US board composition: male, stale and frail?

FT investigation reveals the average US board director is older, serving a longer tenure and more likely to be male

The string of food safety problems at Chipotle Mexican Grill last year, including outbreaks of e-coli and salmonella, wiped 40 per cent off the company’s shares. A year later, customer numbers are still down sharply.

Not by coincidence, the burrito chain has been the focus of one of the biggest corporate governance fights of 2016. Some shareholders blame a stale, insular board of directors for failing to move fast enough or aggressively enough to deal with the crisis.

The company is emblematic, campaigners say, of how too many of America’s boardrooms are failing to protect investors’ interests. A Financial Times analysis of data from the shareholder advisory group ISS Analytics shows US boards are “maler, staler and frailer” than their European counterparts, having directors who are older on average, stay in post longer and are less likely to be women.

There is a straight line between the ensconced position of many board members — the average tenure of Chipotle’s current directors is 13 years, five years more than the US average — and a “slow, superficial and unconvincing” response to the safety issues, according to CtW Investment Group, which represents union pension funds and wrote a thunderous public letter to fellow shareholders.

“Chipotle is in need of genuinely independent oversight now more than ever,” CtW wrote, complaining that one of the longest-tenured directors had been put in charge of overseeing food safety issues for the audit committee. “Its growth has long since outsized its governance arrangements.”

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Chipotle argued it has a small, active and engaged board that has been fully involved in the food safety response, but that did not prevent 30 per cent of shareholders opposing the re-election of Patrick Flynn, who runs the committee in charge of nominating new directors. A company spokesman says it is interviewing for one new independent director and will “consider additional board changes to meet longer-term needs”.

Slow to reform

Shareholders of companies around the world have long fought to get the basics of boardroom accountability right. Yet many still express dissatisfaction with the quality of candidates and the make-up of even large corporate boards, especially in the US, which has been slower to hand shareholders rights that have been common elsewhere for years, thanks to standards like the 1992 Cadbury Code in the UK. There are increasing calls for companies to create more board seats for minorities and women and for “board refreshment” to sweep away vestiges of the clubroom atmosphere.

“I depend on the individuals inside that room to hold management to task,” says Anne Sheehan, head of corporate governance at Calstrs , the $190bn California teachers’ pension fund, which withheld its support from six of the nine members of the Chipotle board this year. “Having too many people that think alike, act alike, come from the same background, perhaps went to the same school or who have all been on other boards together, can lend itself to groupthink. We need directors to ask the tough questions, to probe management and be a little more provocative.”

Demands for board refreshment usually explode into the open after a scandal, or when a company’s performance sours, or if there is an egregious example of executive pay. Shareholders confronted board members this year at BP over chief executive Bob Dudley’s $19.6m pay deal, which they voted down. Dame Ann Dowling, head of the remuneration committee, faced calls to resign.

Ms Sheehan singled out energy and mining as sectors where Calstrs was making a concerted push to shake up boards, including pressure to add more female directors. “It’s a throwback to a lot of the petroleum engineers being the good ol’ boys in Oklahoma and Louisiana,” she says.

The data from ISS, which covers more than 45,000 directors across 5,000 companies in 30 markets, show that the energy sector has the oldest directors, at 61 years, a year older than the average for all directors, and it has by far the fewest women on boards. Female directors account for 12 per cent of board members in the sector, compared with an average of 17 per cent across all the companies in the data.

In terms of length of tenure, however, energy sits in the middle of the pack. Directors in finance have served the longest with an average tenure of 7.9 years, compared with six in telecoms, the sector with the freshest boards.

‘Brandy and cigars’

Board members are widely regarded as less independent-minded after long service. Under many formal governance codes around the world, they cannot serve on important board subcommittees like the compensation committee after a certain length of tenure, “though they can be found lurking around for the brandy and cigars afterwards”, in the words of Anne Simpson, head of corporate governance at Calpers , the largest US pension fund.

In the US, where there is no single code, investors have shied away from saying they will automatically vote against longstanding directors, but Calpers and others demand an explanation when a term lasts beyond 12 years.

