Boards Make Progress with Diversity, More Work Remains

August 16, 2023 – Today’s boards face an increasingly complex business environment, an intensifying regulatory environment, and growing activism by investors and other stakeholders. In response, they are focusing on their own composition and taking a strategic approach to director appointments, according to a new report from Spencer Stuart.
Active and retired executives with CEO experience are in demand, with appointments returning to 2018 levels and reversing several years of decline, says Spencer Stuart’s 2023 S&P 500 Director & Diversity Snapshot. While 75 percent of survey respondents said they have enough CEO experience in the boardroom, 25 percent are focusing on adding an active or retired CEO or COO — the second highest recruitment priority. In addition, 20 percent of companies were prioritizing recruitment of women and underrepresented minorities. “Our view is that with fewer CEOs serving as directors, boards today are increasingly interested in recruiting executives with current or very recent experience running a public company, or a similarly complex business unit,” the Spencer Stuart report said.
The study was based on 2023 proxy statements, combined with the firm’s own 2023 survey of 141 nominating/governance committee chairs.
Spencer Stuart also found that financial expertise was the top recruitment priority (chosen by 38 percent of survey respondents). “Our view is that this focus is less a reflection of boardroom gaps and more the result of natural turnover,” the Spencer Stuart report said. “It is now 20 years since the Sarbanes–Oxley Act of 2002 finalized the financial expert rules, and the second generation of financial experts are now rolling off boards.”
Specialist directors are not generally in high demand, but interest in directors with technology backgrounds is growing, according the Spencer Stuart report. The survey revealed that boards were prioritizing the following technology-related skills for recruitment: technology (21 percent, down from 38 percent last year), digital (20 percent, up from 12 percent last year) and cyber (19 percent, up from eight percent last year).
Diversity Continues to be Important
Specific professional skills are driving director recruitment, but the Spencer Stuart report found that diversity of gender, race or ethnicity, and LGBTQ+ remains a consideration for boards. Fifty-six percent of boards disclosed a Rooney Rule-type commitment to include diverse candidates in their searches.
Sixty-seven percent of this year’s class of new directors are diverse, defined by Nasdaq as directors who self-identify as female and/or underrepresented minorities (black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, or two or more races or ethnicities), and/or LGBTQ+. About 20 percent of respondents said their boards are prioritizing the recruitment of women and underrepresented minorities.
New Directors
S&P 500 boards appointed 388 new independent directors this year, out of a total of 5,266. More than half of S&P 500 boards (53 percent) appointed at least one new independent director, down from 2022 (55 percent) and from 2021’s particularly high level of activity when 59 percent of S&P 500 boards appointed at least one new director and 20 percent appointed more than one.
Related: How to Approach Strategic Board Succession Planning
The 2023 data showed changes in new directors’ professional backgrounds as S&P 500 boards sought top-level executive experience and financial expertise: boards appointed more CEOs, both active and retired, and more directors with financial backgrounds. Fewer functional and P&L leaders were appointed as directors. “Overall, the class of 2023 is split equally between directors who are actively employed and directors who are retired. This is in contrast with previous years, when active directors were in the majority,” the Spencer Stuart report said.
Breaking the Boardroom Glass Ceiling
For far too long, leadership positions have been less accessible for women than their male peers. This has resulted in frustrating gender imbalances across organizations’ top ranks globally—seven percent of the world’s largest companies still have all-male boards, and only 10 percent of Fortune 500 CEOs are women. But despite longstanding barriers, female leadership is on the rise, according Egon Zehnder’s Global Board Diversity Tracker 2022-2023 (GBDT). At the board level, there has been steady investment in diversity, equity, and inclusion, with one in three new hires being women and 27 percent of board seats being held by female directors globally. This is the fastest pace of progress the search firm has seen since tracking these stats.
The Spencer Stuart report found that the most common industry background for the class of 2023, as in 2022, was technology/ telecommunications, accounting for 68 appointments (18 percent). New directors also had backgrounds in consumer goods and services, accounting for 54 appointments (14 percent), industrials/manufacturing sectors (10 percent), and financial services (10 percent).
The average age of new directors was up from 57.3 years to 58 years. The Spencer Stuart report found that the average age of first-time directors increased almost two years, from 54.4 to 56.3 years. The proportion of NextGen new directors (those aged 50 or under) dropped more than a third. They accounted for 11 percent of the incoming class of 2023, down from 18 percent in 2022.
