CEOs Are Returning to the Boardroom: JamesDruryPartners Releases Rankings of the Strength of Governance Capacities of America's Boards of Directors

Baker Hughes, Parker-Hannifin, IBM take top spots in composite weight rank - a measure of the overall governance capacity of America's boards

Aug 27, 2015, 14:45 ET from JamesDruryPartners

CHICAGO, Aug. 27, 2015 /PRNewswire/ --  

  • Corporate boards are becoming more diverse with 30 percent of board seats held by women and ethnic minorities.
  • P&L executives and investment professionals fill the bulk (71 percent) of all board seats in America.
  • But business acumen remains less than desired; despite an increase in CEO board involvement, only 18 percent of the boards of America's largest companies met the proposed minimum standards for adequate governance capacity.

The top corporate boards in the U.S. have seen an uptick in CEOs over the last year, according to the 2014 edition of "The Weight of America's Boards," released today by JamesDruryPartners. The study, which provides an objective perspective regarding the governance capacity of America's largest corporations, found that active and retired CEOs are returning to corporate boardrooms after a prolonged decline in outside board service that began in 1990. Board seats among the top 500 American corporations by revenue and market capitalization that are filled by active CEOs increased by 1.3 percent, while seats held by retired CEOs increased by 2.5 percent. Active or retired CEOs now fill 2,064 of the 6,097 board of director seats of the top U.S. companies.

"I've been working with corporate boards for more than 25 years, and it's encouraging to see CEOs returning to the boardroom after a long decline that began in 1990," said Jim Drury, Chairman and CEO of JamesDruryPartners. "It also is interesting to see boards becoming more diverse across gender and ethnicity."

"While the uptick in CEO participation is a good sign," Drury added, "we have a long way to go to restore governance capacity in companies spanning across industries. The more senior-level executives we have on boards, the higher the capacity of those boards for experience-based governance. I hope this year signals the beginning of a trend toward corporations increasing the weight of their boards."

The 2014 report, the fourth produced by JamesDruryPartners, ranks the governance capacity—a measure of the experience and business acumen of board members—of the country's largest companies by revenue and market capitalization. The study includes three separate rankings: (1) total board weight (TBW), which measures the total board governance capacity of a corporation and takes into account the total number of board members; (2) average director weight (ADW), which measures the business acumen of the average director on a board; and (3) composite weight rank (CWR), which averages the rankings in the first two categories.

Leading the pack in the study's TBW ranking is BlackRock, followed by General Electric, IBM, Ecolab and U.S. Bancorp. Chesapeake Energy has the highest ADW, followed by Parker-Hannifin, PPG Industries, Marathon Oil and Baker Hughes. Baker Hughes also has the highest CWR, followed by Parker-Hannifin, IBM, Ecolab and American Express.

Distribution of Director Board Seats

Top 10 and Bottom 10 Business Acumen Categories

 

Top 10 Acumen Categories

# of
Board
Seats

% of
Total

Bottom 10 Acumen Categories

# of
Board
Seats

% of
Total

CEO

2064

33.9%

Foundation Executive

37

0.60%

Group/Div./Sub. President

641

10.5%

VP-Finance/Treasurer

35

0.60%

President/COO/Exec-Ops./Vice Chm.

460

7.5%

Chief Administrative Officer

30

0.50%

CFO

414

6.8%

Human Resources

20

0.30%

Chairman

342

5.6%

Sports/Entertainment

15

0.20%

Private Equity Investor

198

3.2%

Trade Association Executive

13

0.20%

Investment Manager

195

3.2%

Publishing Executive

12

0.20%

Investment Banker

187

3.1%

Real Estate Executive

11

0.20%

Accountant

167

2.7%

Gov. Relations/Public Policy

4

0.10%

Lawyer

165

2.7%

Museum Executive

1

0.00%

In addition to analyzing the business acumen of corporate boards, the study provides unique insight into board diversity. It found more diversity in corporate boards than last year with an 8.5 percent increase in women directors, who now hold 19 percent of board seats among the companies studied. Furthermore, 13.7 percent of board seats are held by ethnically diverse board members. Estée Lauder and Avon led in women board representation with seven and six female directors, respectively. The majority (60.4 percent) of female board members have senior-level executive experience, mostly as CEOs, presidents, COOs, CFOs and group presidents. The financial services industry has the most female directors with 208 in total. Though they have fewer female directors, 100 percent of boards in the utilities and health care sectors include at least one woman.

