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Knowledge Center Items D&O: Why Rebooting a Board’s Composition Is Good for Companies

D&O: Why Rebooting a Board’s Composition Is Good for Companies

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Last month, we took a look at trends for directors and officers for 2017. One hot topic involves a board’s composition and ensuring that it’s aligned with a company’s goals and future needs. According to a recent KMPG survey, 435 of respondents cited “resistance to change” and “status quo thinking” as hampering their board-building effort. In fact, one survey respondent was quoted as saying, “Companies should be forward-looking when appointing directors, otherwise the composition and expertise of the board may not be in line with the company’s current stage of development. A “status quo” bias is a huge impediment to maintaining a high-performing board.”

A board’s main purpose is to enhance shareholder value by setting strategic priorities, selecting key members of management and overseeing emerging risks and opportunities. Individuals should be working cohesively and productively together as a functioning body. Each member should feel comfortable and trust one another for a board to be successful. Yet getting too comfortable is not necessarily a good thing and could lead to stagnation, especially in light of today’s technology advances, business model disruption, emergence of Millennials and other demographic shifts, heightened expectations of investors and other shareholders and global volatility and political shifts.

Taking a hard look at a board’s underlying composition and skills enables a company to see where improvements can be made to promote fresh, dynamic and engaged perspectives. KMPG and other similar reports on this topic recommend that directors put their focus on board composition/diversity and succession planning, robust evaluations, tenure limits, director recruitment and onboarding, board leadership, stakeholder communications, and continuing director education—all tailored to the company and industry. In short, “periodic board refreshment” should give way to robust, continual improvement and active board succession planning.

 In looking at what mechanisms are most effective to stimulate board refreshment, a separate survey of investors and directors conducted by Ernst & Young (EY) shows that rigorous board evaluations top the list, including evaluations of individual board members. Director or term limits are effective but do not take into account the contributions of valuable, long-tenured directors. They do, however, provide a built-in mechanism to generate a conversation about leaving the board and creating additional assessment of long-tenured directors and officers and the potential need for fresh perspectives. The least effective method according to this survey is director retirement age. Generally speaking, investors don’t believe retirement ages “prompt thoughtful and regular board refreshment.”

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