board diversity – Executive Advisory Institute

February 13 2020

What is the Role of a Board of Directors?

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In simple terms, boards are the governing bodies of corporations elected to make major decisions concerning financing, mergers and acquisitions, selling the company, nominating the CEO, and when or if they should release an IPO to take the company public.

The board serves the corporation as its agent and makes decisions in an unbiased service of the company and its shareholders’ best interests. An important distinction to note between board members and management teams is that it is not the board’s responsibility to run the company. Their responsibility falls more under oversight and ensuring that the right people are running the company. Boards that get too involved risk undermining the management team and fail adherence to the crucial board principle of acting with independence.

The sum of these responsibilities is a board’s fiduciary duty, meaning they must place the company’s best interest before their own. This sounds simple in theory, but in practice, many boards run into trouble when faced with difficult decisions that go against their personal interests. Therefore, it is poor practice for board members to have strong financial ties with the company that will inhibit them from acting ethically.

High performing boards will maintain an active spirit of debate. Because every matter of strategic importance needs the board’s approval, good directors must always be on their toes and highly involved in deliberating the best course of action. Additionally, good board members must listen carefully to and respect opposing opinions. Only then can a consensus be reached efficiently and smoothly.

The leader of the board, the chairman, must ensure that everyone remains in check and leads the decision-making process. The chairman should not be affiliated with the CEO and should weigh the CEO’s opinion of no greater importance than the board directors. A strong chairman will drive its board to ask the necessary hard questions, challenge the status quo, and continuously evolve to develop highly informed, up-to-date perspectives.

The trending evolution as of late has been a sweeping move to incorporate more diversity members and women on boards. A more diverse board reflects an independent board selection process and predicts a greater ability of the board to make unbiased decisions that have been considered from all angles.

Diversity standards typically mean having at least one person of color, one woman, and one independent director on the board, though recent growing pressures to increase diversity have caused some companies to raise the standard to at least two people of color and women. The current top-three public companies ranked by board diversity are leading this movement with numbers as high as 60% female directors in Stitch Fix, 50% ethnic-minority directors in Hewlett-Packard, and 92% independent directors in Verizon. Further proof of the diversity movement is seen through Goldman Sachs CEO David Solomon’s statement that the bank will no longer take companies with all-male, all-white boards public.

It will be interesting to see how these shifting board dynamics play out, but in the meantime, we can rest assured that the overarching roles of boards are not changing anytime soon.

February 13 2020

Overview of Board Committees

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In the ever-changing digital age, board committee structures must constantly evolve to keep up with changes in capital markets and trade policy. Board members face new challenges everyday regarding the complexities of corporate values, strategy and risk management.

A recent Harvard Law School study tracked board structures since 2013 to examine how S&P 500 companies are using board committee structure to address oversight needs. They found that although boards have been growing to encompass additional committees, the underlying framework has remained largely the same and rely on three key committees– audit, compensation, and nominating and governance– that are required by the stock exchanges. Bank holding companies (BHCs) are required to have one additional risk committee to review their global risk-management framework. Beyond this basic structure, most institutions have one additional standing committee to oversee finances or executive order.

During 2013-18, the portion of companies with at least one additional committee grew marginally from 74% to 76%, and the average number of additional committees remained largely consistent.
Harvard Law School Forum on Corporate Governance

Top Additional Committees

Findings on the top additional committees in 2012-18 are as follows.

Executive Committee: Exercises authority of the board when the board is not in session, except in cases where action of the entire board is required by charter, bylaws or applicable law. (36% of S&P 500

Finance Committee: Oversees capital allocation, financial policies, strategies, capital structure, and annual operating and capital budget. The finance committee may also oversee investments, dividend policy, credit and other market risks, share repurchases, and mergers and acquisitions. (36% of S&P 500)

Compliance Committee: Oversees programs and performance related to legal and regulatory risks, as well as implementation and maintenance of the company’s code of conduct and related matters. The compliance committee may have special focus on compliance in a specific area, e.g., environmental, health, safety and technology. (16% of S&P 500)

Risk Committee: Recommends the articulation and establishment of the company’s overall risk tolerance and oversees enterprise-wide risk management to identify, assess and address major risks facing the company, which may include credit, operational, regulatory, interest, liquidity, investment, funding, market, strategic, reputational, emerging or other risks. The risk committee reviews and discusses management’s assessment of the company’s enterprise-wide risk profile. (11% of S&P 500)

Technology Committee: Oversees and assesses the company’s technology profile and related strategies and makes recommendations regarding the execution of technology enablement formulated by management. Technology committee members address opportunities and risks regarding technological strategies, including aspects of cybersecurity. (7% of S&P 500)

Public Policy and Regulatory Affairs Committee: Reviews significant legislative and regulatory initiatives by state, federal, or foreign government authorities, as well as other public issues likely to affect the company and its shareholders. They oversee the development of company policies in response to these developments and may have a related compliance function. (7% of S&P 500)

Corporate Responsibility and Sustainability Committee: Reviews policies and practices related to specific public issues of concern to shareholders, the company, its employees, and the general public. They maintain oversight of corporate responsibility, environmental sustainability, diversity and inclusiveness, and reputational risk. (6% of S&P 500)

Finding the right committees for your specific company depends on the company’s unique needs and must address the company’s major concerns in a forward-thinking manner that will motivate new strategic thinking. However, some common trends that span across all industries is a focus on technology and sustainability as we move into the new decade. Keeping these trends in mind when considering the most effective committee structures will be a smart move for companies who want to succeed in today’s hyper competitive, highly disruptive markets.