Insights for What’s Ahead

• Companies, especially in the S&P 500, are going to face challenges in increasing the diversity of backgrounds, skills, and professional experience on their boards if they continue to elect new directors at the current rate. In the S&P 500, the percentage of newly elected directors has held steady at 9 percent since 2018. By comparison, in the Russell 3000, it has increased from 9 percent in 2018 to 11 percent as of July 2022. To accelerate the diversification of their board, many companies may want to consider adopting a comprehensive approach, which may include adjusting the size of the board, board refreshment, and director succession.
• Companies should consider a variety of board refreshment tools to enhance demographic diversity and add relevant skills and experience to the board. To promote refreshment, boards can institute policies that (1) require board turnover (e.g., mandatory retirement age and term limits), (2) trigger a discussion of turnover (e.g., limit the number of public boards on which a director may sit or require directors to resign upon a change in their primary professional occupation), and (3) reinforce a culture of board refreshment, which may be the most important step that boards can take. A culture in which it’s fully acceptable for directors to rotate off a board before they are required to do so can be created not only by establishing guidelines on average board tenure, but also through setting initial expectations for director tenure through the director recruitment and onboarding process, as well as having candid discussions during the annual board evaluation and director nomination processes about how the current mix of directors matches the company’s needs. Such processes reinforce the message that no stigma is associated with rotating off a board before one is required to leave.
• Companies are moving away from policies that mandate turnover, as these force directors to leave based on tenure or age even when they are still valuable and strong contributors. Very few companies have term limits: as of July 2022, only 6 percent of S&P 500 companies and 4 percent of Russell 3000 companies disclosed a mandatory retirement policy based on tenure. (The most common term limits are either 12 or 15 years.) While mandatory retirement age policies are still common, companies have started to move away from them: in the S&P 500, the share of companies with such a policy declined from 70 percent in 2018 to 67 percent as of July 2022, and from 40 to 36 percent in the Russell 3000. Moreover, companies are increasingly permitting exceptions to the retirement age policy: the share of S&P 500 companies whose policy permits no exception declined from 41 percent in 2018 to 34 percent as of July 2022, and from 24 to 18 percent in the Russell 3000. They are also raising the retirement age: the share of S&P 500 companies with a retirement age of 75 rose from 39 percent in 2018 to 49 percent as of July 2022, and from 42 to 52 percent in the Russell 3000. While mandatory retirement policies can be criticized as arbitrary, allowing exceptions to those retirement policies can not only be viewed as favoritism but also impede board turnover.  
• While companies have considerable flexibility in their approach to board refreshment, expect continued investor attention to this topic. While major institutional investors usually defer to the board’s determination in setting mandatory retirement age or establishing term limits, they are keeping a close eye on board tenure and may oppose or withhold votes from boards that seem to have an insufficient combination of short-, medium, and long-tenured directors.^[2]  Further, BlackRock, State Street, and many other investors will generally vote against independent directors who serve on more than four public boards, which is why companies are increasingly limiting the number of other public company directorships their board members can accept. The share of companies in the S&P 500 with an overboarding policy applicable to all directors grew from 64 percent in 2018 to 72 percent as of July 2022 in the S&P 500, and from 45 to 50 percent in the Russell 3000. Indeed, director overboarding policies are a relatively evenhanded way of ensuring that directors are not overcommitted in this era of increasing workload, and they can prompt a thoughtful discussion between companies and their board members as to whether the director should step down from a particular board.
• Periodic individual director evaluations—which are growing in popularity along with companies’ use of independent facilitators for board evaluations—can promote board diversity and refreshment. In the S&P 500, conducting a combination of full board, committee, and individual director evaluations has become the most common practice (52 percent of companies reported conducting this combination of evaluations as of July 2022 compared to 37 percent in 2018). As our discussion with in-house corporate governance professionals revealed, individual director evaluations and/or the use of independent facilitators allow companies to have fruitful discussions about many challenging topics, including the skills and expertise needed on the board in the current environment, and in fact can lead to changes in board composition. Companies have found that they do not need to evaluate individual directors or use outside facilitators every year; indeed, these reviews can be more effective and less disruptive if conducted every two or three years.