ANALYSIS: Director Qualities Prioritized in Board Composition

As the end of 2023 approaches, and with that, new year’s resolutions, corporate leadership may take some time to reflect on how to make a brighter, better, and more robust board of directors in 2024.

Several corporate boards took some hits this year for their board composition, including Tesla Inc. for its audit committee chair, and Walt Disney Co. for its board seat battle.

Now is a better time than ever to take a step back to evaluate a company’s board composition and to consider certain elements, such as director independence, board term limits, committee expertise, or director diversity demographics.

Bloomberg Law’s most recent State of Practice Survey delved into what areas of board composition are priorities for attorneys and their clients.

The survey findings indicate that the standard prototype of a board director still prevails, but that other attributes of the director, such as new demographics and forward-thinking expertise, are making a strong showing.

Expertise, Independence: Priorities to Improve Boards

One hundred and forty-seven practitioners in the areas of corporate, compliance, ESG, and securities who responded to the survey said that they work on corporate governance matters.

When asked what topics they consider most important for advising clients on how to improve the effectiveness of the board, the top three responses were: professional qualifications or expertise (68%), director independence (63%), and diversity of the board (43%).

Professional qualifications or expertise was the top choice—likely due to a corporate disclosure requirement for public companies. Under Regulation S-K, Item 401(e)(1), companies must disclose the “specific experience, qualifications, and attributes” of the director that led to their placement on the board.

Additionally, public companies listed on exchanges often must place directors with specific qualifications and experience on their boards—which also likely influenced the second most chosen response—director independence—under Nasdaq and NYSE exchange listing rules.

Diversity of the board is an emerging area of board composition, as its number three spot shows. The movement has likely been given a bump from the Nasdaq Diversity Rule, which states that companies listed on the Nasdaq exchange must have at least one self-identified female and one self-identified minority or LGBTQ+ director for their board—or disclose why they have not.

A recent Bloomberg Law analysis uncovered that public companies have slowly increased their board representation of certain diverse groups since the diversity rule came into effect.

Clients Seek Financial Expertise on Boards

“Financial expertise” is the top qualification clients look for in board members, according to the State of Practice Survey’s attorney respondents.

This makes sense, given that public companies are expected to have financial expertise on its board. For instance, Nasdaq Rule 5605(c)(2) requires boards to have a director with specific finance or accounting experience on their audit committees.

Under a board’s fiduciary duties, it must perform a risk analysis of the company, which helps explain why 30% of respondents selected “risk analysis.”

Some encouraging statistics were for gender diversity (29%), cybersecurity expertise (28%), and underrepresented minority or LGBTQ+ (19%) demographics, which are characteristics of board composition that are encouraged by agency guidance, but generally not required. For example, the SEC’s Cybersecurity Risk Governance Rule has emphasized cybersecurity experience in board governance.

Board composition will continue to be fine-tuned and tweaked by company leadership and regulatory developments, and it will be interesting to see whether voluntary board composition characteristics will gather strength next year.

Bloomberg Law subscribers can find related content on our Surveys, Reports & Data Analysis page. Bloomberg Law subscribers can find a variety of Practical Guidance documents, workflow tools, and reference materials for corporate counsel on our Corporate Governance practice page.

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