What is a board of directors and how does it vary by industry?
In recent years, investors have been exerting pressure on their boards to bring in new directors, and not just any new directors. Investors want to see their boards have more women, more people of color, and others who bring diversity in race, ethnicity, skills, experience, age and geography. Boards are also looking for people who bring diverse thoughts and perspectives to the table. Most investors prioritize new board directors who have technological skills and expertise.
While the roles and responsibilities of board directors haven't changed, the seats that have long been held by male directors are starting to turn to individuals who offer much more in the way of diversity.
What Is the Board of Directors Definition?
In simple terms, the board of directors definition is the governing body for a company. They are a group of people who are elected to make major decisions for the company. Board directors make decisions about mergers and acquisitions, selling the company, hiring and firing the CEO, major financing, and when or if they should take the company public.
Board directors have fiduciary duties, individually and collectively. This means that they must place the company's best interests before their own. Fiduciary responsibility also means that board directors must act as an ordinary, prudent person would under the same circumstances.
The board of directors makes sure that they select and hire the highest-quality senior executive team to run the daily operations. The board's role is to participate in risk management, strategic planning, and oversight of the management team and the rest of the employees.
How Board Directors Vary by Industry
As proof of the pressure to add diversity to boards, PwC's 2016 Annual Corporate Directors Survey said that they're seeing a trend toward an increase in diversity in many different industries. According to the survey, about 61% of directors said that they chose one of their new directors because their skills coincided with investor requests. Almost half of the directors responded that they had added a diverse director.
The survey notes that banking and capital markets have traditionally been dominated by men. Currently, this industry has 26% women, one of the highest percentages of women compared with any other industry.
The entertainment and media industry boasted the highest percentage of new female board directors. The retail and communications fields tied for the second-highest number of new female directors. The retail industry also reported the lowest average age of board directors, which was age 60.
Having at least one woman, at least one person of color and at least one independent director on the board is generally accepted as the definition of a diverse board of directors. TheBoardlist took a look at the diversity of public companies, as well as the diversity of private companies, as it pertains to the tech industry and revealed some intriguing results.
Of the public companies that ranked high for diversity, all of them had at least 25% women and at least one person of color on their boards. A board with 25% women typically translates to two or more women on the board. Here are the top-three public companies that have the greatest percentage of diversity on their boards:
- Stitch Fix has a five-member board of directors with 60% women, 40% independent directors and 20% people of color.
- Hewlett-Packard has a 10-member board of directors with 40% women, 60% independent directors and 50% people of color.
- Verizon has a 12-member board with 33% women, 92% independent directors and 25% people of color.
The median representation of women on public boards was 30% and the median representation of people of color was only 16%.
With regard to diversity, private companies are currently lagging behind public companies. The top-three private companies in TheBoardlist survey met the minimum criteria of having at least one woman, one person of color and one independent director. Overall, these companies tend to be the exception rather than the rule. The top-three private companies with the greatest degree of diversity are the following:
- Kickstarter has a five-member board with 40% women, 40% independent board directors and 20% people of color.
- SurveyMonkey has a 10-member board with 40% women, 40% independent board directors and 10% people of color.
- Slack has a six-member board with 33% women, 33% independent board directors and 33% people of color.
The survey indicated that even the boards of some of the largest private companies failed to add diversity to their boards. Most were missing independent directors, women or people of color altogether. The median representation of women on private boards was 23% and the median representation for people of color was only 20%.
Ride-sharing companies are relative newcomers to the corporate world. The two largest ride-sharing companies are Uber and Lyft, which are both private companies. While both companies are going strong, neither is ready for an IPO.
Uber has 11 people on its board. The board is composed of: 27% women directors, 36% independent directors and 27% women of color. Uber ranked 4th among private companies with the best diversity of board directors. Lyft followed closely behind Uber. Lyft has 10 members on its board. They have 20% women, 10% independent directors and 50% people of color. Lyft ranked not far behind its biggest competitor in 6th place for private companies with the most diversity on their boards.
Wrapping Up the Stats of Diversity of Board Directors by Industry
When looking at the board of directors definition, it's important to define the role not only according to the roles and responsibilities of a board directorship. Investors are trying to make a statement that the quality of the individuals is also an important facet of board composition — a quality that also brings diverse perspectives with it.
Long-tenured board directors no longer have the luxury of treating their board seats as rights. Succession planning is as big of an issue as diversity and board refreshment. Boards should expect continued pressure from investors and regulatory bodies to do self-evaluations and implement changes to ensure that their board of directors definition reflects qualified and diverse directors.