The Conference Board released a collaborative report: “Taking a Long-Term Approach to Board Composition” that documents a decline in business strategy experience and rise in ESG-related experience among all S&P 500 and Russell 3000 (R3000) and new S&P 500 and R3000 directors, specifically. The data is based on proxy disclosures as of August 2023. The first figure in each cell below reflects the percentage of the specified director group with that experience in 2018, while the second figure reflects 2023 data.
The percentages of non-CEO C-Suite executives on S&P 500 boards increased from 14% in 2018 to 19% in 2023 and on R3000 boards from 17% in 2018 to 21% in 2023. The percentages of directors from below the C-Suite also increased from 11% in 2018 to 16% in 2023 on S&P 500 boards and from 16% in 2018 to 21% in 2023 on R3000 boards. At the same time, the percentages of current or former CEOs decreased1% on S&P 500 boards and 3% on R3000 boards.
The report cautions against overlooking the value of business strategy experience and, in effect, “trading” functional ESG experience for core business competence, the latter of which is deemed critical to effective board oversight.
Decreased business strategy experience on boards is a worrisome trend, as approving the overall strategic direction of the company is a core responsibility of boards. Having such shared experience enables directors to “speak the same language” and collaborate effectively. Having a strategic lens for assessing business opportunities and risks as they arise also enables boards to maintain a steady course despite a changing environment and—often conflicting—demands.
That said, it also notes that the seeming decline in strategic experience may reflect, at least in part, companies’ disclosure approach, which may emphasize particular skills over others or limit the number of disclosed skills per director to show that the company has “checked all of the boxes” on trending skills and attributes. According to the authors, based on discussions with major institutional investors, this approach may expose perceived weaknesses and make some directors, particularly new directors, who are more often tagged with functional ESG experience rather than business strategy experience, more vulnerable to shareholder activism.
The report, which was produced in collaboration with data analytics firm ESGAUGE, along with Debevoise & Plimpton; KPMG; Russell Reynolds Associates; and the John L. Weinberg Center for Corporate Governance, also benchmarks board refreshment mechanisms (retirement policies, term limits, tenure) and board size.