Eye on board diversity, part 1

Boards are contending with a new breed of investors. This often vocal group takes a keen interest in corporate governance, particularly board composition and board diversity. As PwC’s study points out, “Your investor base wants to know that you’re focused on attracting and retaining directors who are diverse in every sense of the word. We believe gender diversity is a bellwether for boards making efforts to become diverse overall.” The study, “A look at board composition: How does your industry stack up?”, compares 2016 data from samples of leading companies in nine industries:

• Banking and capital markets
• Communications
• Entertainment and media
• Industrial products
• Insurance
• Pharmaceutical and life sciences
• Power and utilities
• Retail
• Technology

The banking and capital markets industry topped the list, with women representing 26% of board members, compared with an average of 21% among companies in the Standard & Poor’s 500. There is evidence the industry is being proactive: At the companies PwC surveyed, 13% of directors added in 2016 were women. Board diversity is especially critical in banking and capital markets at a time when the industry must adapt to change brought about by technology, a new political environment, changing customer expectations and regulatory instability.

The entertainment and media industry ranked second, with 22% women directors. As with banking and capital markets, the industry has recently stepped up its board diversity efforts: Two-thirds of directors appointed in 2016 were women. The need to adapt to change and look for growth opportunities are likely catalysts, as digital technology, changing consumption patterns, demand for global access and cybersecurity concerns intensify the need for more diverse skills sets.

Insurance was among the lowest-ranking, with women comprising 21% of directors and 7% of new directors last year. But as Paula Loop, head of PwC’s Governance Insights Center points out, “Diversity is more than a gender issue – it’s about race, ethnicity, skills, experience, age and even geography, in addition to diversity of thought and perspective.” Looking at the age dimension, directors in the insurance industry are older than average. As the importance of having a technology background increases, insurance boards would be well advised to appoint younger directors. Overall, a more strategic approach is warranted.

Mandatory retirement age and term limits are two measures that can accelerate change, and direct it towards greater board diversity. “For example, less than two-thirds of the banking and capital markets companies surveyed had a mandatory retirement age for directors, a situation that leads to many directors serving well into their 70s”, the New York Times notes. By comparison, 73% of S.&P. 500 companies have an age limit. Retail came out on top here, with 91% of companies having a mandatory retirement age. It also had the lowest average director age, 60.

Across industries, very few companies have term limits. The technology industry had the highest average director tenure, at 10 years, followed by banking and capital markets with an average of eight years. This is the same as the average of S.&P. 500 companies, of which only about 4% have term limits. (One exception is General Electric, which caps board service at 15 years.) Long tenures and no mandatory retirement age slow the pace of change, making “the situation gloomy for diversifying boards”, said Loop.