Good Reads in Corporate Governance Around Board Composition

TheCorporateBoardThe March/April edition of The Corporate Board contains several excellent articles. I e-mailed a couple of quotes from their ‘Spoken & Written’ section to a CEO who needs a real board, instead of a rubber stamp.

Can Your Board Deliver Technology Governance? by Elizabeth Valentine gets to the heart of an important issue regarding enterprise business technology governance (EBTG).

Three separate surveys revealed more than 90 percent of senior executives and directors identify technology as competitively important or very important. However only one percent of Fortune 500 boards and less than 16 percent of boards globally identifying technology-relevant skills amongst their directors…

Optimized EBTG means the board and executives can measure the effectiveness of data and information usage in decision-making within the board and throughout the company. 

That led nicely into 10 Top Boardroom Concerns of 2014 by N. Kathleen Friday and Tracy A. Crum who cited over half of directors saying effective use of IT is either critical or very important to the creation of long-term shareholder value. Plenty of fodder for thought and I won’t give away their ten points. However, #7 Board Composition is key, not only for its own reasons but also for addressing EBTG.

According to the 2013 Spencer Stuart Board Index, the boards of S&P 500 companies elected 339 new independent board members this past proxy season, down 11 percent from five years ago and 14 percent from 10 years ago. Last year they elected just 291 new directors, the smallest number in more than a decade. At the same time, the average age of directors continues to climb. The average S&P 500 director is now 62.9 years old, compared to 60.3 ten years ago…

Shareholder submitted 27 proposals to companies seeking to ensure that women and minorities are considered for board positions, up from only eight such proposals in 2013. Studies show a positive correlation between women in the boardroom and company financial performance, particularly during times of economic stress.

Boardroom-InsiderAre we seeing a connection yet? From the March edition of Ralph Ward’s Boardroom Insider:

“It’s hard to recognize, but directors become complacent, and don’t have the same sense of urgency anymore,” notes Richard Leblanc, associate professor at York University in Canada and a noted board consultant…

A recent study found that most boards average one member rotating off every 2 years. This is a glacial pace, unless you have the perfect board makeup. Most boards aren’t perfect, however, and this slow change is prompted by inertia and vague board standards. Talk with the chair about a board evaluation for a searching look at your membership, processes, effectiveness and values (there are plenty of models out there). “Directors who have been around for years become friends, but they also drink their own Kool-Aid, and think they’re irreplaceable,” notes Leblanc.

cgirBoard assessments are certainly the best way to refresh boards but if they don’t work you can always institute proxy access and let shareowners do it. And from the March edition of Corporate Governance: An International Review comes Governance, Ownership Structure, and Performance of Entrepreneurial IPOs in AIM Companies by Hisham Farag,  Chris Mallin and Kean Ow-Yong.

Our findings suggest a high level of VC ownership and its reputation leads to better corporate governance in our sample of entrepreneurial Initial Public Offering (IPO) companies. We also find a positive and significant relationship between corporate governance characteristics and financial performance, which suggests that outside shareholders such as VCs bring managerial know-how and hence help improve IPO companies’ performance.

Refresh your board with some tech-savvy women who have a real stake in your company; that’s what I want as a shareowner. Here’s how EY’s 2014 Proxy Season Preview put it: 

Closer attention to board composition and renewal will be a key theme of the 2014 proxy season and beyond. Lack of turnover on boards is raising concern among many investors that board independence may be compromised, groupthink may be stifling boardroom debate, and fresh perspectives may be lacking from strategic discussions. The low rate of board turnover is also seen as a major impediment to progress on board gender diversity. More than half of investors we spoke with indicate they will pay more attention to board renewal in 2014 – the greatest focus area for the investors as a group. Almost all of these investors plan to raise the topic in their conversations with companies. A smaller number of investors say they may cast proxy votes against nominating committee members (or entire boards) where boards lack gender diversity.

Investors want to know that the right people — those with qualifications aligned with the company’s strategic goals, stakeholders and risk oversight needs — are in the boardroom. They are looking more carefully at board composition, director qualifications, tenure and diversity, along with director succession planning and board refreshment practices.

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