Balancing Director Expertise With Diversity of Experience
Interesting new data rising from the public company sector provide useful guidance to health system governance committees on how best to balance the somewhat competing nomination options of director candidates with previous board experience, and those with broadly diverse perspectives and experiences. While not mutually exclusive, the issue may deserve focused committee attention.
The new data, compiled and interpreted by Institutional Shareholder Services, Inc. (ISS), promotes the need for nominating committees to reach a working balance between the relevant criteria; e.g., new versus experienced directors, industry expertise versus broad knowledge, the right level of refreshment, etc. The premise is that the level of scrutiny over the selection of directors will only increase. This reflects an increasing focus of institutional investors/asset managers in supporting shareholder initiatives to increase board diversity as a means of enhancing the decision-making process of the board in general, and the ability to consider, where appropriate, alternatives to management strategies.
The data reach two high level conclusions, both of which have relevance to the director nomination process of nonprofit health systems. First is that while a majority of S&P 500 directors maintain multiple directorships, approximately one in three S&P 500 companies have seated new first-time directors since the beginning of 2015. ISS data indicates that this number is trending upward, possibly in reaction to internal and external efforts to increase diversity and fill important boardroom “skill gaps.” The second conclusion relates to industry concentration of directors who serve on multiple boards. The results suggest that industry concentration is not as significant an issue for directors as it may be for executives. However, some industries (e.g., pharmaceuticals, life sciences, and health care equipment and services) demonstrate a higher need for “specialty” directors.
The ultimate conclusion is—not surprisingly—that there is no one-size-fits-all combination of directors for every company. Matters relating to new versus experienced directors, and industry expertise versus diversity across multiple perspectives, is a matter for thoughtful consideration by the board’s nominating committee.