PwC survey of directors showed skepticism on the benefits of shareholder engagement, critical views of some board colleagues and gender splits on board diversity

by Cydney Posner

In its annual survey released Tuesday of more than 800 corporate directors, PwC identified ten key findings, including critical views on other board members, split views on board diversity and skeptical views on the benefits of shareholder engagement.

  • Of the directors surveyed, in 2016, 35% thought that at least one of their board colleagues should be replaced, compared with 31% in 2012. The reasons most frequently cited were lack of preparation for meetings (2016: 25%/2012: 11%), lack of the right expertise (17%/13%), aging (12%/15%) and overstepping of boundaries of the board’s oversight role (12%/10%). Not surprisingly, directors with briefer tenures tended to be more critical: 39% of those serving for two years of less thought a director should be replaced, compared with 29% for directors that had served for more than ten years. Surprisingly, however, only 8% of directors surveyed indicated that, following a board self-evaluation, they had decided not to renominate a director as a result. Moreover, only 49% of directors reported that their boards made any changes as a result of the self-evaluation process — and most of those changes related to the composition of committees or adding more expertise. Only 14% took action to diversify their boards.

  • There has been some improvement in expanding the resources used to identify director candidates, but for the most part, board members just asked each other for director recommendations. In 2016, 87% of directors looked to other directors for recommendations, compared to 91% in 2012. Some of the other resources for recruiting actually declined in use in 2016 relative to 2012: search firms (60%/67%) and management recommendations (52%/55%). But more boards looked for candidates on public databases (11%/4%) and turned to investors for recommendations (18%/11%), reflecting a slight shift toward a more investor-centric model.
  • In 2015, women made up about 20% of S&P 500 boards, although, in 2015, 31% of all new directors joining S&P 500 boards were women. Nevertheless, the proportion of women on boards increased only five percentage points in the last decade. Forty-three percent of directors surveyed believed that the optimal percentage should be 41% to 50%, and the same percentage believed that 21% to 40% was optimal. However, 10% believed that the optimal percentage should be 20% or less, and — surprise — 97% of those who subscribed to that idea were male. (My question is: who were the 3%?) Nearly all directors (96%) agreed that diversity is at least somewhat important, but to no one’s surprise, female directors thought that it was a lot more important than male directors.  When asked whether diversity leads to enhanced company performance, 35% of all directors responded “very much,” but drill down and you find that percentage composed of 89% women and 24% men.  Similarly, when asked whether diversity leads to enhanced board effectiveness, 47% of directors responded “very much,” including 92% of women and 38% of men.  As indicated in this PubCo post, the data from last year’s survey were substantially similar. (See also this PubCo post  reporting on a different board survey.) 

SideBar: Of course, as discussed in this PubCo post and this PubCo post, the research data show that these women are right.  And the study itself indicates that some “research has shown that Fortune 500 companies with the highest representation of female directors attained significantly higher financial performance, on average, than those with the lowest representation of female directors.” Even the Business Roundtable, in its 2016 Principals of Corporate Governance, acknowledged that “[d]iverse backgrounds and experiences on corporate boards, including those of directors who represent the broad range of society, strengthen board performance and promote the creation of long-term shareholder value. Boards should develop a framework for identifying appropriately diverse candidates that allows the nominating/corporate governance committee to consider women, minorities and others with diverse backgrounds as candidates for each open board seat.”

