Are Your Board’s Skills in Question?

Corporate directors and investors can, at times, have a contentious relationship on seemingly nuanced corporate governance issues. I have the opportunity to attend many lectures, symposiums and conferences where improving the dialogue between shareholders and directors is the key objective. One recent event, Shareholder–Director Dialogue on Boardroom Practices, sponsored by TIAA and BlackRock, prompted me to reconsider board composition specifically—from an investor’s perspective.

This has long been an area where investors feel they need more to truly assess the quality of board candidates. Though some companies have increased the number of face-to-face interactions, or information and disclosures about individuals, there is still no systematic way for institutional investors to accurately assess a board’s effectiveness across all of their portfolio holdings.

Director Perspective

According to PwC’s 2015 Annual Corporate Directors Survey, directors consistently consider core attributes, including financial expertise, industry expertise, operational expertise, and risk management expertise, the most important skills for directors. In my observation, most boards do go through a rigorous nomination process to ensure that directors possess these skills, and spend quite a bit of money on continuous education initiatives.

Despite thorough processes and training, however, directors are still less satisfied with peer performance, and note a lack of expertise as one of the primary reasons. Close to one-third of directors surveyed believe that one (or more) of their current board members should be replaced—a 31% increase from three years ago. Being unprepared for meetings and diminishing performance due to aging are also drivers of peer dissatisfaction.

If directors show wavering confidence in their peers’ contributions in the boardroom, why wouldn’t investors have similar concerns?

Investor Perspective

Institutional investors could not feasibly interview and evaluate each director who represents their interests, especially with hundreds or thousands of holdings in their portfolio. However, the annual shareholder process in the Unites States requires investors to make a judgement, along with a vote, based on the information available about individual directors. Despite increasing levels of direct shareholder and director engagement in recent years, this is no easy task.

More than half of the companies surveyed by PwC admitted to discussing and preparing directors for their shareholder engagements and outlining permissible topics for these discussions. While planning for these pertinent strategic conversations is critical, boards are far from prepared when it comes to justifying their own skills and experience.

In fact, it is very rare for a company to disclose their board skills matrix—and when they do disclose it, it is often in response to an activist slate. While it is difficult to qualify the effectiveness of a board based on individual directors’ skills, without this information, investors will draw their own conclusions about the board composition.

Our mission is to improve the process by which boards, corporate secretaries and investors gather, evaluate and share this type of pertinent, independent information.