The assault has been enough to generate a rearguard action by Wachtell, Lipton, Rosen & Katz, the august law firm which for 50 years has been defending US corporations against the advance of shareholder activism. In a paper in the New York Law Journal last month, Wachtell partner David Katz and his colleague Laura McIntosh wrote that “director tenure is an issue at once too picayune — as it is well within the discretion of the board — and too significant — as it affects the board’s latitude to do its job effectively — to be determined by shareholders or outside groups rather than by directors themselves”.

They went on: “We believe that many investors as well as proxy advisory firms are looking at this issue the wrong way. Rather than focusing on simply the longest tenured directors, we believe that it is the average tenure of the entire board that is most relevant.”

The ideal is a mix of seasoned and new executives, says Glenn Booraem, fund treasurer at Vanguard, one of the largest shareholders of US listed companies. “Not everyone can be new all the time. There is a value to institutional memory and a degree of consistency.”

Mr Booraem adds that directors may become more independent from management, not less, if they have seen several chief executives come and go. And Michelle Edkins, head of corporate governance for BlackRock, the world’s largest asset manager, says companies could justify longer board tenures if they are overseeing investment decisions that play out over a longer cycle, such as in oil and gas, than in, say, fast-moving consumer goods. Ms Edkins says most of the largest multinationals now tended to have “world-class boards” and investor attention was turning to midsize companies.

The FT’s analysis of ISS Analytics data shows that larger companies tend to have fresher and more gender-diverse boards. Those with a market capitalisation above $50bn have an average tenure for sitting directors of 6.9 years, the only segment below seven years. Among companies worth less than $500m, a sitting director has been in place for 7.5 years on average. The proportion of women on the boards of $50bn-plus companies has hit 25 per cent; among sub-$500m companies it is half that.

Click the buttons below to view the top 10 boards and directors by tenure or age
Top 10 by tenure
Top 10 by age

Longest and shortest tenures of boards and directors of companies with a $50bn+ market cap.

Longest average tenure

Berkshire HathawayUS18.9 years
Banco BradescoBrazil13.5
Simon PropertyUS12.1

Shortest average tenures

SamsungSouth Korea2
Rosneft OilRussia2.3
Lloyds BankingUK3.3
National GridUK3.3
Kraft HeinzUS3.4
Westpac BankingAustralia3.4

Longest serving directors

Warren BuffettBerkshire Hathaway51 years
Richard BurkeUnitedHealth39
Charles MungerBerkshire Hathaway38
S Robson WaltonWalmart38
Sheldon BonovitzComcast37
Rupert MurdochTwenty-First Century Fox37
Herbert AllenCoca-Cola34
John MeisenbachCostco33
Walter LohrDanaher33
Donald EhrlichDanaher31

Oldest and youngest boards and directors of companies with a $50bn+ market cap.

Oldest average age

Berkshire HathawayUS71.7 years old
Costco WholesaleUS69.7
Gilead SciencesUS67.9
Banco BradescoBrazil67.9
United TechnologiesUS66.5
Union PacificUS66.5
Simon PropertyUS66.5

Youngest average age

FacebookUS48 years old
Kweichow MoutaiChina52
Imperial BrandsUK55.5
BT GroupUK55.6
Anheuser-Busch InBevBelgium55.8

Oldest directors

Charles MungerBerkshire Hathaway/Costco92 years old
Thomas MurphyBerkshire Hathaway91
Daniel EvansCostco90
David GottesmanBerkshire Hathaway90
Albert FrereLVMH Moet Hennessy Louis Vuitton90
Harold BrownPhilip Morris88
Warren BuffettBerkshire Hathaway/Kraft Heinz85
Walter ScottBerkshire Hathaway85
Rupert MurdochTwenty-First Century Fox85
Sanford RobertsonSalesforce.com84

Youngest directors

Jean-Victor MeyersL'Oréal30 years old
Tracy Britt CoolKraft Heinz31
Mark ZuckerbergFacebook32
Kevin SystromWalmart32
Clara ShihStarbucks34
Steuart WaltonWalmart35
Sabina Fluxa ThienemannTelefonica36
Samuel MerksamerAIG36
Sandrine VerrierBNP Paribas37
Antoine ArnaultLVMH Moet Hennessy Louis Vuitton39

‘The company outgrows them’

There are outliers among the $50bn-plus club, however. Berkshire Hathaway has an average tenure for sitting directors of 19 years. While that is skewed by the 51-year service of Warren Buffett, chief executive, and the 38-year tenure of Charlie Munger, his deputy, the board also includes long-time business collaborators of Mr Buffett’s, including Walter Scott and Ronald Olson, who have been on the board since 1988 and 1997, respectively.

