from 43% to 35%. The percentage of new directors with global professional experience from working at an international location remained relatively unchanged from last year at 31%. 27% of new directors (compared with 18% in 2009) have financial backgrounds, including banking, finance, investment or accounting credentials.
c. Diversity. Women account for 46% of new independent directors, up from 17% in 2009 (a 171% 10-year change). More minority directors (defined as African-American/Black, Hispanic/Latino or Asian) are represented in the class of new independent directors, constituting 23%, compared with 12% in 2014 (a 92% 5-year change)). One out of six new directors are 50 years of age or younger.
d. Recruiting. Survey results reveal that 43% of nominating and governance committee members shared that their board had 1 or more underperforming directors. More than half of these respondents asked the underperforming directors to step down.
Companies that responded to the survey are increasingly focused on refreshment because of upcoming director retirements, and their desire to add new skills and increase board diversity. Gender diversity continues as a top recruiting priority. Other recruiting priorities, in descending order, are technology experience (34%), active CEO/COO (32%), financial experience (28%) and operational experience (27%).
2. Independent leadership. 34% of S&P 500 companies have independent chairs who meet either the NYSE or Nasdaq independence standard. This marks an 113% increase from a decade ago. For 17% of S&P 500 companies, chair roles are held by former executives or CEOs of their respective companies. Similar to last year, 47% of S&P 500 boards have combined CEOs and chairs. The number of companies splitting the chair and CEO roles has been increasing for over a decade, and is now at 53%, compared with 37% in 2009.
3. Tenure, term limits and retirement age. The average tenure for independent directors is 8.0 years, down from 8.4 years in 2014. 65% of boards explicitly state in their governance guidelines that there is no term limit. Only 27 companies have an explicit term limit for non-executive directors, with term limits ranging from 10 to 20 years. 74% of the 27 companies set the term limit at 15 years or more.
71% of S&P 500 companies report having a mandatory retirement age, while 12% specify that they do not. Some companies do not address the topic in their corporate governance guidelines. Retirement age limits continue to inch upward, with 46% of companies setting it at 75 or older, compared with 15% of companies in 2009 (a 207% change). The most common age limit is 75, set by 42% of S&P 500 boards. Upon departure, the average age of an independent director is 68.7 with a tenure of 12.3 years.
4. Number of boards (overboarding policies). On average, independent directors sit on 2.1 boards, which has remained consistent for over the last 5 years. 11% of independent directors sit on four public company boards, while 2% sit on more than 4. The number of S&P 500 CEOs who do not sit on any outside board continues to increase, currently at 59%, up from 55% in 2018 and 51% a decade ago. 37% of CEOs serve on 1 outside board. 41% of CEOs serve on 1 or more outside boards, the same as last year. 10 years ago 15% of CEOs served on 2 or more public company boards.
Spencer Stuart found that “[m]ost formal policies [of S&P 500 companies] regarding board service are inconsistent with the Vanguard and BlackRock guidelines.” Vanguard released its new overboarding policy in spring 2019, stating that the asset manager would vote against “named executive officers” serving on more than 1 outside board (for a total cap of 2 boards) and other directors serving on more than 4 public company boards (a total cap of 4 boards). BlackRock’s overboarding policy, which was adopted in 2018, states that the firm may vote against a CEO who serves on more than 2 boards (including the company where the person serves as chair) and against other directors (including “named executive officers” and “executive officers” who are not the CEO) that serve on more than 4 boards (a total cap of 4 boards).
Spencer Stuart determined that over 60% of 113 companies that have overboarding policies set the cap at 2 or more outside boards. 52% of the 317 boards that impose restrictions on all independent directors limit service to 4 total boards, while 5% allow more than 4 boards. 140 boards impose tighter restrictions on fully employed directors.
Nearly all the 114 companies that Spencer Stuart found had no limit on outside board service also do not require directors to provide notification before joining another board and/or encourage directors to “reasonably limit” outside board service.
23% of S&P 500 boards include a provision in their corporate governance guidelines limiting the CEOs outside service. Nearly all are limit CEOs to 1 or 2 outside boards.
It remains to be seen if these companies amend their corporate governance guidelines to be consistent with the Vanguard and BlackRock overboarding policies.
5. Board Evaluations. 42% of boards disclosed evaluating all three levels: the full board, committees and individual directors. 44% of companies reported that individual director evaluations were conducted.
6. Board size and meetings. Boards average 10.7 members, which has roughly remained the same over the last 10 years. The largest board has 18 members and the smallest board has 5 members. 31% of companies (85 companies) increased the number of female directors by increasing the board size.
Boards met an average of 7.9 times, compared with 9 times a decade ago. Audit committees met 8 times a year on average, while the compensation committee met 6 times on average and the nominating/governance committee met close to 5 times on average.
7. Board compensation. Excluding the chair’s premium compensation, the average director compensation increased to $303,269 from $295,406 in 2018. Stock grants and cash account for 57% and 38%, respectively, for director compensation. Generally, companies have been tending to provide more stock grants and fewer stock options. The additional fee for an independent chair averages $172,127, received by 98% of such chairs. By contrast, a little over three-quarters of lead and presiding directors receive additional fees, with an average of $39,992. Meeting fees continue to be less common, as only 12% of boards paid them, compared with 27% five years ago.
8. Diverse directors. 92% of S&P 500 boards have 2 or more female directors and 8% have only 1 female director (a decline from 13% in 2018 and 36% in 2009). 59% of new independent directors are “diverse,” which Spencer Stuart defines as either women or minority men. Women constitute 26% of all directors, which is a nominal increase from last year, but represents a significant change from a decade ago when they constituted 16%. Nearly 75% of first-time directors are women or minorities.
9. Committees. On average, boards have just over four standing committees, with 71% having more than the committees mandated by the NYSE (compensation, audit and nominating/governance). Thereafter, the most common committees are the executive committee and finance committees. Other types of committees cover topics in descending order by prevalence include risk; public policy/social and corporate responsibility; science and technology; environment, health and safety; legal and compliance; and investment and pension. Committee chairs are most likely to be retired CEOs, active and retired executives, and investors/investment managers.