Female Director Representation by Industry

 

Sector

# Cos. in
Sector

Cos. with
Female
Directors

# Female
Board
Seats

Average #
Female
Directors

Utilities

35

100%

78

2.23

Consumer Goods

68

96%

151

2.22

Financials

102

97%

208

2.04

Telecommunications

12

83%

24

2.00

Consumer Services

103

94%

196

1.90

Health Care

54

100%

102

1.89

Basic Materials

46

98%

84

1.82

Technology

65

94%

103

1.58

Industrials

96

84%

151

1.57

Oil & Gas

56

70%

59

1.05

In addition to gender diversity, the study examined the ethnic makeup of corporate boards in the U.S. It found that, during the period studied, 838 board seats were held by 655 non-white directors. Black and Hispanic directors account for 10.4 percent of all board seats among the companies studied, while Asian, Indian and Middle Eastern directors account for 1.6 percent, 1.4 percent and 0.3 percent of all board seats, respectively. The industries that appear to have the most ethnic diversity are utilities, telecommunications and consumer goods, while the industries that appear to have the least diversity include health care, technology and oil and gas (though technology has more Indian and Asian directors, while oil and gas has more Middle Eastern directors).

Diversity Composition of All Board Seats

 


Male Seats

Female Seats

Total Seats


Race

#

% of
All
Seats

#

% of
All
Seats

#

% of
All
Seats

Male:Female
Ratio

White

4,303

70.6%

956

15.7%

5,259

86.3%

4.5 : 1

Black

325

5.3%

116

1.9%

441

7.2%

2.8 : 1

Hispanic

162

2.7%

36

0.6%

198

3.3%

4.5 : 1

Asian

67

1.1%

33

0.6%

97

1.6%

1.9 : 1

Indian

72

1.2%

12

0.2%

84

1.4%

6 : 1

Middle Eastern

15

.03%

3

0.1%

18

0.3%

5 : 1


4,941

81.0%

1,156

19.0%

6,097

100%


Non-White

638

10.5%

206

3.4%

838

13.8%

3.1 : 1

 

Diversity Representation by Industry

 



Non-White

Female

Industry

Total Seats

#

%

#

%

Utilities

366

71

19.4%

78

21.3%

Telecommunications

119

21

17.6%

24

20.2%

Consumer Goods

683

119

17.4%

151

22.1%

Consumer Services

976

155

15.9%

196

20.1%

Industrials

898

123

13.7%

151

16.8%

Financials

1,053

137

13.0%

208

19.8%

Basic Materials

450

55

12.2%

84

18.7%

Health Care

507

59

11.6%

102

20.1%

Technology

566

61

10.8%

103

18.2%

Oil & Gas

479

37

7.8%

59

12.5%

In 2014, corporate executives with P&L experience continued to have a strong presence in boardrooms, holding 57.5 percent of all board seats in the companies studied. Outside financial advisors, including commercial bankers, investment bankers, private equity investors and venture capitalists, account for the second largest group of board members with 13.2 percent of seats. The smallest professional group represented is comprised of "non-mainstream industry" executives, including advertising, media, publishing, real estate and sports executives, who hold 1.3 percent of seats. Those with no professional affiliation at all hold 11 of the 6,097 seats of the corporate boards studied.

Distribution of Director Board Seats

by Business Acumen

 

Group

# of
Board Seats

% of Total

Change
from 2013

Cumulative %

P&L Executives

3,507

57.5%

+ 1.2%

57.5%

Outside Financial Advisors

802

13.2%

- 0.5%

70.7%

Corporate Staff Executives

739

12.1%

+ 0.4%

82.8%

Other Outside Professional Advisors

412

6.8%

- 0.2%

89.6%

Academics

265

4.3%

- 0.5%

93.9%

Government/Military

195

3.2%

0.0%

97.1%

Non-Profit Executives

89

1.5%

- 0.3%

98.6%

"Non-Mainstream Industry" Executives

77

1.3%

0.0%

99.9%

No Professional Affiliation

11

0.2%

0.0%

100.0%


6,097

100%



The results of the 2014 report are consistent with earlier reports, finding that the strength of business acumen among many of America's corporate boards continues to be less than expected. In 1990, 70 percent of active Fortune 500 CEOs served on outside boards, filling 772 seats. In 2014, only 47 percent of active Fortune 500 CEOs served on outside boards, filling 276 seats. To improve business acumen, JamesDruryPartners advises that boards strive to achieve rankings in total board weight, average director weight and composite weight rank no lower than 50 points below their revenue rank and/or market cap rank. Thus, a corporation that is the 100th largest in the U.S. in terms of revenue and market cap should strive to fall within the top 150 companies in TBW, ADW and CWR. This year's report found that only 18 percent of America's largest companies by revenue met the criteria suggested by JamesDruryPartners, while only 16 percent of the largest companies by market cap were able to do so.

Highest, Lowest, and Median Performers

 


TBW Scores

ADW Scores

CWR Scores

Highest

BlackRock (133)

Chesapeake Energy (9.6)

Baker Hughes (6.5)

Median

Google (62)

Union Pacific (6.6)

Boeing (306.5)

Lowest

TravelCenters (16)

Erie Indemnity (3.1)

Wyndham (633)

"While we have seen some improvement in the number of CEOs serving on outside boards, we remain concerned with the historically low levels of business acumen in many of America's boardrooms," said Drury. "As we continue to emerge from the 2008 financial crisis, the role of the corporate board remains heightened. Much of the recent erosion in board service by business executives is the result of increased demands on directors' time, as well as pressure from the boards on America's best business leaders to reduce their outside board responsibilities. It is my hope that the trend is in the middle of a reversal—that we will soon see more corporate executives committing to serve on the boards of America's biggest companies to restore governance capacity and maximize value for shareholders."

