NEW YORK, May 20, 2022 /PRNewswire/ -- A new report by The Conference Board reveals that, as boards seek to recruit more directors with functional expertise, the percentage of board members in the Russell 3000 with business strategy experience has declined by five percentage points, from 67.7 percent to 62.9 percent. Accompanying that worrisome decline is a drop in directors with international experience, despite a more interconnected and tumultuous world.

At the same time, The Conference Board report, featuring data from analytics firm ESGAUGE, also reveals significant increases in the disclosure of diversity on boards. The percentage of S&P 500 companies disclosing directors' sexual orientation has more than tripled, from under seven percent in 2021 to nearly 23 percent as of April 2022, and in the Russell 3000 it increased seven-fold, from 3.5 percent to 25.4 percent. 

While 58.8 percent of the S&P 500 disclosed the racial/ethnic diversity of their boards in 2021, 73.3 percent have done so thus far in 2022. Similarly, in the Russell 3000, the share of companies disclosing the racial/ethnic diversity of their boards rose from 27.7 percent in 2021 to 45.1 percent as of April 2022.

But the increase in disclosure has not been matched by increases in racial/ethnic diversity. While the percentage of non-White directors has increased in the S&P 500, it has stalled among the Russell 3000. By contrast, gender diversity has continued to increase, with women now representing over 30 percent of directors at S&P 500 companies, and over 25 percent of board members at Russell 3000 companies. 

As companies are seeking to increase the diversity and range of expertise of their boards, they are also increasing the size of their boards, with the average size of S&P 500 company boards increasing from 10.8 in 2021 to 11.2 as of April 2022, and among Russell 3000 boards from 9.2 to 9.8. 

The publication includes insights and data—as recent as April 2022—relating to the composition of S&P 500 and Russell 3000 boards. Topics covered include director qualifications and skillsets, education, gender, race and ethnicity, sexual orientation, and board size. It is the first in a three-part series, with the subsequent two reports examining board leadership and structure, and board refreshment.

The project is led by The Conference Board in collaboration with ESGAUGE, along with Debevoise & Plimpton, the KPMG Board Leadership Center, Russell Reynolds Associates, and the John L. Weinberg Center for Corporate Governance.

The report offers the following findings and insights:

Director Qualifications and Skillsets

Business strategy experience declines, as many companies seek to add specialists

• The percentage of board members with business strategy experience is declining:
• A decline in the S&P 500:
• 2018: the share of directors with business strategy experience was 69.7 percent
• 2021: the share decreased to 67.5 percent
• An even bigger decline in the Russell 3000:
• 2018: the share of directors with business strategy experience was 67.7 percent
• 2021: the share decreased to 62.9 percent
• By contrast, experience in areas such as business operations, finance (in the S&P 500), and accounting/auditing (in the Russell 3000) has increased in recent years:
• S&P 500 directors:
• Business operations: from 5.7 percent in 2018 to 11.9 percent in 2021
• Finance: from 19.7 percent in 2018 to 22.2 percent in 2021
• Russell 3000 directors:
• Business operations: from 7.5 percent in 2018 to 10.7 percent in 2021  
• Accounting/auditing: from 4.5 percent in 2018 to 6.6 percent in 2021
• Additionally, after a decline from 2018 through 2020, the percentage of board members with technology experience is increasing again, both in the S&P 500 and Russell 3000:
• S&P 500 directors:
• The share of directors with technology experience declined from 25.1 percent in 2018 to 22.1 percent in 2020, but has increased since then to 22.6 percent in 2021 (and even further to 23.9 percent as of April 2022)
• Russell 3000 directors:
• The share of directors with technology experience declined from 16.8 percent in 2018 to 16.4 percent in 2020, but has increased since then to 16.6 percent in 2021 (and even further to 17.2 percent as of April 2022)

"The recent decline in board members with business strategy experience is worrisome. Directors without broad strategic experience risk hindering effective board discussions and will likely be less useful partners for management," said Paul Washington, Executive Director of the ESG Center at The Conference Board. "Although boards may want to add functional experience in ESG areas such as technology, human capital, and climate, directors can bring meaningful value only if they can make the connection between these functional areas and business strategy."

International experience also declines

• Despite a more interconnected and tumultuous world, directors with international experience is declining:
• A decline in the S&P 500:
• 2018: the share of directors with international experience was 19.6 percent
• 2021: the share decreased to 14.4 percent
• A decline in the Russell 3000:
• 2018: the share of directors with international experience was 10 percent
• 2021: the share decreased to 8.1 percent

"From the COVID-19 pandemic, to social justice upheavals, rising inflation, and the war in Ukraine, US corporate boards have been faced with crisis after crisis. We're in an environment that underscores the need for leaders with very strong interpersonal attributes," said Justus O'Brien, co-leader of Russell Reynolds Associates' Board and CEO Advisory Partners practice. "Even though companies have traditionally focused on recruiting directors with 'hard skills,' boards need to keep an eye on 'soft skills' when recruiting new directors. Such skills include the ability to listen, empathy, openness to change, and eagerness to learn, among others."

