Boards Turn Critical Eye Inward: Peer Dissatisfaction on Rise

This post was originally shared on LinkedIn and is republished here with permission.

Board of Director views have continued to evolve in the face of unprecedented short-term pressures like shareholder activism. There’s no doubt the bar has been raised and there is increasing pressure on Directors to perform at a higher level. In fact, nearly 40 percent of Directors now say someone on their Board should be replaced—a jump from 31 percent only three years ago. This eye-opening statistic is just one of the insights gleaned from PwC’s 2015 Annual Corporate Directors Survey, a comprehensive report compiled from the responses of nearly 800 public company Directors.

So why do we see this uptick in peer dissatisfaction? Our research shows that Directors continue to cite diminished performance due to aging, unpreparedness for meetings and lack of expertise as the top reasons for their dissatisfaction with peer performance.

On a related note, there was a decline in the percentage of Directors who believe their Boards are spending sufficient time on CEO succession. Only 48 percent “very much” believe this to be the case, down from 62 percent last year. In addition, more than half of Directors only “somewhat” or don’t at all believe their company is adequately prepared to deal with an unplanned CEO succession emergency.

The survey also showed a dichotomy in views between male and female Board members. In fact, male and female Directors disagree on the importance of having gender and racial diversity on their Boards. Female Directors continue to be far more likely to consider Board diversity important, with 63 percent of women describing gender diversity as a “very important” attribute—compared to only 35 percent of males. Similarly, 46 percent of female Directors describe racial diversity as “very important,” compared to only 27 percent of their male counterparts.

Overall, more than eight in 10 believe diversity at least “somewhat” enhances Board effectiveness and company performance, and more than one-third believe it does so “very much.” Newer Directors place a much higher value on Board diversity than long-serving Directors. While the majority of Directors believe there are impediments to increasing Board diversity, citing a limited pool of diverse Director candidates as a significant obstacle, nearly half of all women believe there are sufficient numbers of qualified diverse candidates, compared to only 18 percent of males. These findings suggest we have a long we to go to make progress on this issue.

Looking at other significant findings, directors rate IT strategy expertise as a bigger priority than a cyber risk background. Given the climate around cyber breaches, it’s not surprising that 87 percent of Directors find Board expertise in this area to be at least “somewhat” important. But it’s surprising that Directors prioritize IT strategy expertise more than cyber risk expertise. Overall, Directors continue to place the greatest importance on core attributes in Director candidates. The most desirable Director attributes continue to be financial expertise (91 percent describe it as “very important”), followed by industry expertise (70 percent), operational expertise (66 percent) and risk management expertise (62 percent).

Finally, regarding proxy access, the majority of Directors believe it is appropriate at higher ownership thresholds and with longer holding periods than many investors prefer. Less than one-in-five Directors believe that three percent ownership and a three-year holding period is the right standard for proxy access. Rather, more than half of Directors believe proxy access is appropriate at five percent ownership for at least five years or more. Twenty-seven percent of Directors do not believe proxy access is ever appropriate, and long-term Directors are much more inclined to reject the notion of proxy access.

These are just some of the key findings from PwC’s annual survey. With 74 percent of respondents serving as Directors on the Boards of U.S. companies with more than $1 billion in annual revenue, this year’s survey provides timely insights on their priorities and issues of most concern.