New Next-Gen Directors
A fifth (20 percent) of this year’s NextGen new directors had backgrounds in private equity/ investment management, up from seven percent in 2022; 14 percent had backgrounds in technology/telecommunications, down from 31 percent; 11 percent had healthcare/ pharmaceuticals backgrounds; and 11 percent had industrials manufacturing backgrounds (both up from eight percent).
The Spencer Stuart report found that first-time directors were more likely to be actively employed. Thirty-one percent of the class of 2023 were first-time directors. Directors in this group were much more likely to be actively employed (69 percent) than retired. They were also much more likely to be actively employed than those who were not first-time directors (43 percent). Among first-time directors, the most common professional background was financial: finance executives and CFOs, accounting executives, bankers and investors (28 percent).
Diversity on Boards
This year, 67 percent of new director appointments were filled by diverse individuals, according to the Spencer Stuart report. This was down from 72 percent in 2022 and 2021, but diverse directors still made up a significantly bigger share of new director appointments than in 2018 or 2013.
Related: The State of Gender Equity on Boards
The report found that the percentage of new directors who were women remained the same as last year: 46 percent of appointments. This was a 92 percent increase in 10 years and 15 percent over the past five years. Seventy-eight boards (16 percent) expanded to add one or more women directors. Among first-time directors, female directors made up 56 percent of appointments this year. This was up 12 points from 2022 and more than twice the level of a decade ago, when female directors were a quarter of first-time directors. Female directors made up a slightly smaller share of underrepresented minorities among the class of 2023 than they did last year.
In 2022 and 2021, nearly all of the gains in representation of underrepresented minorities among new directors were due to an increase in black or African American directors, according to the Spencer Stuart report. That increase was not sustained: This year, black or African American individuals made up 15 percent of new directors, less than half the level seen in 2021 (33 percent). The representation of Asian (11 percent) and Hispanic or Latinx directors (nine percent) each increased one point from last year. However, compared with 2013, the number of new directors who self-identify as underrepresented minorities increased 100 percent. Ten percent of boards expanded to add one or more directors who self-identified as underrepresented minorities.
Aligning Diversity and Talent in Board and C-Suite Recruitment
Achieving diversity must begin with proactive and intentional recruitment efforts. A recent report from BoardEx outlines strategic efforts to help executive recruiters and others realize D&I success at the board and C-suite levels.
Of the first-time directors appointed this year, the Spencer Stuart report found that 75 percent were diverse. This was down from 2022 (82 percent) and 2021 (86 percent), but it does represent a significant shift over the longer term: up from 60 percent five years ago and 39 percent a decade ago. Among first-time directors, female directors made up 56 percent of appointments this year. This was up 12 points from 2022 and more than twice the level of a decade ago, when female directors were a quarter of first-time directors. Appointments of underrepresented minorities among first-time directors dropped from 61 percent to 36 percent. However, the report found that they remained higher than prior levels (24 percent in 2018, for example).
Diversity of S&P 500 Boards Continues to Increase
“The overall diversity of S&P 500 board composition has continued to shift incrementally, with low boardroom turnover impacting year-over-year change,” the Spencer Stuart report said. “Some demographic groups on S&P 500 boards more closely reflect the broader U.S. population; others have a significant disparity in representation.”
Female directors now accounted for 33 percent of S&P 500 directors, up one point from last year. This was an 83 percent increase from a decade ago and a 38 percent increase from five years ago. Boards today had 3.6 female directors on average, up from 3.4 last year and 1.9 in 2013; 99 percent of boards now had two or more female directors, compared with 66 percent a decade ago.
“Diversity in board leadership continues to climb, albeit less steeply compared with previous years. In particular, the representation of women is marginally increasing on all counts,” the Spencer Stuart report said. “The same is true for the representation of underrepresented minorities in board leadership, which improved a few points from last year in all categories but one — only eight percent of S&P 500 independent board chairs self-identify as underrepresented minorities, a decrease of one point from last year.”
Nearly all S&P 500 boards disclosed their gender balance (98 percent) and composition relating to underrepresented minorities (97 percent). More boards this year — 56 percent, up from 50 percent last year — reported implementation of a policy like the Rooney Rule for candidate pools.
Related: Women Still Lag on Boards and in the Executive Suite
Contributed by Scott A. Scanlon, Editor-in-Chief; Dale M. Zupsansky, Managing Editor; and Stephen Sawicki, Managing Editor – Hunt Scanlon Media