As the financial sector begins to enter a stage of regrowth and rebuilding, financial experts, regulators and other stakeholders are casting a fresh set of eyes on best practices for corporate governance in order to improve the financial markets and the economy.
Board refreshment and board composition have been among the most challenging aspects of corporate governance to tackle. Up until recent years, board director tenures lasted for many years and age limits rose with age. With the new pressures from regulators and shareholders, new trends for best practices in board refreshment and board composition are emerging. The quality of board composition is getting as much attention as selecting, overseeing and compensating the CEO and other senior executives.
Shareholders, stakeholders and regulators seek greater board turnover and diversity in order to keep up with the evolution that’s taking place in the financial realm.
As the expectations and best practices for board composition begin to change, boards need the right tools to fill their boardroom with the best that board directors have to offer.
Balancing Board Positions With the Needs of the Corporation
Just as the trend began to sway in the direction of smaller board sizes, the pressures and expectations of boards began to increase. Today’s boards face a major balancing act as they seek to balance stakeholders’ expectations of diminished size with the same group’s expectations to meet the growing pressures to develop a well-composed board that’s capable of meeting the evolving needs of the corporation. The average number of board directors used to be between 14 and 16 members. The financial crisis of 2008 shed a strong light on board composition and its role in the downfall of the financial industry. Suddenly, governance experts were asking all kinds of questions about who filled board seats: whether they were qualified; whether they were active; how old they were; how long they’d been there; and whether certain board directors were needed at all. These questions caused boards to decrease in size to numbers more along the lines of 10 to 12 directors. As directors retired or resigned, many boards simply didn’t replace them. Beyond the obvious impact of the financial crisis, board composition is also being affected by such issues as cybersecurity, pressures to add diversity and insistence on having a majority of independent directors. According to an article by the American Bar Association, today’s financial arena is influenced by many different factors, including:- The Internet
- Communications technology
- Social media
- Complex financial transactions and products
- Rising business sustainability
- Increased reporting obligations
- Demands from regulators and stakeholders to improve risk recognition, assessment and mitigation skills
- Increased recognition of the need for better industry experience on boards
- Recognition that board performance may suffer from lack of gender, ethnic and age diversity