Viewpoint March 16, 2010, 1:31PM EST

Spencer Stuart Board Index: How Boards Are Changing

As the number of boards on which a director serves comes under greater scrutiny, the boards themselves are becoming increasingly diverse

Story Tools

The financial crisis of 2007-08 prompted a flurry of governance proposals, some of which are now coming to fruition in the form of declarations from the Securities & Exchange Commission that are meant to raise the bar on board disclosure about director recruitment and succession-planning practices. Meanwhile, board directors and corporate watchdogs alike await the outcome of other pending legislative and regulatory actions that are under review by the SEC or are wending their way through congressional committees. Proposals on the table include those that would make it easier and less expensive for shareholders to nominate board directors; give shareholders a say on executive compensation; and require boards to have a standing risk committee and a nonexecutive chairman.

What's too often lost in this latest round of corporate governance debates is the magnitude of change already seen in corporate boards. A growing number of boards already embrace corporate governance best practices and continue to try to improve their effectiveness—even in the absence of government regulation or specific shareholder pressure.

While the breadth of the changes in board behavior cannot be captured fully in data alone, the numbers do tell a striking story about how board governance has evolved. Many of the trends in the composition and governance practices of corporate boards are reflected in the data compiled for the Spencer Stuart Board Index (SSBI). Now in its 24th year, the index is the result of a careful study of the proxies of companies in the Standard & Poor's 500-stock index. It tracks trends in board service, the careers and backgrounds of new directors, and the policies and processes of these boards. It also includes a survey of corporate secretaries about the issues dominating the board agenda.

annual elections, majority required

What has changed in America's corporate boardrooms? Here's what the data reveal:

• More than two-thirds (68%) of S&P 500 boards have adopted a declassified board structure and annual elections of directors. A high priority for advocates of corporate governance reform, annual director elections have become the norm for corporate boards in the span of a few years. Ten years ago, only 38% of S&P 500 boards elected directors annually.

• Boards are rapidly adopting majority voting requirements. Another priority for institutional shareholders during the past several proxy seasons has been the adoption of majority voting rules. In general, these require directors who fail to secure a majority vote of shareholders in board elections to offer their resignation. In fact, boards have moved quickly to adopt this standard. The 2009 Spencer Stuart Board Index found that 65% of S&P 500 boards have majority voting requirements, compared to 56% in 2008.

• Boards are limiting the number of corporate boards that directors may serve on. Ten years ago, directors commonly served on multiple boards. As the scope of the board's role has grown and the amount of time required for board service—both during and outside formal meetings—has increased, many boards have concluded that there should be limits on directors' board commitments. SSBI research revealed that 67% of S&P 500 companies restrict the number of corporate boards their directors may join.

As recently as 2006, the percentage of companies that had such restrictions for directors was only 27%. Some 40% of those companies that do not place a numerical restriction on board service ask directors to notify the chairman before accepting an invitation to join another board and/or they encourage directors to "reasonably limit" additional board service. For similar reasons, boards are limiting—and in some cases prohibiting—the number of board positions company executives may accept.

• A wider range of experience and perspectives are represented in the boardroom. A decade ago, chief executives, chief operating officers, chairmen, presidents, and vice-chairmen represented 53% of the pool of new independent directors. In 2009, the proportion of new directors with these backgrounds fell for the third year in a row, to 26%. A primary driver of the evolution in the director profile is the drop in the number of active CEOs serving on outside boards.