Board Refreshment and the New York City Comptroller

January 9, 2018

Developments in Best Practices in the Boardroom  

Board composition and environmental, social and governance (ESG) issues have been a focus of good governance for several years.We featured both of these topics in our memo to boards of directors last year.  In the past year, the focus has continued to intensify and many companies are becoming increasingly responsive on these issues—both in public and private engagements.  There have been significant developments in these areas in 2017 that merit review as companies prepare for 2018.  In addition, the Board of Governors of the Federal Reserve System (FRB) released guidance on board effectiveness that may affect how even non-financial institution boards view their oversight role.

Board Refreshment and the New York City Comptroller

This past September, New York City Comptroller Scott M. Stringer and the New York City Pension Funds launched the “Boardroom Accountability Project 2.0,” calling on companies to make their boards more diverse and to enter into a dialogue regarding their board refreshment process with the Comptroller’s office. 

As part of the campaign, Comptroller Stringer sent letters to the boards of 151 U.S. companies urging them to disclose the race, gender and skills of their board members in a standardized director-qualifications matrix.  Of these 151 companies, 92 percent have adopted proxy access, thus their boards face the possibility of a proxy access candidate or other shareholder proposal if they do not demonstrate meaningful progress in expanding diversity on the board.  This all comes at a time when BlackRock and State Street have started voting against nominating and governance committee members that fail to demonstrate progress in addressing diversity issues, and, in its 2017 Investment Stewardship Annual Report, Vanguard emphasized its focus on gender diversity in the boardroom.

Proxy advisory firms ISS and Glass Lewis have as part of their annual review of voting guidelines included considerations regarding board diversity, a key driver of refreshment.  ISS noted that board composition should be significantly diverse to consider a wide range of perspectives and will highlight a lack of board diversity in its company-specific reviews.  Glass Lewis put companies on notice that beginning in 2019, it will recommend that shareholders vote against the chair of the nominating and governance committee at companies with no female directors (although it seemed to make allowances for non-Russell 3000 companies) and hinted that depending on other company factors, including size, industry and overall governance profile, its no-vote recommendations may extend to other nominating and governance committee members.

Many companies have heeded the warning; according to Spencer Stuart, women and minorities accounted for half of the nearly 400 independent directors added at S&P 500 companies as disclosed in 2017 proxy statements, an increase of 15 percent as compared with 2016 proxy statements.  However, this news is tempered by the fact that nearly half of S&P 500 boards did not appoint a new director and many boards continue to rely on mandatory retirement ages as the driver for refreshment.

In light of the focus on board diversity and refreshment, below are some practical steps that boards can begin to take as they prepare for the 2018 proxy season:

  • Critically review board composition and skill set.  The nominating and governance committee should critically reflect on the board’s progress in diversity recruitment and review the skill set of the board against current and projected needs.  
  • Enhance the director search process.  The lack of board diversity at many companies results in part from a nomination process that relies largely on the recommendations of existing directors.  Boards should consider how they can enhance the director search process (e.g., soliciting investor recommendations; engaging director search firms; looking outside of existing networks) to identify a more diverse mix of candidates.   
  • Review corporate governance documents.  The nominating and governance committee should review its committee charter and the corporate governance principles to ensure that the company’s commitment to board diversity is appropriately reflected.         
  • Engage with shareholders.  Institutional investors expect companies to actively engage with them on diversity and board refreshment issues.  Companies should review and, if necessary, revise their disclosures on board composition and diversity and consider discussing their plans for improving board diversity over time.

In launching the Boardroom Accountability Project 2.0, Comptroller Stringer stated, “Diversity isn’t a box to be checked—it’s a strategy for economic success.  Today, we’re doubling down and demanding companies embrace accountability and transparency.”  As investor attention to board diversity and refreshment continues to grow, it will become increasingly important for companies to demonstrate corporate governance practices that support more diverse, independent and effective boards.