Each year, PwC’s Annual Corporate Directors Survey gives the world a glimpse into the boardroom. Corporate board members “bare all” in honest consult about their perceptions, motivations, and pain points.
This year, nearly 900 sitting directors responded to PwC’s survey questions spanning topics from shareholder activism to peer performance.
Emerging from the data were several trends which, on the whole, paint a picture of progress in board governance. Directors are devoting more time to their board responsibilities, casting a critical eye to board composition, and engaging with investors more frequently. Yet, as is almost always the case, there are less-than-positive trends revealed by the survey that highlight areas where boards can continue to improve.
We’ve extracted from PwC’s 2016 survey four critical trends, which reinforce positive board behavior (“The Good”), identify long-standing inefficiencies (“The Bad”), or represent an obstinate way of thinking that must be changed (“The Ugly”). Let’s have a look…
The Good: Directors are recognizing the value of activism (and using feedback to improve board performance).
It’s an investor’s world these days. At least, that’s how it feels for the 224 boards this year who’ve been caught in activist cross-hairs. Yet, while the increased pressure from activist investors is apparent, this year’s PwC survey gave us a silver-lining perspective.
- * Nearly 80% of directors believe that activism has compelled companies to more effectively evaluate strategy, execution and capital allocation.
Around the same number (79%) believe that activism has “resulted in companies improving their operations and capital allocation.” In a recent blog, PwC’s Paula Loop explained the balancing act that directors must perform in order to reap the benefits of shareholder activism. Most directors (96%) believe activists are too short-term focused, so they must continually balance activist feedback with their own long-term strategy for value creation.
The Takeaway: “The Good” news is that boards are beginning to recognize the value of thinking like an activist. Not only should boards be attuned to concerns voiced through shareholder dialogue, but they should adopt the activist mindset of anticipating company weaknesses and addressing them before someone else does.
The Good: Boards are reaching outside of their existing networks to add new (diverse) directors.
Throughout the various sessions of our Investors Board Performance Review, board composition remained among the primary concerns of today’s largest and most influential institutional investors and proxy advisors.
Almost invariably, where you find a problem at a company—or a company that’s not performing well—you focus on the composition of the board. The question is: ‘Why isn’t there a self-correction mechanism going on here to fix the problems with management or the strategy or the capital structure or the collection of assets? What’s missing?’ Often, those companies have a mismatch of skill sets on the board.
Likewise, Vanguard’s Head of Corporate Governance (Glenn Booraem) predicted that the “biggest risk issue for boards in 2017” will be the board’s failure to align its own composition to the company’s long-term strategy—an oversight that could cripple a board at the occurrence of any unexpected risk (read the article in C-Suite Magazine).
This pressure from major shareholders and activists has propelled boards to examine composition more critically, whether targeting specific skill sets or expanding beyond their comfortable (often homogenized) network for new board candidates.
- * More directors are leveraging investor recommendations and public databases to recruit new board members than they were four years ago.
Despite investor pressure, we’d like to believe that boards are beginning to recognize the value of diversification for other logical reasons… like improved company performance or diverse perspectives that more closely mirror the consumer base, etc.
The Takeaway: “The Good” news is that investor pressure is having a seemingly positive effect on board composition for all the right reasons. Investors want boards to be best-equipped for understanding the operations of the company and managing the unexpected risks that tomorrow’s tumultuous environment may bring. And boards certainly don’t want to be caught without an umbrella when the rains come.
The Bad: Boards are still struggling to replace ineffective directors.
Year after year, the answer to this recurring survey question has remained relatively unchanged. We’re not sure which is more unsettling… the idea of ill-equipped directors overseeing our country’s major corporations or boards lacking the gumption to do something about it.
- * 35% of directors say that someone on their board should be replaced.
Among the top reasons for poor performance, directors continue to cite unpreparedness for meetings, lack of expertise, and diminished performance due to aging. A notable change in this year’s data was an increase in board members who cited “unpreparedness” as a reason for subpar performance (up from 11% in 2012). This may be suggesting that directors’ plates are getting too full for them to uphold the same number of board commitments or workloads of years past.
This brings us back to our familiar soapbox. Board leadership is important, and among its most critical functions is overseeing an effective board evaluation process—one that’s comprehensive in all facets of board responsibilities and takes action on the feedback collected. Each year PwC’s survey shows us that there is significant room for improvement with respect to board leadership. We’ll know we are seeing improvement when this number starts to decrease.
The Takeaway: “The Bad” news is that the survey results regarding peer performance have remained quite constant. Boards should use this statistic as a catalyst for reassessing and elevating their board evaluation process. If the board fails to remove ineffective directors, can it really be fulfilling its fiduciary duty?
The Ugly: Male directors (on the whole) are still not grasping the value of board diversity.
Despite growing empirical evidence that gender diversity leads to better financial performance, the male jury remains undecided. Indeed, when asked whether diversity leads to enhanced company performance or board effectiveness, a mere 24% and 38% respectively indicated “very much.”
- * Only 24% of male directors “very much” believe that board diversity leads to enhanced company performance.
To call this statistic “ugly” is not an overstatement. Progress in changing the views of sitting board members has been slow. Even boards who are interested in finding diverse candidates often define their criteria too narrowly (i.e., only look for CEOs) or they require previous board experience as a criteria on all board search openings.
We need to be much more innovative about how we define board roles. It comes down to the board evaluation; it comes down to defining the role (not the person); it comes down to looking outside your normal network. One of the engagement questions we ask a lot of boards, particularly if we’re concerned about the diversity of the board, is: What is each board member doing to deliberately diversify their network?
The Takeaway : Board diversity is not limited to gender or race or age or skill set—it’s all of those things. Whether due to investor pressure or the enlightenment of reason, we expect this statistic to improve. Hand in hand with our discussion on board composition, those companies who fail to advance their boards will likely pay the price in the years ahead.