Director Education

Companies are stepping up their efforts to educate directors on ESG issues

• Given the board's increased role with respect to environmental, human capital, technological, and other issues, boards are looking for ways to enhance their understanding of ESG issues—and their appropriate role.
• The predominant practice in director education remains relying exclusively on in-house resources. But using a combination of in-house and outside resources to develop and deliver board education programs has been increasing in both indices:
• An increase in the S&P 500:
• The share of companies taking this approach grew from 25.3 percent in 2018 to 29.1 percent in 2021
• An increase in the Russell 3000:
• The share grew from 11.8 percent in 2018 to 16.4 percent in 2021

"Expect more companies to adopt a combination of using internal and external resources for director education. The hybrid approach will continue gaining popularity, given the need to ensure directors are able to effectively oversee a growing number of ESG subject areas, and senior management itself may also needing to be brought up to speed," said Umesh Chandra Tiwari, Executive Director of ESGAUGE. "While it can be useful for directors to meet with advocacy organizations in other contexts, for board education programs it's critical for outside providers to provide objective and trusted advice and benchmarking."

Director Race/Ethnicity

The momentum continues: disclosure of race and ethnicity

• Last year, The Conference Board reported the surge in companies disclosing the race/ethnicity of their directors:
• Big strides in disclosure in 2021:
• S&P 500: the share of companies disclosing grew from 11.4 percent in 2018 to 58.8 percent in 2021  
• Russell 3000: it grew from 3.8 percent in 2018 to 27.7 percent in 2021
• A continued increase in 2022:
• S&P 500: the share grew from 58.8 percent in 2021 to 73.3 percent as of April 2022
• Russell 3000: it grew from 27.7 percent in 2021 to 45.1 percent as of April 2022

Percentage of non-white directors steadily increase at larger companies

• In the S&P 500 from 2018—2021, most non-white ethnicities made gains—except Latinos or Hispanics:
• S&P 500 directors, 2018—2021:
• Decrease in Whites/Caucasians: in 2018 their share was 80.1 percent; in 2021 it was 76.7 percent
• Decrease in Latinos or Hispanics: in 2018 their share was 6.6 percent; in 2021 it was 5.1 percent
• Increase in African Americans: in 2018 their share was 11.3 percent; in 2021 it was 12.6 percent
• Increase in Asians, Hawaiians, or Pacific Islanders: in 2018 their share was 1.8 percent; in 2021 it was 5.1 percent
• In the Russell 3000 from 2018—2021, just one non-white ethnicity made gains—Asian, Hawaiian, or Pacific Islander:
• Russell 3000 directors, 2018—2021:
• Increase in Whites/Caucasians: in 2018 their share was 78.1 percent; in 2021 it was 79 percent
• Increase in Asians, Hawaiians, or Pacific Islanders: in 2018 their share was 3.3 percent; in 2021 it was 5.3 percent
• Decrease in Latinos or Hispanics: in 2018 their share was 7.5 percent; in 2021 it was 4.4 percent
• Decrease in African Americans: in 2018 their share was 10.9 percent; in 2021 it was 10.6 percent

"While corporate disclosure of diversity soared in 2021 and continues to reach new heights in 2022, increased disclosure alone will not satisfy investor and other stakeholders' expectations," said Justin P. Klein, Director of the John L. Weinberg Center for Corporate Governance. "Investors and proxy advisors alike have begun setting targets for the racial makeup of boards and will advise voting against directors if those targets are being unmet. Companies—especially smaller ones—will want to augment the racial diversity of their boards by executing a succession plan where the focus on strategic skills and expertise is accompanied by the pursuit of racially diverse members." 

Director Sexual Orientation

Disclosure of sexual orientation surges

• In 2022, there's been a sudden rise in companies disclosing their directors' sexual orientation:
• A surge in the S&P 500:
• 2021: the share of companies disclosing was just 6.6 percent
• 2022, Jan—April: the share increased to 22.7 percent    
• A surge in the Russell 3000:
• 2021: the share of companies disclosing was just 3.5 percent
• 2022, Jan—April: the share increased to 25.4 percent

The highest percentage of directors who self-identified as LGBTQ+ was at the smallest companies

• There's no clear correlation between sexual orientation and company size. However, in 2021 the highest percentage of directors who self-identified as LGBTQ+ was seen at the smallest companies:
• Under $100 million in annual revenue:
• The share of directors who self-identified was 20 percent
• $50 billion or higher in annual revenue:
• No directors self-identified

"A possible explanation for the stark gap between directors who choose to self-identify as LGBTQ+ is that those at the smallest companies believe they can have a bigger impact on the firm and its culture by disclosing," said Merel Spierings, author of the report and Researcher at The Conference Board. "But whether at a large or small company, disclosure on sexual orientation, and other personal and less visible traits, needs to be undertaken with sensitivity to the directors' individual and collective views."

