With institutional investors owning more than half of all U.S. companies and index funds emerging as the dominant institutional owners, understanding the viewpoints and proxy voting guidelines of key investors and advisers is a governance imperative. Incorporating an investor lens can help boards assess and update their governance practices and enhance communications to investors and other stakeholders. Here we highlight several board- and director-specific topics of top interest to investors.
Board composition and quality are top-of-mind issues for institutional investors, and factors such as board diversity, director capacity, and board refreshment practices are now routinely assessed by investors. Understanding the proxy voting policies of key investors and their advisers can help boards prepare for the 2020 proxy season.
Gender and Racial/Ethnic Diversity in the Boardroom
Investors have been critical of the low representation of women in U.S. boardrooms, and they have demanded change. Boards have responded, appointing a record number of female directors. However, overall progress on the gender diversity front faces the headwind of low boardroom turnover. With historically only 8 percent of S&P 500 directors joining a board in any given year, moving the needle on boardroom diversity is difficult. As a result, in spite of the record number of new female directors, the average S&P 500 board now has 2.8 women (out of an average of 10.7 directors), and women represent 26 percent of all S&P 500 directors, up incrementally from 24 percent in 2018 and 16 percent in 2009.
Progress continues at a slower pace for racial/ethnic diversity in the boardroom. Just under one in four new S&P 500 directors (23 percent) are minorities (defined as African-American/Black, Asian or Hispanic/Latino). Minority women represent 10 percent of the 2019 incoming class of directors, up slightly from 9 percent in 2018. Minority men represent 13 percent of the new directors, an increase from 10 percent in 2018 but still down from 14 percent in 2017. When looking at all directors of the top 200 S&P 500 companies, 19 percent are male or female minorities, up from 17 percent in 2018 and 15 percent in 2009.
Considerations for the board
Director diversity in terms of gender, race and ethnicity should be an ongoing priority for boards. The current formal investor policies for gender diversity should be considered the floor, and boards should understand that the goal for many investors is gender parity (or close to parity). While investor voting policies are currently not prescriptive when it comes to racial/ethnic diversity in the boardroom, boards should anticipate increased focus on the issue.
Boards best positioned to meet investor expectations in these areas will commit to including female and racial/ethnic minorities in all director searches and expect the same of any firms used to assist with director searches. Disclosures will be important. At a minimum, boards should voluntarily disclose “at-a-glance,” aggregate breakdowns of the gender and self-identified racial/ethnic composition of the boardroom. Since investors do not have formal definitions of racial/ethnic diversity, directors have the flexibility to self-identify as they see fit.
BLACKROCK |
In addition to other elements of diversity, BlackRock encourages companies to have at least two (2) women directors on their board.
To the extent it believes that a company has not adequately accounted for diversity in its board composition within a reasonable timeframe, BlackRock may vote against the nominating/ governance committee for an apparent lack of commitment to board effectiveness.
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VANGUARD |
Vanguard has long believed in the importance of diversity in the boardroom, and we have increasingly advocated for greater representation of women on corporate boards. We have expanded our focus to more explicitly urge boards to seek greater diversity across a wide range of personal characteristics, such as gender, race, ethnicity, national origin, and age.
Vanguard will continue to promote gender diversity—there is still progress to be made—but our research and experience with corporate boards tell us that gender diversity is not enough. The effective boards of today and tomorrow should reflect all facets of diversity, and we are calling for greater progress on this front.
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STATE STREET GLOBAL ADVISORS (SSGA) |
SSGA expects boards of Russell 3000 and TSX listed companies to have at least one (1) female board member.
Starting in 2020, SSGA will vote against the entire nominating committee "if a company does not have at least one woman on its board and has not engaged in successful dialogue on SSGA Global Advisors' board gender diversity program for three consecutive years."
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ISS |
For companies in the Russell 3000 or S&P 1500 indices, ISS will generally vote against or withhold from voting on the chair of the nominating committee (or other directors on a case-by-case basis) at companies when there are no women on the company's board.
