1. Optimize board composition for an increasingly complex and changing business environment
Today’s businesses face no shortage of emerging risks, new and renewed: emerging technologies such as artificial intelligence; increasing and persistent inflation; growing geopolitical instability and uncertainty; rising costs of capital; and changing workforce expectations. The challenge for nominating/governance committees is seeing around the corner, objectively analyzing the board’s current composition and future needs and developing a boardroom succession plan that best fits the company’s needs.
In our experience, leading nominating and governance committees are looking forward three to five years, evaluating difficult issues, asking tough questions, and developing a strategic plan to optimize boardroom composition.
Questions for nominating/governance committees to consider:
- Looking ahead, what skills, perspectives and backgrounds are necessary in the boardroom?
- How could anticipated top leadership changes at the company impact boardroom needs?
- Is expected turnover sufficient to optimally evolve the board?
- Is the board using the right mix of tools — meaningful board matrices, robust board and individual director evaluations, director tenure expectations — for board succession strategies or does the board have an overreliance on mandatory tenure/retirement policies? How does the board’s retirement/tenure policy impact expected director tenure?
- Is the board matrix of skills and experiences up to date? Are the rights skills and experiences incorporated in the matrix? Is recency of experience considered, particularly for some evolving areas? Would limiting directors to identifying their top 4-5 skills/experiences sharpen the committee’s understanding of board composition strengths and opportunities for improvement?
- Is the board looking ahead to consider new opportunities and risks such as AI and geopolitical uncertainty?
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- How robust are the board’s disclosures about its composition, evaluations, diversity and succession planning?
- Is the board demonstrating a commitment to board diversity of skills, experiences, gender, race and ethnicity?
2. Consider how best to oversee new and changing risks and opportunities (AI, geopolitical, etc.) relevant to business and sector
As companies and boards face issues that continually evolve in terms of variety, complexity and relevance, nominating/governance committees are wrestling with how best to structure board composition and governance practices in order to most effectively govern.
S&P 500 board size has remained largely unchanged over the past decade at 10.8 directors. In our experience, while boards are seeking specialized knowledge areas on their boards, they generally want directors to be “best athletes” who can contribute to boardroom discussions on many fronts beyond their areas of expertise.
Directors with operational or financial experience are highly valued. Just over 70% of independent directors joining S&P 500 boards last year were either active/retired CEOs, other top C-suite executives, financial professionals or division/subsidiary executives. And according to our survey of nominating/governance committee chairs, these profiles are top recruiting profiles for the upcoming year.
We also aren’t seeing much change in boards’ governance structures. The number of standing board committees has held steady for a decade at 4.2 committees. Technology committees are in place at only 15% of S&P 500 boards, unchanged from the prior year.
Questions for nominating/governance committees to consider:
- How should the board best oversee ongoing or nascent risks and opportunities facing the company?
- Should the board add one or more “specialist” directors or should it rely more heavily on external advisors and in-house talent?
- Is the board’s committee structure optimal?
- Are oversight responsibilities for new or emerging issues clearly delegated to standing committees or handled by the full board? Do charters adequately describe each committee’s oversight duties?
- How is the board educating and upskilling directors on critical or emerging issues?
3. Ensure robust oversight of CEO succession
A board’s most important responsibilities revolve around oversight of the chief executive officer, including the CEO’s appointment, performance, compensation and succession. CEO succession planning — generally a responsibility of either the compensation committee or the nominating/governance committee — is consistently cited as a top priority in our annual survey of nominating/governance committee chairs.
CEO succession is inevitable, and perhaps even more likely in the near future. The average tenure of an S&P 1500 CEO is 9.4 years. In 2023, 136 companies in the S&P 1500 changed CEOs, a decline from 2022 and well behind pre-pandemic transition levels (when 160 new CEOs were appointed, on average, each year from 2018-2020). With these facts in mind, best-in-class CEO succession planning involves starting early and regularly overseeing both emergency and ongoing succession plans.
The CEO’s job, meanwhile, is harder than ever — which means getting CEO succession right is harder as well. Given the amount of change and complexity in the external environment, boards need to develop and maintain a pipeline of possible CEO succession scenarios for a variety of situations, considering both a range of possible timelines and different states of the business, which would require different future CEO profiles.
Questions for nominating/governance committees to consider:
- Is the board dedicating time to CEO succession planning on a regular basis?
- Does the board have a plan for an emergency CEO succession?
- Beyond emergency planning, is the board considering multiple potential scenarios for the organization’s future, and their implications for the profile of the next CEO?
- Is the board focused on ensuring the creation of a strong leadership team and a deep bench, including potential successors, to increase the likelihood that the board is best prepared for the future?
- Beyond CEO succession, is the board ensuring the management team have the talent to address (and to help the board understand) new and emerging risks and opportunities?