A confluence of factors has increased the number of directors serving on public company boards for the first time and the number of new directors who have experience outside of the company's core business. The expanding role of the board in company risk assessment and risk management, increasing dependence on and threats from technology and more active audit, compensation and governance board committees have resulted in companies seeking board members with a greater variety of backgrounds and skills. REITs, for example, often no longer rely on a board composed exclusively or primarily of directors with significant real estate backgrounds, but are electing or seeking directors with accounting, technology, finance, marketing and other diverse experience. Moreover, boards, management, institutional investors and corporate governance scorekeepers are emphasizing board diversity, inclusion and refreshment.
The Alliance for Board Diversity in collaboration with Deloitte published the "Missing Pieces Report: The 2018 Board Diversity Census of Women and Minorities on Fortune 500 Boards", which provides useful metrics regarding changes in board composition. The report notes that, among Fortune 500 companies between 2016 and 2018, there has been (a) an increase of 230 directorships, (b) 1,033 new directors and (c) a 3.2% increase in women and minority board representation.
In the REIT industry, as highlighted in "A 2018 Report: REIT Board Composition & Diversity Trends," produced by FPL Associates/Ferguson Partners:
- "Of the 94 newly-elected, non-employee/outside REIT directors, just over one-half (52%) are female, representing a doubling from just two years earlier (26% in 2016)."
- "Of the newly-elected female REIT directors, the most common backgrounds are in the consumer sector or investments; separately, we note that approximately 61% have no prior board experience."
- "Separately, Boards are getting slightly younger. In 2015 the average age of newly elected directors was 60, and that has since dropped to 58 in 2018."
The benefits of new directors and more diverse boards come with additional considerations. As public companies increase the percentage of minority and women board members, many well-qualified candidates may have had limited or no prior public company board service. Similarly, board refreshment – particularly combined with a view that directors should not be "overboarded" – furthers the influx of directors with limited or no prior public company board experience. A director without a background in a company's core business may initially have difficulty finding his or her role on the board. Mindful of these considerations, many public companies invest time and resources in comprehensive director onboarding programs.
Illustrating this point were directors who participated as panelists on a panel on "Working with REIT Board Members" at the Nareit REITWise 2019 Law, Accounting & Finance Conference and a panel on "Nareit's Dividends through Diversity Initiative" at NYU's 24th Annual REIT Symposium. In each of these panels, participating directors noted the need for, and benefits of, director onboarding programs. Panelists also emphasized the importance of "board chemistry" as a key element of a well-functioning board, which can be enhanced by a clear strategy to welcome new members to the board. Stated and implicit in their comments was a recognition that a program designed to ensure that new and continuing directors receive relevant information regarding the company, its industry and public company board service provides immediate benefit to the company and the productive and efficient functioning of its board.
An onboarding program logically would include key business information regarding the company and its industry, such as financial information; strategic plan; customer, supplier, competitor and peer summaries; organizational structure; stockholder base; current SEC filings; compensation programs; succession plans and biographical information of other directors and management. An opportunity for new directors to interact with members of management, board committee chairs and other company leaders may also be useful. Additional items to consider include presentations on, or summaries of:
- Key laws and regulations applicable to business operations, including federal, state and local laws, and any applicable international regulations;
- Compliance and risk management strategies;
- The powers and duties of, and protections from liability for, directors;
- Securities laws considerations, including insider trading, Form 4 filing requirements and timelines for filing of quarterly and annual reports; and
- Key company documents and policies, including the charter and bylaws, corporate governance guidelines, code of business conduct and ethics, committee charters, disclosure policies, conflicts of interest and insider trading policies and employment agreements.
Directors generally, and new directors in particular, should have easy access to the materials identified above. However, because these materials represent a substantial amount of dense and detailed information, well-planned presentations and well-drafted summaries are important. Companies may wish to take advantage of their regular financial, legal, compensation and other advisors to assist in the presentation of matters within their areas of expertise. We have assisted boards in drafting and annually updating guidelines for directors covering many of the foregoing subjects. Companies can also consider providing recommendations to new (and continuing) directors of, and reimburse the costs related to, available third-party programs or leading industry conferences.
In establishing an effective onboarding program, consideration should be given to tailoring the program to each new director to focus on areas in which the particular director may need additional information. Finally, soliciting director views on the effectiveness of the onboarding and continuing education process as part of the board's annual evaluation could provide valuable insight into ways to improve the onboarding experience.
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As always, we and our colleagues are available at any time to discuss these or other matters.