Mitigating factors include:
- Until Feb. 21, 2021, a firm commitment, as stated in the proxy statement, to appoint at least one woman to the board within a year;
- The presence of a woman on the board at the preceding annual meeting and a firm commitment to appoint at least one woman to the board within a year; or
- Other relevant factors as applicable.
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GLASS LEWIS |
Glass Lewis will generally recommend against the nominating committee chair of a board that has no female members.
Depending on other factors, including the size of the company, the industry in which the company operates, the state in which the company is headquartered, and the governance profile of the company, we may extend this “against” recommendation to vote against other nominating committee members. When making these voting recommendations, we will carefully review a company’s disclosure of its diversity considerations and may refrain from recommending shareholders vote against directors of companies outside the Russell 3000 index, or when boards have provided a sufficient rationale for not having any female board members. Such rationale may include, but is not limited to, a disclosed timetable for addressing the lack of diversity on the board and any notable restrictions in place regarding the board’s composition, such as director nomination agreements with significant investors.
During the 2020 proxy season, if a company headquartered in California does not have at least one woman on its board, we will generally recommend voting against the chair of the nominating committee unless the company has disclosed a clear plan for how they intend to address this issue.
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Overboarding
Director capacity emerged as a hot issue in 2019, with Vanguard announcing a tougher proxy voting policy regarding director board service. While investor and adviser policies on overboarding differ on the specifics, they share a consistent underpinning: boards should carefully consider each director’s professional obligations and evaluate whether directors have the time and capacity to fully exercise their board and committee duties.
Generally S&P 500 directors are compliant with investor policies on board service. On average, independent directors of S&P 500 companies serve on 2.1 boards, unchanged over the past five years. CEOs of S&P 500 companies are increasingly not serving on other boards; 59 percent of S&P 500 CEOs serve on no outside boards. Only 23 S&P 500 CEOs serve on two or more outside boards, and only 79 independent directors serve on more than four public company boards.
Considerations for the board
Boards should revisit their policies addressing director outside board service and evaluate alignment with investor policies. Boards should carefully consider the capacity of each director and enhance disclosures around the capacity of any active executives currently serving on more than one outside public company board and any retired executives serving on more than four public company boards. Private company directorships should also be considered, since these can be as complex and time-consuming as public board service.
BLACKROCK |
BlackRock will consider voting against:
- Public company CEOs serving on more than one outside public board (i.e., total of more than two public company boards)
- All other directors serving on a total of more than four public company boards
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VANGUARD |
Vanguard will generally vote against:
- Any director who is a named executive officer (NEO) serving on more than one outside public board (Note: Vanguard will generally vote against the nominee at each company where he/she serves as a nonexecutive director)
- All other directors serving on a total of more than four public company boards (Note: Vanguard will vote against the director at each of these companies except, generally, one where he/she serves as chair of the board)
- OVERRIDE: Vanguard might vote for an overboarded director if the director has publicly committed to stepping down from the other directorship(s) necessary to fall within the thresholds listed above.
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STATE STREET GLOBAL ADVISORS (SSGA) |
SSGA may withhold votes from:
- Public company CEOs serving on more than three public company boards
- All other directors serving on more than six public company boards
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ISS |
ISS generally recommends voting against or withholding votes from:
- Public company CEOs serving on more than two public company boards besides their own (withhold only at outside boards) (Note: all of a CEO’s subsidiary boards with publicly traded common stock will be counted as separate boards. ISS will not recommend a withhold vote for the CEO of a parent company board or any of the controlled (>50 percent ownership) subsidiaries of that parent but may do so at subsidiaries that are less than 50 percent controlled and boards outside the parent/subsidiary relationships).
