1. Courageously evaluate current board composition and future boardroom needs in developing boardroom succession strategies.
Formal policies are too often driving boardroom turnover. Too many boards wait for directors to reach retirement age or voluntarily step down before thinking seriously about boardroom needs and recruitment priorities. According to the 2024 U.S. Spencer Stuart Board Index, one-third of directors on boards with retirement policies left within one year of the age cap, and half left within three years of that limit. And our annual surveys of nominating/governance committee chairs have consistently found that replacing directors who reached retirement age is a top driver of board refreshment.
Our view: Tenure limits and/or retirement ages should never be the sole motivator for boardroom change. Instead, to the extent these limits are in place, nominating/governance committees should use these rigid tools solely as supplements to other routine and meaningful practices, including:
- An overall boardroom culture that embraces change and focuses on best serving the company, executives and shareholders
-
Robust board, committee and director evaluations
- Impartial analyses of forward-looking boardroom needs
- Meaningful board skills matrices highlighting the top four or five skills and experiences of each director, eliminating matrices where directors check nearly all boxes
- Objective assessments of the recency of each director’s skills and experiences
- Thoughtful consideration of shareholder-specific input on board composition and expectations of shareholders in general
2. Make the necessary boardroom changes to best serve the company and its shareholders.
Among S&P 500 and S&P MidCap 400 companies, board turnover is consistently low, around 7% or 8% for the past five years. Only 58% of S&P 500 boards appointed a new director in the 2024 proxy year, translating to an overall turnover of less than one (0.83) new director per board. Is this pace of change sufficient in light of the rapidly changing risks and opportunities facing companies?
Our view: Nominating/governance committees should seriously consider the question above as it evaluates board composition and succession planning. Given the gap between executive and director views on board effectiveness, nominating/governance committees should solicit and seriously consider the views of the CEO and other key executives as part of boardroom succession planning. Certainly, the committee should own this work, but executives’ views can provide important data for committee consideration.
3. Foster a boardroom culture that supports change, with directors understanding that their board service is linked only to boardroom needs and director performance.
The best boards appropriately place a high value on collegiality and respectful, constructive relationships in the boardroom and between directors and executives. However, this emphasis can result in too many boards avoiding tough discussions about board composition in general, and individual directors in particular. Half of respondents in our 2024 survey of nominating/governance committee chairs said their board dealt with underperforming directors by either waiting for retirement age or doing nothing.
Our view: Each year, nominating/governance committees should lead the board on a discussion of expectations around board culture and director service. Boards need a flexible culture that enables and fosters the changes necessary to best serve the company and its shareholders. And directors themselves should be more introspective about their board service. Do they believe their skills are recent enough? Do their skills match the board’s priorities? Are they adding value in the boardroom? If any of the answers are “no,” then directors should have the self-awareness to volunteer to step down.
4. Elevate board evaluations and board strategic planning by periodically using a third party.
It’s too easy for annual board and committee evaluations to become inconsequential compliance exercises. An increasing number of boards are retaining third parties to assist with board evaluations. According to the 2024 U.S. Spencer Stuart Board Index, 28% of S&P 500 boards reported working with an independent third party to facilitate the evaluation process, up from 25% last year. Since generally third parties are retained every two to three years, we believe this number significantly underreports the total percentage of S&P 500 boards using third parties for board evaluations.
Our view: Third parties can tease out — and articulate — meaningful insights that might not be revealed by an online survey or one led by someone on the board or the general counsel. In our experience, periodically retaining a third party, incorporating interviews of directors and key executives, can provide deeper insights into boardroom dynamics, identify board strengths and weaknesses, and offer recommendations on how to meaningfully enhance the board’s effectiveness.
5. Embrace periodic peer evaluations to enhance individual director performance and boardroom succession planning.
A rising number of boards are using periodic peer evaluations as part of their evaluation processes. Our 2024 board reports found that 20% of S&P MidCap 400 boards and 47% of S&P 500 companies disclosed some form of individual director evaluations — either self or peer assessments. Many don’t disclose the practice, which is why we believe our annual board index may underestimate its prevalence.
Our view: Peer evaluations, done well, can provide meaningful feedback to directors and not only enhance individual director performance and engagement but also boardroom culture.
• • •
In our decades of experience working with boards, CEOs and other top executives, we have seen how growth can come from a firm foundation based on a company’s core values, including advising with humility and courage, and acting with a better future in mind. We know that change can help boards and executive teams be stronger — together.