In 2019, public companies were facing pressure from investors and proxy advisors to add women and minority directors to their boards. Prominent proxy advisors, ISS and Glass Lewis, both established policies which recommended voting against the Nomination and Governance chairs of companies with no female directors. State Street Global Advisors and BlackRock have similarly demonstrated their commitment to boardroom diversity by voting according to this policy. BlackRock voted against companies without at least two women on the board and with no clear policy or demonstrated improvement on board diversity. State legislative powers added to this pressure when new states passed legislation mandating board diversity. California passed a law establishing gender quotas for public companies headquartered in the state, while Illinois mandated the disclosure of public companies’ diversity information.
In the 2019 proxy year 432 new independent directors were added to S&P boards with 59% from underrepresented groups, showing a 9% increase from the previous year. Gender diversity was a clear priority for boards with women making up 46% of the incoming class of directors. More than 90% of boards had two or more women in 2019, a 4% increase from the previous year. Demand for racial and ethnic diversity continues to grow with 23% of new independent directors in 2019 being from underrepresented racial and ethnic groups, a 5% increase from the previous year. Of nomination and governance committee members surveyed in 2019, 36% reported that their highest recruiting priority is female directors. 40% of committee members surveyed said that female directors will be the director candidates in the highest demand over the next 3 years and 24% said POC candidates will be in the highest demand.
Based on data collected in 2019, areas of expertise featured on corporate boards have shifted in recent years and will continue to shift moving forward. CEO experience is no longer required to serve on a board, as 65% of the incoming directors in 2019 came from outside top executive ranks. That being said, corporate leadership experience is still valued with 23% of new independent directors having experience in positions like division head, VP, and functional unit leaders. Previous board experience also is no longer required with 27% of new independent directors serving on their first public company board. Moreover, age diversity is a lower priority as 16% of directors are 50 or younger, a decline from 17% in 2017 and 2018.
While a top priority for boards before the pandemic was nominating new directors with proven expertise and increased diversity to help meet new demands, both of these characteristics are in even higher demand now as a result of the pandemic. Despite the fact that the proportion of female directors is the highest it has been in 11 years, and the marked 10% increase in the proportion of POC directors, the increased focus on racial injustice and social inequality in 2020 has led many leaders to reconsider their diversity and inclusion efforts by building better representation internally and supporting POC externally.
In 2020, the proportion of women is staying strong among new independent directors. Functional experience has increased while demand for CEO experience has decreased. While employees are working from home, digital expertise is trending and cybersecurity and financial risk have become critical priorities, heightening the demand for experience in those areas. Despite the focus on increasing diversity, first time directors are still not as common. The proportion of directors with prior CEO experience is declining annually but is still the most common type of prior expertise, followed by CFO experience.
Social responsibility is more important for companies than ever before, so moving forward boards will significantly increase their efforts toward greater racial and ethnic diversity to be more representative of the communities they serve. Similarly, economic and social volatility present increased risk in 2020, so boards will continue to prioritize experience moving forward in order to help stabilize their companies during these unprecedented times. Boards have also adopted a more relaxed policy on the limit to how many public boards an individual can serve on to help manage the challenges companies are facing due to COVID-19. As a result of the crisis, companies are displaying a continued reliance on financial services experience and financial expertise. Experience with bankruptcies and restructuring in capital markets is more highly valued than ever before and directors with experience in digital and sustainability are going to be highly sought after both during the crisis and in the long term.
On a broader note, in 2020 companies are looking not only to weather the crisis, but to make changes now that will benefit them in the long term. The COVID-19 crisis and the heightened focus on racial injustice this year have shed light on the importance of the relationship between business and society. Organizations play a pivotal role in helping society overcome its challenges and as such are facing heightened scrutiny. As a result, talent is going to shift from organizations that create value only for their shareholders to those that create value in the long term for their employees, consumers, shareholders, and society at large. The expectations of these audiences have changed in 2020—making it all the more important for companies to redefine and reactivate their purpose. This responsibility falls first on the board, heightening the importance of hiring new board members who suit their current needs during the crisis and who can offer new insight and a valuable skillset to help tackle the times ahead.