Alphabet, parent company of Google, also has an average tenure well above the norm, at 12.5 years, because its board still contains four directors from the 1990s, including the founders.

After financial services, the information technology sector has the longest tenure of sitting directors, at 7.6 years, and has become a focus of some investors. BlackRock’s Ms Edkins says shareholders need to ask tech companies if they have “really made the transition from a close-knit private company, often with people who have been very closely involved in developing the company to the IPO stage. Some of those key personnel can be a drag on the performance of a recently listed company because they do not have the experience needed. The company outgrows them.”

Mr Buffett was among the signatories to a statement of corporate governance principles released last month, an initiative of Jamie Dimon, chief executive of JPMorgan Chase, which brought together the heads of many large asset managers and multinational companies including General Electric. It said boards should be diverse and independent of management but stopped short of prescribing tenure or age limits.

“It is important to make sure that boards are introspective, to challenge them to make sure they are being hard on themselves,” says Jeff Ubben, founder of ValueAct and the only hedge fund manager among the 13 participants in the Dimon initiative.

Roughly one in five directors say they are serving with a director who they believe should step down because his or her age has diminished performance levels, according to PwC’s 2015 director survey. “Younger directors are broadly saying the older ones need to go,” says Paula Loop, leader of PwC’s Governance Insights Center.

A further impetus for bringing in new blood is the growing demand for more diverse voices in the boardroom. A consortium of US state treasurers last month called on companies to create more openings for women and minorities, areas where the US lags behind the rest of the world. One in four US boards have no female directors at all; in Europe the number is one in 20.

Shareholders are urging boards to deepen the pool from which they pick directors, moving away from the idea that a board member need be someone who used to be a chief executive.

“If we have constrained the pool of people that we are considering for potential directorships, the likelihood we will get the best people is lower than if we have a more broadly diverse pool,” says Mr Booraem.

Ms Sheehan of Calstrs puts it more bluntly. “Frankly some individuals felt this was their retirement gig and that they would be on the board until they get carried out in a box,” she says. “That is not the way it is any more.”

Playing catch-up on diversity

When Sir Adrian Cadbury died last year, he was lauded for the increased professionalism that his 1992 code of practice brought to the UK boardroom.

In the City of London, investors mutter a sardonic “at last” when asked about the US shareholders who are focusing on board refreshment issues they say they have focused on for decades. But they also admit that the UK has further to go, particularly in gender diversity.

“We need to improve the executive pipeline,” says Sacha Sadan, director of corporate governance at Legal & General Investment Management. “We need women coming through middle management to make sure there are strong candidates who can take up executive board positions as well as non-executive positions.”

The UK sits mid to low in the European league table for the most diverse boards, with 20 per cent of directors being women, in the FT’s analysis. That is lower than Germany and France and the continental leader Norway, which has quotas.

Executives and investors in the UK, the US and elsewhere have argued that quotas prevent companies from picking the best candidates — female directors in Norway are derided in some quarters as “the golden skirts”.

Anne Richards, chief executive of M&G Investments and a leading gender diversity campaigner, says improvements will come through flexibility over childcare and career breaks to help both men and women, bolstering executive experience for women and creating a class of future non-executive directors.

“A break of a year or two for a man or woman for caring responsibilities does not signal an end to ambition or a sudden decline in ability to contribute or lead,” Ms Richards says.

Interactive: how male, stale and frail is your board?

The average board member is 60 years old and has been in post for 7.4 years. The percentage of women on an average board is 17 per cent, but one in 10 companies has no women at all. There is a wide disparity between countries and companies.

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FT graphic by Joanna S Kao and Steve Bernard
Source: ISS Analytics, powered by DataDesk