“Intentionality” has been a word used a great deal lately as the definition of “Impact Investing” has been evolving. Front and center is the clearly stated intent to not only drive financial returns, but to seek measurable positive impact towards societal and environmental goals. In this note we simply argue for the same kind of intentionality when organizations build their Boards of Directors. Whether a new start-up venture which seeks to lay the groundwork for successful future access to the capital markets, or an already listed company set on achieving a lasting legacy of excellence, Board composition and development is a defining issue of our day that must begin with a set of core beliefs.

To the last seat, investors must push for Boards that steward their companies in the relentless pursuit of material progress towards a more regenerative and inclusive economy. To the last seat, Boards must know the right questions to ask of their executives and of themselves so they can both assess risks and seize opportunities. To the last seat, Boards should set a tone of constructive debate where a diversity of views is embraced, and in the final analysis the “loyal opposition” works to set a tone whereby the organization is (in the words of Harvard’s Robert Eccles) continually “innovating for sustainability.” At Cornerstone Capital Inc., we are coming to the point where we will now fill “The Last Seat” on our own Board of Directors. In filling this last seat, and in fact every seat, we have asked many questions.

What skill set and knowledge base is needed to set the tone for high-level decision making? What insights, leadership, collaboration and communication styles will allow for efficient goal-oriented meetings? Is each director in some way complementary to the existing group such that there is the right level of managerial, financial, business and industry understanding?

Will this group be able to bridge differences of opinion and constructively navigate inevitable conflicts of interest? Will this Board truly steward the organization into the future?

In keeping with the intentionality of decisions about Board development, there are some big issues to consider. In particular, we refer to an understanding of the global macroeconomic challenges of the coming years and decades. With the post-financial crisis level of regulatory scrutiny, the challenges of building (or rebuilding) the world’s infrastructure to support

9 billion people, the unprecedented speed of knowledge transfer and transparency associated with social media, and the demands for accountability and corporate responsibility by the next generation of investors, Boards had better be in top form.

To be in top form, we know that the Board does not exist solely to oversee management. Rather, it is there to provide strategic insight and a window to the firm’s market and stakeholders. We truly need the board to avoid insularity and group think. To work towards its best and highest purpose, we need a Board whose members are networked externally and will benefit from exposure to the broadest of perspectives.

Longer term, we will also consider the notion that Board renewal is critical for corporate renewal. As company culture is set from the top, having fresh thinking from the Board encourages a similar approach across the organization. In fact, we would question the extent to which many companies are bringing truly new blood into the boardroom, even though there seems to be a stated desire to do so.

Consider some data points from the Spencer Stuart Board Index 2013:

  • The average age of independent directors on S&P 500 boards has risen to 63 years from 60 a decade ago. In 2013, for the first time, nearly half of the 339 newly elected directors are retired.
  • More retired CEOs, COOs, Presidents and chairs than active executives in those roles joined boards in the past year – 79 retired vs. 77 active.
  • Boards are raising mandatory retirement ages to allow experienced directors to serve longer; 88% of boards with a mandatory retirement set it at age 72 or older versus 46% just a decade ago. Nearly one-quarter have a retirement age of 75 or older versus 3% a decade ago.
  • 91% of S&P 500 boards now have annual director elections.
  • 53% of S&P 500 CEOs serve on no outside corporate boards.

They also report that only 3% of boards have term limits. Notably, the idea of term limits and age limits have gained some support among those advocating for board renewal. However, this is controversial among corporate governance experts. Some argue that arbitrary limits force good directors to leave boards, and encourage mediocre ones to remain. Instead, they contend that rigorous board assessment should be used to weed out underperformers.

The same survey offers useful data around recruiting new directors:

  • Among the respondents, 60% said their board is planning to add new directors in 2013 or 2014 to replace a retiring director. Another 22% cited the desire to add new skills to the board as a reason for recruiting new directors; 11% intend to raise diversity levels on their board, while 2% said they were adding directors in response to shareholder pressure.
  • Recruiting minority directors is a top priority, cited by 56% of respondents. Women and active CEOs and COOs were the next most desired director profiles, with 54% each. Recruitment of directors with these profiles, has not kept pace with demand. Of the new directors added during the 2013 proxy year, 24% were women, 23% were CEOs and 18% were minorities (defined as African-American, Hispanic/Latino and Asian).
  • Financial expertise and international experience also are in demand, cited by 47% and 44% of respondents, respectively, while expertise in risk management was cited by 25% of respondents.
  • 34% of survey respondents said they are looking for retired CEOs and COOs. In practice, retired executives represent 23% of new directors, a 44% increase over five years ago.
  • Roughly 20% of respondents said they are looking for specialized expertise in each of the following areas: technology, marketing and regulatory frameworks. Finally, 12% of respondents said digital and social media expertise are also needed.

We also think it’s worth reviewing the PWC 2013 Annual Corporate Directors Survey where we see that Directors are even more critical of their fellow directors than last year: 35% now say someone on their board should be replaced (compared to only 31% in 2012). PWC notes the top three reasons cited are diminished performance because of aging, a lack of required expertise, and poor preparation for meetings. While replacing a fellow board member can be difficult and sometimes explicitly due to technical impediments, the top inhibitor is that Board leadership is uncomfortable addressing the issue. To be effective, high performing Boards need to do what is hard to do!

Despite the challenges, we are encouraged to know that, for the most part Board service is not driven by money or ego. We would aspire for that to be true. According to PWC, more than half of directors (54%) say that their primary motivation for sitting on a corporate board is intellectual stimulation; 22% see board service as a way to keep engaged and 17% indicate they simply want to give something back.

It would be interesting to consider some sort of litmus test for this mindset. For those Board candidates that can speak the language of corporate sustainability fluently, we could suspend some skepticism.

Finally, while the subject of diversity on Boards has been widely discussed and there is heavy empirical evidence that diverse groups make better economic decisions, Boards are still 85% male. Progress also appears to be stalled on the engagement of minority Directors. We argue that diversity and corporate sustainability are inextricably linked given the potential for innovation that comes from constructive debate in the Boardroom. We also hold that in order to find talented women and minority directors, companies need to look beyond the obvious places and search for individuals with fresh ideas and differing experiences.

The status quo and the “old boys club” will simply not suffice for high performing Boards of the future. An appreciation for diverse perspectives, leadership experiences, and communication styles will be critical to Board development and Board renewal … from the very first, to the very last seat.

The Cornerstone “Sustainable Domain Bank” contains 2,000+ addresses on the Internet, which are an articulation of business processes, business practices and aspirations for a more regenerative form of capitalism. Many of these domain names have the potential to be developed into business plans reflecting a robust interpretation of sustainable capitalism and finance.  In particular, each “Sustainable Domain” captures a principle, or reflects a value inherent in the systematic understanding of the Environmental, Social and Governance (ESG) imperatives facing businesses and the economy today.  Each Domain is intended to facilitate dialogue across functions and sectors of the capital markets; and each is available for collaborative partnership, purchase or transfer should it have particular appeal to Cornerstone clients and colleagues. 

Erika Karp is the Founder & Chief Executive Officer of Cornerstone Capital Inc. and the former Head of Global Sector Research at UBS Investment Bank.