  • However, 83% of directors at least somewhat agreed that there were impediments to increasing diversity, including a shortage of qualified diverse candidates. About one-quarter of all directors surveyed very much believed there were a sufficient number of qualified diverse candidates. However, 93% of female directors at least somewhat believed there were sufficient diverse candidates, compared to only 64% of male directors. The report noted that some directors cited as a reason for the shortage the absence of much diversity in the C-suite, where boards often look for potential director candidates: according to the report, only 4% of S&P 500 CEOs are female, and only 1% of Fortune 500 CEOs are African-American. As a result, to increase board diversity, nominating committees will need to expand the pool of candidates beyond the standard pool of C-suite and boardroom veterans.
  • Surprisingly, notwithstanding all the handwringing recently about director overload, the survey indicated that 75% of directors surveyed were not at all concerned about the workload of the full board, 89% were not at all concerned about the workload of the nominating committee (so I guess they have plenty time then to search for more diverse candidates), 59% were not concerned at all about the committee’s workload and, even for the beleaguered audit committee, 57% were not at all concerned. (See, e.g., this PubCo post, this PubCo post and this PubCo post.) Areas on which directors would like to spend more time included strategy (61% ), IT risks such as cybersecurity (59%) and IT strategy (44%); 77% thought they didn’t need to spend another minute on executive comp. Notwithstanding all the recent media attention to cybersecurity breaches, 81% were at least “moderately confident” that their companies had comprehensive data security programs, had adequately identified the parties responsible for digital security and appropriately tested their resistance to cyberattacks. But about 20% believed that they didn’t have sufficient information from management about security metrics.
  • When asked to identify the single greatest challenge to timely and effective CEO succession planning, 29% of directors identified the current CEO’s effective performance, while 15% said the conversation was just too uncomfortable or that an internal successor had already been identified. The report noted the importance of this board obligation, given that, at the world’s 2,500 largest companies, there was a 16.6% CEO turnover rate—the highest in the past 16 years.
  • Although board engagement with shareholders has become almost de rigueur — 54% of directors said their boards engage directly with their investors— you would expect to see directors lauding the benefits of engagement. Not so.  About 40% believed it does not impact proxy voting at all and 38% believed it does not impact investing decisions at all. Only 20% very much believed that they were engaging with the right investor representatives and only 25% very much believed investors were well-prepared for the engagement meeting. In fact, “21% of directors said they didn’t receive any valuable insights from directly engaging with investors.”  However, those conclusions appear to vary with company size: 51% of directors at very large companies very much thought their boards received valuable insights, while only 14% reached that conclusion at smaller companies. Interestingly, the list of topics that were now considered fair game for shareholder engagement has expanded to include matters such as board composition (74%) and company strategy (69%).
  • The study reports that investors were increasingly pushing boards to focus on board “refreshment.” In that light, 61% of directors said that, in response to investor pressure, their boards had added a director with a specific skill set, 46% added a “diverse” board member, 34% added a younger board member, 24% removed a director as a result of age, 17% added an activist to the board and 15% removed a director with long tenure.
  • Another area where activists were reported in the survey to have had an impact was with regard to capital allocation, especially in light of the “excess” cash of about $1.4 trillion reportedly on companies’ balance sheets.  Activists have been pushing boards to use those cash resources, especially in ways that return that capital to shareholders. Forty-eight percent of directors said their boards had, in response to activist pressure, increased share buybacks, 38% initiated or increased dividends and 27% decreased corporate investments, while only 17% increased corporate investments. Directors also indicated that 67% of them were willing to discuss capital allocation with shareholders.

SideBar: These data might support often-expressed concerns about the potential adverse impact of activist pressures on R&D spending and other long-term corporate investments. (See, e.g.,  this PubCo post, this PubCo post and this PubCo post.)

  • While 96% of directors agreed at least somewhat that activists were too focused on the short term, most did believe that shareholder activism had brought some benefits; about 80% of directors agreed (either somewhat or very much) that activism had compelled companies to more effectively evaluate strategy, execution and capital allocation and to improve operations and capital allocation. With regard to corporate governance matters, 57% of directors at least somewhat agreed that investors have too much of a say in corporate governance, while 42% didn’t agree at all. However, proxy advisory firms are a different story: 93% of directors at least somewhat agreed that proxy advisors “have too much of a say in corporate governance and 54% very much believe this.” Almost 80% of directors reported that, over the last 12 months, their boards “took proactive steps to prepare for actual or potential activism,” while 50% indicated that their boards regularly communicated with the companies’ largest investors, 37% said their boards reviewed strategic vulnerabilities that could be targeted by activists and 36% engaged a third party to advise the board on potential activism.

While “say on pay” didn’t hit PwC’s top 10, the survey showed that, although say-on-pay proposals have had very high rates of approval, directors still believed that say on pay has had a real impact in some areas since its inception in 2011. Seventy-seven percent of directors at least somewhat agreed that it has led their boards “to look at compensation disclosure in a different way,” 73% at least somewhat believed it increased the influence of proxy advisory firms, 72% at least somewhat agreed that it has led to a better investor understanding of company pay practices, and 67% at least somewhat agreed that it had prompted their boards to change their communications about compensation. Nevertheless, 72% of directors did not think that it had “right-sized” CEO compensation.

SideBar: But see this Pubco post reporting on an academic study indicating that, following low favorable votes for say-on–pay proposals, directors incurred significant reputational damage and financial costs, and this PubCo post discussing a number of unintended consequences of say on pay.

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