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Mar 18, 2019

Boards refreshing quicker and with younger directors, study finds

EY finds more new appointments and average age of new directors falling

Board refreshment is speeding up, while new independent directors are getting younger, according to EY’s third annual report on Fortune 100 companies, which gives a snapshot of the boardroom ‘class of 2018.’

Last year saw 71 percent of Fortune 100 firms add at least one new independent director, while 27 percent added two or more, EY finds. This represents an increase from previous years, when ‘levels were steady at around 51 percent and 21 percent, respectively,’ the researchers say.

These new board appointments are getting younger, too: the portion of new nominees under 60 grew from 51 percent in 2016 to 58 percent in 2018, while the portion of those under 50 grew from 8 percent to 14 percent, according to the study.

Much of the push behind these changes is down to investors, Kellie Huennekens, associate director at the EY Center for Board Matters, tells Corporate Secretary sister publication IR Magazine. ‘The institutional investor community deserves a lot of credit for propelling important topics like board refreshment, board diversity and board composition to top of mind,’ she says.

At the same time, a quarter of new independent directors were recognized for their experience in innovation, transformation and ability to navigate change, according to the report. A further 10 percent were highlighted for their ability to bring an investor perspective to the boardroom, and EY notes a growing trend for companies to link new director skills to company strategy.

‘We observe a continuing shift of attention from the more traditional director candidates (current and former CEOs) to individuals with a wider range of skills, expertise, backgrounds and personal characteristics – diversity across multiple dimensions,’ the report authors write. But they add that given the limited opportunities to add new board members to Fortune 100 companies, change remains slow.

Huennekens notes that younger directors often bring desired skills to the table. ‘Generally, younger directors tend to be more technology-savvy and serving a dual role as an executive (not retired),’ she says. ‘Their business perspectives can be very current or leading-edge.’ But these skills aren’t just limited to younger directors, of course.

‘During the research effort, we saw that the talent being added to boards is incredible and that the directors associated with innovation ranged from those under 50 to individuals in their mid-60s,’ Huennekens says. ‘Overall, disclosures highlighted the importance of thinking differently – whether in the form of diverse skills, experiences or personal backgrounds – and how these innovation directors applied these perspectives to opportunities in navigating the changing business landscape or driving the change.’

Despite the more varied skillsets coming into the boardroom in 2018, the most common areas of expertise among the new nominees remain, unsurprisingly, international business and corporate finance/accounting. EY says the areas of expertise most often cited in new nominees are international business, corporate finance and accounting and industry expertise. ‘Around half of the new class was recognized for expertise in at least one of these categories,’ the report authors write.

In its list of the top 10 areas of expertise among the class of 2018, EY says technology, operations and manufacturing and board service and corporate governance are the next most-cited areas, highlighted in 40 percent to 45 percent of new nominations. ‘On average, 35 percent are recognized for experience in government, public policy or regulation, risk oversight, strategy or marketing and business development.’

Although Fortune 100 boardrooms are slowly becoming more diverse overall, the number of new female nominees has remained static, at around 40 percent over the three years the EY Center for Board Matters has been publishing the report. But this is still contributing to a growth in overall board diversity across Fortune 100 companies. EY notes that in 2018 ‘27 percent of existing independent directors were women, up from 25 percent in 2016.’

This year, as well as the male-to-female split of new board members, EY has looked at career paths into the role of independent director and how it differs by gender.

Overall, by far the most popular path to the boardroom is via the CEO role, with almost half (49 percent) of all new independent directors in 2018 being either current or former CEOs. This is followed by other current or former executives (non-CEOs) at 35 percent, those doing public company board service for the first time at 23 percent and those coming from non-corporate backgrounds at 16 percent.

But looking by gender, 71 percent of women nominees come from a non-corporate background, while men are disproportionately more likely to take the traditional chief executive route: 79 percent of men nominated as an independent director at a Fortune 100 company last year were current or former CEOs.

These women are bringing their own skills to the table. ‘The category of non-corporate backgrounds includes experience in government or military, scientific or academic organizations and non-profits,’ Huennekens explains. ‘A quick look at the women directors in this category shows they bring to the table policy and regulatory experience, as well as backgrounds in science and research and development.’