Snoozing Boards Can Stunt Your Stocks


Corporate governance debates include the woeful fact that America's boards of directors lack diversity. However, there's another element too easily overlooked in the argument: the hunger and excitement of youth. Aging, entrenched boards consisting of the same types of people can transform venerated companies into dinosaurs.

GMI Ratings recently released a report that digs a little deeper into the board diversity issue. It highlights one commonsense culprit that's too easily thrown into a different category but correlates well with why different candidates can't find seats in corporate boardrooms.

Same-old, same-old, same-old
GMI Ratings' analysis highlights some interesting factors explaining why diversity isn't a faster-moving improvement in corporate board composition. Of all the board seats in the U.S., more than a quarter are held by men with at least a decade's worth of tenure.

No wonder progress for women and minorities on corporate boards has been glacial. Too many old buddies are sitting around on stagnated boards, sometimes for decades.

GMI Ratings' 2013 Women on Boards report earlier this year revealed that since 2001, the number of female directors on S&P 1500 boards rose by less than 5 percentage points. Obviously, though, it's difficult to obtain a board seat when current occupants simply aren't budging.

The new report brings up some interesting points. If you took the S&P 500 and removed 46% of the male directors who'd been serving for more than 10 years and put female directors in their seats, the results would be astounding: 30% of the index's seats would be held by women.

Sitting back in the Naugahyde recliners
Entrenched boards can lead to company-stunting problems. CEOs are overcompensated, risk is poorly addressed or managed, new consumer trends are missed, stagnant bureaucracies petrify, and terrible disasters like the financial crisis happen. The beauty of a system with checks and balances fails.

Blame usually falls on the public-facing corporate managements, but the boards of directors should have been pushing back against excess, poor management decisions, and risk oversight, and in such cases, they most likely didn't make a peep. Even so, many were paid handsomely to successfully execute this side job.

GMI Ratings' report also points out that long tenures deteriorate supposed "independence." Even if long-tenured directors aren't company employees, attending board meetings for such long periods of time must feel like a reunion of best buddies. A decade is nothing to sneeze at.

Given that backdrop, it becomes far more difficult to have an unbiased attitude or an independent frame of mind as time goes by. The relationships between directors and management at public companies probably shouldn't be too warm and fuzzy. Board meetings aren't intended to be BFF reunions, and when they're homogeneous groups, they're all preaching to the choir anyway.

Man, those seats are warm
BusinessWeek recently reportedthat 64% of the directors at S&P 500 companies have served for 10 to 15 years, and 5% more have been seated for more than 15.

A recent board shakeup at Hess had tenure at the core of the controversy. Elliott Management fought hard to replace three directors at the firm. BusinessWeek reported that Hess had the 10th-oldest board in the S&P 500, and the average age of directors was 69.

Coca-Cola has added some new blood to its board this year, but it's historically had staggering tenure. Three of its directors have served for more than 30 years, and two others have been around for two decades. In a step in the right direction, though, two Coke directors in their 80s didn't stand for reelection this year; it seems like a great age to retire.

Earlier this year, the oldest director in the S&P 500 relinquished his post at 96 years young. Mortimer Caplin had served on the board of directors of Danaher since 1990. It's wonderful to see Bloomberg's report that he planned to direct all his post-retirement time to things he feels passionate about: tax law (somebody's got to love tax law) and the University of Virginia. Still, while octogenarians have great insights from decades of life, it's less likely they have the greatest insights into the modern, evolving marketplace.

Flash forward or flash in the pan
Many people counter the pro-diversity debate with the pro-experience argument. While experience is important, in certain areas of our society, decades of experience equates to residing on the very top of the ivory tower. You can't see much of what's going on down in the real world from up there.

Women and minorities have made major inroads in the last several decades in corporate America. Many possible candidates are younger, with less traditional experience, but we should get creative and inject more of them -- and their insights -- into board composition. Although all candidates may very well be residing on some level of the "ivory tower," those who are on the upward trajectory can still see what it's like to be a regular person in the marketplace. Corporate boards need such different viewpoints to make discussion and discourse real.

What can we shareholders do? We can pay attention to our proxy statements, and vote against directors who have been serving for decades, or may have become, shall we say, overripe. We can also vote for proxy access, and stand in favor of declassifying boards, so directors are all up for reelection every single year.

Tired boards are stuck in the past, and cognitive diversity improves groups and cause more robust discourse. Successful investing relies on managements and boards that are preparing for the future, not focusing on the past.

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Alyce Lomax has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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