- All other directors serving on more than five public company boards
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GLASS LEWIS |
Glass Lewis generally recommends votes against:
- Public company CEO/executives serving on more than two public company boards
- All other directors serving on more than five public company boards (Note: When determining whether a director’s service on an excessive number of boards may limit the ability of the director to devote sufficient time to board duties, we may consider relevant factors such as the size and location of the other companies where the director serves on the board, the directors’ board roles at the companies in question, whether the director serves on the board of any large privately-held companies, the directors tenure on the boards in question, and the directors’ attendance record at all companies. In the case of directors who serve in executive roles other than CEO (e.g. executive chair), Glass Lewis will evaluate the specific duties and responsibilities of that role in determining whether an exception is warranted. Glass Lewis may refrain from recommending against certain directors if the company provides sufficient rationale for their continued board service. Glass Lewis will also generally refrain from recommending votes against a director who serves on an excessive number of boards within a consolidated group of companies or a director that represents a firm whose sole purpose is to manage a portfolio of investments which include the company.)
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Board Leadership
Investors generally defer to the board’s judgment on whether to appoint an independent chair or an independent lead director. Meanwhile boards are increasingly separating the chair and CEO roles and appointing independent chairs. In 2019, 53 percent of S&P 500 boards split the chair and CEO roles, up from 37 percent a decade ago. One-third (34 percent) are chaired by an independent director, an increase from 16 percent in 2009.
Considerations for the board
One size doesn’t fit all when it comes to independent board leadership. Regardless of the underlying structure, boards should disclose in the proxy statement the roles and responsibilities of the independent leader. Boards can use a CEO transition as an opportunity to reconsider and potentially reshape board leadership structures.
BLACKROCK |
In the absence of a significant governance concern, BlackRock defers to boards to designate the most appropriate leadership structure to ensure adequate balance and independence.
In the event that the board chooses a combined chair/CEO model, BlackRock generally supports the designation of a lead independent director if the lead director has the power to: 1) provide formal input into board meeting agendas; 2) call meetings of the independent directors; and 3) preside at meetings of independent directors. Furthermore, while BlackRock anticipates that most directors will be elected annually, the firm believes an element of continuity is important for this role for an extended period of time to provide appropriate leadership balance to the chair/CEO.
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VANGUARD |
Vanguard believes the structure of board leadership should be within the purview of the relevant board. As such, Vanguard will generally vote against shareholder proposals to separate CEO and chair, absent significant concerns regarding independence or effectiveness of the board.
When independence or effectiveness concerns suggest an exception may be appropriate, the following factors are considered:
- Lack of a lead independent director
- Lack of board accessibility
- Low overall board independence
- Governance structural flaws (For example, multiple share classes with different voting rights, or key committees that are not fully independent)
- Lack of responsiveness
- Governance failings
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STATE STREET GLOBAL ADVISORS (SSGA) |
SSGA analyzes proposals for the separation of chair/CEO on a case-by-case basis taking into consideration numerous factors, including the appointment of and role played by a lead director, a company’s performance, and the overall governance structure of the company.
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ISS |
ISS generally recommends votes for shareholder proposals requiring that the board chair’s position be filled by an independent director, taking into consideration the following:
- The scope and rationale of the proposal;
- The company's current board leadership structure;
- The company's governance structure and practices;
- Company performance; and
- Any other relevant factors that may be applicable.
The following factors will increase the likelihood of a “for” recommendation:
- A majority non-independent board and/or the presence of non-independent directors on key board committees;
- A weak or poorly-defined lead independent director role that fails to serve as an appropriate counterbalance to a combined CEO/chair role;
- The presence of an executive or non-independent chair in addition to the CEO, a recent recombination of the role of CEO and chair, and/or departure from a structure with an independent chair;
- Evidence that the board has failed to oversee and address material risks facing the company;
- A material governance failure, particularly if the board has failed to adequately respond to shareholder concerns or if the board has materially diminished shareholder rights; or
- Evidence that the board has failed to intervene when management’s interests are contrary to shareholders' interests.
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GLASS LEWIS |
Glass Lewis believes that separating the roles of CEO (or, more rarely, another executive position) and chair creates a better governance structure than a combined CEO/chair position. Glass Lewis does not believe alternate forms of independent board leadership (such as an independent lead director or presiding director) provide as robust protection for shareholders as an independent chair.
