The traditional board committee model is changing.
“Committees have changed a lot over the years,” Bill McNabb, former CEO and chairman of Vanguard, said at a Tuesday panel hosted by EY’s Center for Board Matters. “I think we’re in the process…of seeing another major shift in the responsibilities within various committees.”
Most boards, if not all, typically have a finance or audit committee, a compensation committee, and a nominating & governance committee. These three committees are mandated by the New York Stock Exchange and they’re the most common on S&P 500 boards. Today, companies are adding new committees and also reshaping the responsibilities of existing ones.
Not all committees are built the same. About one-third of board members in attendance at the EY panel rated their committee structure as “very effective.” Twelve percent said their committee structure was not effective and over half said it was “somewhat effective.”
S&P 500 boards have an average of 4.2 committees, a total which has not changed much over the last decade, according to a report by Spencer Stuart. While 28% of boards have three or fewer committees, 31% have five or more. The number of committees is positively correlated with the growth in size of boards. Data from The Conference Board, in partnership with ESGAUGE, found that the average board size among Russell 3000 companies grew from 9.2 to 9.8 within 2022.
Paul Washington, executive director of The Conference Board’s ESG center, says that when boards find good candidates, they don’t want to wait for an opening to add them, so “they need to increase their size, to increase the functional expertise, to increase the diversity of the board.”
Not only are boards taking on more responsibilities than ever before, Washington adds, in some cases, they’re adding new committees. “And even if they’re not adding committees, each committee is taking on a greater workload.”
McNabb, who is conducting research on board innovation in partnership with the National Association of Corporate Directors, has a few suggestions for restructuring committees, which includes adding talent and execution of company goals to the compensation committee’s remit.
“As we talked to a lot of people who were serving on some of these committees,” McNabb explains, “the comp stuff was too formulaic and there was less in depth understanding of what was driving the results.”
Michele Hooper, a board director at UnitedHealth Group and United Airlines, has observed more nom-gov committees taking on ESG oversight, noting that she approves of this development because those committees are well-equipped to make changes to the company governance models to account for the new reporting and public standards around sustainability, community and environmental impact, and talent.
McNabb’s other suggestions include the formation of ad-hoc committees and a new strategy & risk committee.
Ad-hoc committees in particular can help boards address pressing matters faster, allowing them to explore an issue in depth, and preventing all directors from getting into the weeds on granular topics that are not as valuable a use of time for the broader board, McNabb says.
It also gives the full board more time to focus on big-picture issues such as talent, strategy, and risk at a high level.
“The best performing boards, at least that I’ve had experience with, have these just incredible dialogues around these topics,” McNabb says. “If the committees are doing the work well, then the boards can really be freed up for these higher level discussions.”
Aman Kidwai
aman.kidwai@fortune.com
Headlines
LGBTQ reporting up. Data shared exclusively with The Modern Board found significant increase in the number of companies reporting board directors' sexual orientation. About 6.6% of S&P 500 companies and 3.5% of Russell 3000 companies disclosed their directors’ sexual orientation in 2021, according to The Conference Board. That percentage has jumped to 22.7% in the S&P 500 and 25.4% in the Russell 3000 as of April 2022.
Gender mandate. An LA Superior Court judge said a law that would have required boards to have up to three female directors by this year violated mens' right to equal treatment. SB 826 took effect in 2019, requiring a minimum of one female director on public boards. NBC
JetBlue vs. Spirit. After Spirit turned down another acquisition offer from JetBlue, the latter airline began a hostile takeover attempt on Monday. Spirit executives are urging shareholders to reject the new offer, but JetBlue has publicly insisted that Spirit’s management is not looking out for the best interest of shareholders, who could see significant returns from their combined company. CNBC
Investors balk at pay. In shareholder votes for executive pay, 23 S&P 500 companies received 70% or less support, a marker that corporate-governance analysts say reflects significant investor dissatisfaction. At Intel and JPMorgan Chase, investors owning roughly two-thirds of shares voted against. At Coca-Cola, 49.5% voted against executive pay plans. Analysts suggest this is part of a growing call for increased compensation oversight and an emphasis on pay equity. WSJ
BOARD MOVEMENT
Daymond John, founder of iconic clothing brand FUBU and a panelist on the TV show Shark Tank, is joining the board of Overtime, a sports media company that also counts Jeff Bezos, Drake, and Reddit co-founder Alexis Ohanian among its investors. Neptune Wellness Solutions has added Phil Sanford, formerly of n3, a sales service firm that was acquired by Accenture in 2020, to its board of directors. He will also serve as audit chair. Vertex Pharmaceuticals has elected Suketu Upadhyay, EVP and CFO at Zimmer Biomet, a health care manufacturer, as an independent director. Arun Oberoi, former EVP global sales and services at Red Hat, is joining the board of Schrodinger, Inc, a software platform in the therapeutics space and will also be on the audit committee. FirstEnergy announced a new board, entirely elected to one-year terms, re-electing 10 former directors while adding Jana T. Croom, CFO Kimball Electronics, and Sean T. Klimczak, senior managing director and global head of infrastructure, Blackstone Inc.
View from the C-Suite
"Office centricity is over," according to Shopify leadership.
In the latest installment of View from the C-Suite, a new series that sheds light on how executives are addressing the most pressing issues in corporate America and society at large, Shopify president Harley Finkelstein sat down with Fortune's Phil Wahba to discuss the company's transition to a "digital default" organization.
The Ottawa-based e-commerce platform recently hired a CTO from San Francisco and a general counsel from Washington D.C., which would not have been possible without the company's remote-first pivot. In this Q&A, Finkelstein explains the benefits of a digital-first model and why it's key to survival in today's ultra-competitive talent market.
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