Update on the current board issues: June 2012

June 2012
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To achieve diversity, boards may have to shake things up

At a glance

Shareholder proxy access "private ordering" proposal is critical for the 2012 proxy season. Institutional investors have filed shareholder proxy access proposals to amend company bylaws and allow shareholder director nominations to be included in the annual proxy statement. Directors should review and amend company bylaws and ensure shareholder engagement regarding director nominations.

Issue in focus

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To achieve diversity, boards may have to shake things up

If public companies are going to truly make their boards more diverse, they will have to "shake people away from their comfort zones."

That quote from Reatha Clark King, a long-time director who now sits on the Allina Health Systems and National Association of Corporate Directors (NACD) boards, captures what many corporate governance experts believe: changing the makeup of public boards will not be easy.

"New benefits are revealed from diverse situations," King said during a recent NACD Diversity in the Boardroom event in Chicago co-sponsored by the PwC Center for Board Governance. "You have to commit yourself to learning and shake people away from their comfort zones in thinking they are doing a great job. Sometimes, you have to be willing to risk upsetting the status quo."

Apparently, boards in the United States and globally have started to slowly shake things up in their boardrooms. The Governance Metrics International Ratings 2012 Women on Boards Study shows there has been incremental improvement in female board representation worldwide since 2011.

For the first time ever, women hold just over one in ten board seats globally (10.5%), a 0.7 percentage point increase from last year, according to the study. At the same time, the percentage of companies with no female directors at all has fallen below 40% for the first time, to 39.8% (a two percentage point decrease since last year).

In the United States, the percentage of women on boards increased only marginally (0.5 percentage points) from 2009 to 2011, and now stands at 12.6%, well below the figures for Nordic countries, Canada, Australia, and France, the GMI study found. Also, while more than 70% of US boards have at least one female director, only about 10% have three or more women, and only 2% of board chairs are women.

One hurdle women and minorities face in getting on public boards is how companies define diversity. For some, it is based on gender and ethnicity. For others, it is more about diversity of thought (e.g., politics, philosophy) and diversity of function (e.g., operations, finance, management).

So why are some directors around the world starting to pay attention to the board diversity issue? In the Nordic countries and France, there are quotas. In Australia, the number of women directors has increased 13.8% due in part to a listing standard that calls for board diversity report disclosures. In the United Kingdom, last year's government-commissioned Lord Mervyn Davies report, Women on Boards, February 2011, declared that at least 25% of the largest British companies' boards should include women by 2015.

In the United States, interest in board diversity is being driven by institutional shareholders, SEC disclosure rules, and the work of business advocacy groups that see diverse boards as an essential part of good governance.

"Diversity leads to better and more informed decision making," Andrew Sherman, a partner at Jones Day, said during a peer exchange at the NACD diversity event. "And that is governance."

In early 2010, the SEC implemented enhanced proxy disclosure rules that called for companies to disclose how its nominating committee considered diversity in the director nomination process and whether or not they have a board diversity policy. The rules allow each company to define diversity as they consider appropriate.

At around the same time, there have been efforts by shareholders and such organizations as NACD, Corporate Board Member, and several female corporate director groups to raise awareness of board diversity. In some cases, some of these and other organizations have started creating databases of potential diversity candidates.

The California Public Employees Retirement System (CalPERS) and the California State Teachers Retirement System (CalSTRS) have developed the Diverse Director DataSource tool.

The NACD last month created a Blue Ribbon Commission on diversity in corporate boardrooms. The panel plans to issue a report that will discuss the benefits of boardroom diversity, the barriers that exist, and action steps to advance greater diversity. The commission plans to issue the Report of the NACD Blue Ribbon Commission on The Power of the Diverse Board later this year.

PwC and the NACD will continue their series Diversity in the boardroom -- A competitive advantage in Seattle on September 11 and in New York City on November 8. For more information about the two events, click here.

For more information on board diversity, you may want to read PwC's Continuing the Conversation - Board Renewal.

What should directors do:

During the PwC-sponsored NACD diversity event, presenters and participants suggested some actions individual directors and boards could consider when choosing new board members. Some of those actions, which were also included in our Continuing the Conversation article last fall, include:
  • Expand the definition of a “typical director” to include non-CEOs, especially since many companies are restricting the number of boards their CEOs can sit on.
  • Encourage diversity in gender, ethnicity, industry experience, and thought as part of a boardroom renewal.
  • Mentor and support the development of an executive who thinks, acts, and looks different than you do -- not to create conflict, but to bring different views and skills into the boardroom.