Glass Lewis does not recommend that shareholders vote against CEOs who chair the board. However, Glass Lewis typically recommends that clients support separating the roles of chair and CEO whenever that question is posed in a proxy (typically in the form of a shareholder proposal), as Glass Lewis believes that it is in the long-term best interests of the company and its shareholders.
Where a company has neither an independent chair nor independent lead director, Glass Lewis will recommend voting against the chair of the governance committee.
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Age/Tenure Limits
Investors generally oppose mandatory retirement policies and tenure limitations, preferring board and individual director assessments for evaluating and enhancing board and director performance, identifying gaps in boardroom skills and promoting boardroom refreshment. While nearly all S&P 500 companies reported annual board evaluations, only 44 percent disclosed some form of individual director assessments.
Despite investor views, formal retirement policies are in place at 71 percent of S&P 500 boards and more than half mandate retirement at 74 or higher. Mandatory tenure policies are rare. Only 24 S&P 500 boards (5 percent) set explicit term limits for non-executive directors, with a majority of the policies set at 15 years or more.
Considerations for the board
Boards should annually consider ways to optimize the annual evaluation process, incorporating feedback from the annual board, committee and individual director assessments into the succession planning process. When assessments are done in a meaningful way, they can help identify whether new or different skills or greater diversity is needed, as well as other changes. Many boards benefit from working with an independent facilitator at least periodically to enhance the evaluation process.
BLACKROCK |
Where boards find that age limits or term limits are the most efficient and objective mechanism for ensuring periodic board refreshment, BlackRock generally defers to the board’s determination in setting age or tenure limits.
While BlackRock supports regular board refreshment, BlackRock is not opposed in principle to long-tenured directors, nor does it believe that long board tenure is necessarily an impediment to director independence. A variety of director tenures within the boardroom can be beneficial to ensure board quality and continuity of experience.
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VANGUARD |
Vanguard generally defers to the board’s determination regarding age or tenure limits for directors. Vanguard will vote for management proposals to limit terms of outside directors and generally vote against shareholder proposals to limit such terms.
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STATE STREET GLOBAL ADVISORS (SSGA) |
Generally, SSGA will vote against age and term limits unless the company is found to have poor board refreshment and director succession practices.
SSGA may withhold votes from directors based on the following:
- Overall average board tenure is excessive. In assessing excessive tenure, SSGA gives consideration to factors such as the preponderance of long-tenured directors, board refreshment practices and classified board structures
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ISS |
ISS will recommend votes against management and shareholder proposals to limit the tenure of outside directors through mandatory retirement ages.
ISS will recommend votes against management proposals to limit the tenure of outside directors through term limits. However, ISS will scrutinize boards where the average tenure of all directors exceeds 15 years for independence from management and for sufficient turnover to ensure that new perspectives are being added to the board.
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GLASS LEWIS |
Glass Lewis strongly supports routine director evaluation, including independent external reviews, and periodic board refreshment to foster the sharing of diverse perspectives in the boardroom and the generation of new ideas and business strategies. Further, we believe the board should evaluate the need for changes to board composition based on an analysis of skills and experience necessary for the company, as well as the results of the director evaluations, as opposed to relying solely on age or tenure limits. When necessary, shareholders can address concerns regarding proper board composition through director elections.
While we understand that age limits can aid board succession planning, the long-term impact of age limits restricts experienced and potentially valuable board members from service through an arbitrary means. We believe that shareholders are better off monitoring the board’s overall composition, including the diversity of its members, the alignment of the board’s areas of expertise with a company’s strategy, the board’s approach to corporate governance, and its stewardship of company performance, rather than imposing inflexible rules that don’t necessarily correlate with returns or benefits for shareholders.
However, if a board adopts term/age limits, it should follow through and not waive such limits. If the board waives its term/age limits, Glass Lewis will consider recommending shareholders vote against the nominating and/or governance committees, unless the rule was waived with sufficient explanation, such as consummation of a corporate transaction like a merger.
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