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Demands on corporate boards are stronger than ever

IN popular Imagine that a corporate board seat might seem like the easiest job in the business world. Board members seem to be paid—often handsomely—to attend several meetings a year and nod knowingly when the CEO preaches the strategy.They seldom make the news, except for the occasional tut-tsk CEO Being shut out, or an activist investor fighting for a seat at an iconic company (as has happened with Disney, Salesforce and Tesla in recent months). Once the wrong boss steps down or the activism is over, whether because it succeeded or, as in Disney’s case, the challenger was appeased by concessions, the board slips back into comforting obscurity.

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In fact, these low-key shareholder representatives have never been busier. They are expected to help bosses deal with wars, geopolitical strife, resurgent inflation, climate change and technological disruption, all in the wake of a once-in-a-century pandemic. Stricter corporate governance rules force corporate directors to take on more responsibility. They are also more likely than in the past to receive stock compensation, aligning their incentives with those of other shareholders.

hot seat

Perhaps because of this, they are working harder and longer than before, often on top of the grueling day-to-day work of being executives at other companies. “It’s not uncommon to have a two-day meeting,” said Crawford Gillies, chairman of the board of British bank Barclays. “That was very unusual ten years ago.” At least they had dinner.

All new requirements for directors are reflected in the ideal board composition. Thirty years ago, directors were little more than window dressing, recalls University of Delaware board veteran and corporate governance expert Charles Elson. The management team “basically runs the show,” he said. The board is filled with friends of the manager or other board members. Today, a self-respecting board should include supply chain experts, the Fed, China, ESG, AI– The list goes on. On top of the requirement of “diversity, equity and inclusion” — that is, ensuring that not everyone is a white male — piecing together a board has become a high-stakes corporate sudoku game.

According to a 2022 survey of directors of more than 700 public companies in the U.S., many believe board performance is substandard PwC, a consulting firm. When asked to rate other board members, nearly half said at least one director needed to be replaced. One in five respondents would replace two or more.Less than half thought their peers had a strong grasp of environmental, social and governance issues (this is ESG representative) or network security. One in five think other board members are reluctant to challenge management, which is ostensibly one of their main jobs.

Boards are also equal in another key task: making sure the right people sit in the corner office. Directors have suspended succession in recent years, first amid the uncertainty of the covid-19 pandemic and then amid heightened geopolitical and economic concerns.share of CEOData from the research firm’s Advisory Council showed that 1.4% of U.S. companies on the Russell 3000 index of companies eliminated by their boards in 2021 are below the historical average of nearly 6%. ESGAUGE, an analytics firm.no boss inside small&P The 500 index of America’s largest companies was eliminated that year. CEOPlans to pull out have been urged to delay.

Where new chief executives were named, there was a surge in insider appointments.About nine out of ten by June 2022 CEO dating in small&P 500 were insiders, the highest rate since records began in 2011. In November, Disney brought magic back to the Magic Kingdom by reappointing its retired longtime boss, Bob Iger (never mind that it was Mr. Iger who handpicked his magic—less successors).

For boards, meeting these challenges will require fresh blood. Injecting it is no easy task. One problem is making room for newcomers.Few companies are willing to impose term limits on directors; only 6% of companies small&P 500 do it. If anything, retirement policies are becoming less popular: 67% of large U.S. companies have retirement policies in 2022, down from 70% in 2018.More than a quarter of directors leave small&P In 2019 there were 500 boards with more than 15 years of service. Some persist for decades. Charlie Munger, who turned 99 last month, has been on the board of industrial conglomerate Berkshire Hathaway since 1978. Appeasing these old-timers is delicate work.

Another way is to increase the size of the board. Share during 2018-2022 small&P The 500 firms with more than 12 directors rose from less than 16% to almost 18%. The obvious downside is that larger boards can get bulky.

Director’s Cut

With boards actively recruiting replacements or additions, they face another problem.Much of the newly relevant expertise is in its own domain, such as ESG or AI, new. This means that very few potential candidates have it. So many companies are fishing in the same talent pool. That may help explain why boards are getting more expensive: median pay for Russell’s 3,000 directors rose from $177,000 in 2019 to $205,000 in 2022.And even more incest: about 65% of directors small&P 500 non-executive directors sit on at least another board, up from 58% in 2018 (see chart); one in 10 sits on at least three people. Ann Mather, the former chief financial officer of animation company Pixar Studios, will serve on eight board members in early 2022.

Demand is especially high for experienced directors who are not white or male.In UK, government commissions review of board diversity FTSE Companies have found that most companies still fail to appoint people of color to their boards. Moni Mannings, a former lawyer who has held various non-executive roles at major British firms, said the murder of George Floyd sparked racial justice protests in the US In the months since the event and sparked a director-hiring spree, she has been fielding calls from recruiters from ethnic minorities on both sides of the Atlantic. “Don’t they know anyone else?” she would wonder angrily.

Investors are starting to realize the risks of overstretched directors allocating too little time. In May, Twitter shareholders voted to strip venture capitalist Egon Durban of his board seat after two proxy advisory firms warned that the seven board positions he was juggling at the time might be too many. (Twitter’s board issues were finally resolved in October, when its new owner, Elon Musk, disbanded it for good.) In June, BlackRock, the world’s largest asset manager, voted against Ms. Mather’s role in Alphabet, Google’s parent company. Board appointee, as part of its campaign against “offside”. Ms. Mather retained her seat but has since quit home-rental service Airbnb and computer networking company Arista Networks.

The upshot is that companies will have to cast their nets more widely. Veteran multinational chairman Peter Voser points out that hiring may therefore take longer, especially if you refuse to bid on director remuneration with competing recruiters. ABB companyWith Swiss engineering giant Voser as chairman, it took time to find a director to fill the vacancy – two years to be exact. But in the end, it found the right people with the right skills and experience. The board is rocking in the background.

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