The full report is available at: http://resources.ketchum.com/HelpDesk/nyc/1_H_L_2014_Board-Weight-e-Copy.pdf  

Methodology

As the weight of an executive's business acumen and accomplishments can be reasonably approximated, we have developed a method by which each director's weight, and the board's total weight, can be valued as a predictive indicator of a board's governance capacity. While there are factors other than the weight of business acumen that could be considered in the assessment of a director's governance capacity (i.e., quality of experience in the boardroom, preparation for board meetings, time allocated, etc.), these factors are virtually impossible to measure and do not necessarily translate into effective governance capacity. However, the weight of a director's business accomplishment does lend itself to measurement, both objectively and subjectively. And the total weight of a board's directors is a factor unique to each board.

Drawing upon board feedback during a professional lifetime of experience evaluating America's most accomplished executives, we created a methodology by which business acumen weight values are awarded to directors, ranging from 1 to 10. The award is based on their level of business accomplishment in their primary field of endeavor, and the relative value boards currently place on that experience in the boardroom. A company's total board weight is the sum of the weights of its individual directors.

Experience as a CEO and board chairman is awarded the highest weight rating for director governance capacity: 10. All other director weights are scaled down from that weight. Weights are downward adjusted further in two circumstances: (1) if a director is retired from his/her principal field of endeavor, and/or (2) the director is considered an insider.

Boards tend to prefer active executives to retired executives, because they are thought to bring more currently relevant insight and experience to the boardroom. Therefore, while that view is not true in every case, retired executive weights are adjusted downward by 1 point, reflecting this general perception. Non-independent directors who have had a close affiliation with the company are deducted 3 points, recognizing that their personal interests might occasionally compromise the value of their judgment in the boardroom. As the corporation's CEO is almost always a member of the board, we have excluded him/her from our board weight analysis. The intent of our system is to measure only those variable weight-relevant factors over which the board actively exercises control, i.e., board size and the experiential backgrounds of directors.

Weight Ratings

 

10 Points

6 Points

3 Points

- Active Chairman or CEO

- Group VP

- Group VP


- VP Finance/Treasurer  

2 Points

9 Points

- Investment Banker

- Exec – Government/Public Policy

- Retired Chairman or CEO

- Private Equity Investor

- Exec – Hospital/Museum/ Foundation 


- Venture Capitalist

- Exec – Trade Association

8 Points

- Management Consultant

- Exec – Real Estate

- Vice Chairman

- Chief Information Officer

- Exec – Publishing

- President

- Exec – General Counsel

- Exec – Sports

- Chief Operating Officer

- Exec – Accounting

- Military


- Exec – Sales/Marketing/PR

1 Point

7 Points

- Accounting Partner (active and retired)

- Religious Leader

- CEO – Company <$500MM Revenue

5 Points

- Executive Search Consultant

- Chief Financial Officer

- Corporate Secretary

- Exec – Other*

- Chief Administrative Officer

- Exec – Advertising/ Marketing/Media

0 Points

- Group/Division/Subsidiary President

- Lawyer

- No Professional Affiliation

- Non-CEO Banker




4 Points



- Academic – President



- Exec – Financial Regulatory (SEC)



- Exec - Entertainment




*Not elsewhere classified

ABOUT JAMESDRURYPARTNERS

Founded in 2001 by Jim Drury, JamesDruryPartners is one of America's leading board advisory services firms. Our extensive board and governance practice is one of the most diverse in our industry. Our experience introducing qualified director candidates to the most appropriate board opportunities spans 25 years. Our unique BoardSelect® practice, introduced in 2006, enables corporate boards to retain our firm to proactively select an outside board for their CEO, as well as other senior executives. As appropriate, we also undertake traditional assignments involving the recruitment of individual directors to replace retiring directors, multiple directors to rejuvenate legacy boards, and completely new boards for IPOs and spinouts. Over the years, our firm has played a leadership role in the advancement of the governance process. As a result, we have had the opportunity to advise clients regarding governance and policy statements; board and director evaluation systems; boardroom best practices; and CEO succession planning.

JamesDruryPartners continues to be in the forefront of innovation within our industry. In addition to generating intellectual capital, such as "The Weight of America's Boards," we provide proprietary advisory services that significantly enhance the success of matching the world's most accomplished business executives with the boards that will be of greatest interest—those that best fit the executive's professional objectives and the strategic priorities of his/her company. BoardSelect® enables corporate boards to proactively select optimal directorships for their top executives. DirectorSelect® enables corporate boards to access the confidential profiles of "America's foremost executives seeking a board opportunity," carefully screened and qualified by our firm. Other customized governance and board consulting services such as director assessment, board succession planning, skills inventory analysis, benchmarking best practices, and director training complete our governance offerings.

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