What Does it Take to be a Modern Board?
On April 19th, FORTUNE published the first-ever Modern Board 25 ranking, which recognizes the most innovative boards of directors among S&P 500 companies. The ranking is powered by the Diligent Institute and considers data around board expertise, director independence, tenure of independent directors, diversity, and more to rank companies on board effectiveness and environmental, social, and governance (ESG) issues.
The 25 companies recognized in the ranking performed in the top quartile of the S&P 500 in board effectiveness and ESG criteria. Among the top companies on the list are Microsoft, Hewlett Packer Enterprise, Walgreens Boots Alliance and Intel. As we celebrate the companies that made our list and see what we can learn from them, we should also ask, what does it take to be a “Modern Board?”
The Board’s Role is Changing
A modern board is able to ensure that their organization’s long-term strategy is sound. That means being able to foresee and take advantage of what opportunities may arise, and mitigating risks that could negatively impact the company now and in the future.
As boards face new challenges, directors need to be able to understand and oversee new and rapidly evolving issues areas. However, in the 2022 edition of “What Directors Think,” an annual survey of U.S. public company directors conducted in partnership between Corporate Board Member and Diligent Institute, directors expressed concern that their roles were becoming far too wide-ranging, and the issues they were responsible for overseeing had expanded rapidly.
The key to combat this problem is board diversity, which lies at the core of our Modern Board 25 ranking. Through careful board composition practices, modern boards can reach true diversity of though.
Board Composition and Diversity: The Key to Modern Governance
Many companies around the world have realized this and made board composition and executive leadership diversity a greater priority over the course of the last few years. It is worth noting that in this year’s Modern Board 25 list, the top three companies are all led by diverse CEOs: Microsoft is led by Satya Nadella, HPE is led by Antonio Neri, and Walgreens Boots Alliance is led by Rosalind Brewer.
When diving deeper into the S&P 500, the number of companies with more than 50% women representation in their boardrooms has doubled from 2019 to 2022. The findings show that 4% of companies in the index have women occupying more than half of their board seats compared to 2% of the index in 2019. Though still a small percentage, progress is being made.
In our own research at Diligent Institute, our March 2022 gender diversity report conducted in partnership with HR Governance Leaders and the Better Boards Initiative has shown slow but steady progress on gender diversity, with 29% of board seats being held by women in our global data set. Women are also gaining ground on committees, moving from 27% to 30% of committee seats being held by female directors in the last year. Additionally, the percentage of lead director and board chair positions held by women increased from 8% to 10% in the same time span.
Meanwhile, the proportion of director appointments coming from new, nontraditional skillset backgrounds is also on the rise. In July 2021, our Diligent Institute report Beyond the C-Suite: Trends in Director Skillsets analyzed director appointments since 2019 in three key regions: The US, UK, and Australia, to see whether more directors were coming from skillset backgrounds outside the traditional CEO, COO, or CFO role. We found that the share of newly appointed directors who come from nontraditional backgrounds, such as technology, marketing, legal, HR and ESG has increased from 13.0% to 18.9%.
Currently, Diligent Institute is in the process of compiling one diversity report that seeks to bring together and highlight these and more areas of diversity, shining a light on what data we have and the data we do not have to bring a more holistic perspective to discussions around boardroom diversity and composition. Moving forward, we hope to use this data to inform future Modern Board 25 lists.
Upskilling the Board: Expanding Diversity of Thought from Within
Even as boards become more diverse through director appointments and board turnover, modern boards are also hard at work upskilling their current directors around new and evolving issues. Undoubtedly, boards need to have a balance of new talent and diverse perspectives, but they also need to ensure that all directors are conversant in complex issues like climate change and other ESG topics.
At Diligent, we are working to aid in this effort by launching the Diligent Climate Leadership Certificate, a program that prepares board directors and executives to better oversee climate risks and opportunities and create sustainable growth strategies for their companies. We know that what makes a modern board is not only the right composition and diversity of thought, but the spirit of constant improvement and ongoing education.