Director Gender

Women now hold 30 percent of board seats at large companies

• Women's representation on boards continues to increase in both indices:
• A continued increase in the S&P 500:
• 2018—2021: the share of female directors grew from 22.8 percent in 2018 to 28.9 percent in 2021
• 2022, Jan—April: the share reached 30 percent
• A continued increase in the Russell 3000:
• 2018—2021: the share of female directors grew from 16.6 percent in 2018 to 24.1 percent in 2021
• 2022, Jan—April: the share reached 26.6 percent

There is a direct correlation between company size and gender diversity on boards

• The highest percentage of female directors are concentrated among boards of larger companies:
• Annual revenue under $100 million:
• In 2021, the share of women directors was 19.5 percent
• Annual revenue at or above $50 billion:
• In 2021, the share of women directors was 30.8 percent 

"Some major institutional investors and proxy advisors have pledged to vote against the nominating committee chairs of those boards that are not at least 30 percent gender diverse, starting in 2023," said Annalisa Barrett, Senior Advisor with the KPMG Board Leadership Center. "Without a comprehensive plan to accelerate progress, meeting this target will be particularly challenging for many companies in the Russell 3000—only about a third of which have three or more female directors on their board."

Board Size

Boards are gradually getting bigger

• Data from the first four months of 2022 indicate that boards are expanding:
• S&P 500 boards expand:
• 2018—2021: average board size held steady at 10.8 directors
• 2022, Jan—April: average board size expanded to 11.2 directors
• Russell 3000 boards expand:
• 2018—2021: average board size grew from 9 to 9.2 directors
• 2022, Jan—April: average board size expanded to 9.8 directors

"Boards will likely continue expanding, as companies seek to increase diversity and add new skills and expertise, most notably with respect to ESG and cybersecurity," said Paul Rodel, Partner at Debevoise & Plimpton LLP. "Boards cannot wait to add a new director until a retirement creates an opening; attractive candidates may have other offers before then. Instead, boards need to strike while the iron is hot, which means at least temporarily increasing the size of the board to allow for some overlap."

About The Conference Board ESG Center
The Conference Board ESG Center serves as a resource, platform, and partner to help Member companies address their priorities in corporate governance, sustainability, and citizenship. www.conferenceboard.org/ESG

About The Conference Board
The Conference Board is the member-driven think tank that delivers trusted insights for what's ahead. Founded in 1916, we are a non-partisan, not-for-profit entity holding 501 (c) (3) tax-exempt status in the United States. 
www.conferenceboard.org

About ESGAUGE
ESGAUGE is a data mining and analytics firm uniquely designed for the corporate practitioner and the professional service firm seeking customized information on U.S. public companies. It focuses on disclosure of environmental, social, and governance (ESG) practices such as executive and director compensation, board practices, CEO and NEO profiles, proxy voting and shareholder activism, and CSR/sustainability disclosure. Our clients include business corporations, asset management firms, compensation consultants, law firms, accounting and audit firms, and investment companies. We also partner on research projects with think tanks, academic institutions, and the media.

About Russell Reynolds Associates
Russell Reynolds Associates is a global leadership advisory and search firm, working with public, private and nonprofit organizations across all industries and regions. From helping boards with their structure, culture and effectiveness to identifying, assessing and defining the best leadership for organizations, our teams bring their decades of expertise to help clients address their most complex leadership issues. www.russellreynolds.com

About the John L. Weinberg Center for Corporate Governance
The John L. Weinberg Center for Corporate Governance was established in 2000 at the University of Delaware and is part of the Lerner College of Business and Economics. It is one of the longest-standing corporate governance centers in academia, and the first and only corporate governance center in the State of Delaware, the legal home for a majority of the nation's public corporations. The Center is recognized as a thought leader in the corporate governance field. www.weinberg.udel.edu

About Debevoise & Plimpton
Debevoise & Plimpton LLP is a premier law firm with market-leading practices, a global perspective and strong New York roots. We deliver effective solutions to our clients' most important legal challenges, applying clear commercial judgment and a distinctively collaborative approach.

About the KPMG BLC
The KPMG Board Leadership Center (BLC) champions outstanding corporate governance to drive long-term value and enhance stakeholder confidence. Through an array of insights, perspectives, and programs, the BLC—which includes the KPMG Audit Committee Institute and close collaboration with other leading director organizations— promotes continuous education and improvement of public and private company governance. BLC engages with directors and business leaders on the critical issues driving board agendas—from strategy, risk, talent, and ESG to data governance, audit quality, proxy trends, and more. Learn more at www.kpmg.com/us/blc  

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SOURCE The Conference Board