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S&P 500 Companies Making Huge Shifts in CEO Hiring Practices to Appeal to Younger Markets

The Market For Board Talent Is Changing. Here Is What You Need To Know

When Howard Schultz, Founder, Chairman and CEO of Starbucks, asked us to work with his board’s nominating committee to help recruit a new director for one of the world’s most innovative and admired companies, he outlined what started as a normal mandate but then evolved into a nearly impossible task.  Our task was to find a young director who was a digital expert to bring two perspectives into the Starbucks board room:  1) the native views of millennials, one of the company’s most important customer segments, and 2) deep social media expertise, to help accelerate the company’s market leading engagement through sophisticated apps, targeted marketing, and mobile payments.

That was all well enough.  In 2015 nearly one in six S&P 500 companies had a “digital director” on their wish list and over 40% sought technology expertise[1].  But then he added to the criteria.  Given the demands on her time, Sheryl Sandberg was not going to be able to run for reelection to the Starbucks board, so it had to be a woman.  Also, fair enough.  Whereas only 20% of S&P 500 company board directors are now comprised of women (up from only 15% in 2005), 31% of new directors were women on S&P 500 boards in the past year.  Then when he then said the board wanted a native view of millennials, he meant it.  The candidate had to be under 30 years old!  In the S&P 500, the average age of directors as of 2015 is 63 years old (up from 61 years old 10 years ago).  And the person had to be a sitting CEO.  Another challenge.  Whereas 65% of S&P 500 boards say they want an active CEO or COO, because of the competition for directors, only 20% of new director appointments in 2015 were indeed active CEOs or COOs.  And then came the piece de resistance.  Because China was one of the company’s most important markets, Howard wanted a new director with significant exposure to China.

Never daunted from a challenge, we went about our research and found the perfect candidate (and perhaps the only person in the world to meet all of these criteria!), Clara Shih.  Just 29 years old at the time, Clara was the founder and CEO of Hearsay Social, a San Francisco based software company that develops social CRM applications to help (primarily B2C) companies find and engage customers across social media sites.  Clara was the author of The Facebook Eraand a true expert on marketing through social media.  Having graduated at the top of her class from Stanford in computer science and economics in 2005, she went on to win a Marshall Scholarship and get master’s degrees in computer science at Stanford and Oxford (she was obviously an academic under-achiever).  She then went onto work at Microsoft, Google, and, before founding Hearsay Social in 2009. And the piece de resistance, Clara and her family emigrated from China when she was four years old.  She spoke Chinese and still had an excellent feel for the market.

Yes, it was amazing that we found Clara and that she met all of the exacting criteria (full disclosure, she was recommended to us by her former boss, chief Marc Benioff, who knew how remarkable she was).  But it was almost as extraordinary that Howard and the Starbucks nominating committee had the courage to appoint Clara to the board.  After all, whereas the average tenure on S&P 500 boards is 8.5 years, only 3% – 13 companies in the S&P 500 – set an explicit term limit for non-executive directors.  Most large company boards use retirement age as the vehicle to force rotation on their boards.  Nearly three-quarters of boards set a mandatory retirement age, and of this group, half set it at 72 years old and 34% set it at 75 years old or older.  This meant that Starbucks, which could arguably attract almost any prospective director candidate in the world, chose to go for a young woman who could be a member of the board for 45 years.

As adventurous as boards say they are seeking directors with new, diverse, and fresh perspectives, few have shown the appetite to really put their money where their mouth is and appoint unknown talent, as did Starbucks.  They had to make trade-offs between all of the experience and expertise that Clara brought to her candidacy and the fact that she would be a first-time director and her CEO experience was of a start-up, not a large corporation.  Not surprisingly, in the five years since Clara’s appointment, scores of other prestigious companies have come knocking on her door, asking her to consider joining their board.

The Starbucks and Clara Shih example illustrates some of the curious aspects of the market for boards of directors, and hopefully offers lessons both for companies seeking to find valuable new directors as well as for individuals seeking to join boards in order to expand their experience base and make a positive impact on an organization that they care about.

The Board of Director Market

You may think it a bit strange to think about board directors in terms of a market, but it is absolutely the case.  There is a demand for independent directors and a supply of potential directors.  Hence a market.  And both demand and supply are changing to meet the evolving roles of boards in governing, supporting, and helping to grow companies.

Along with our friends at Kleiner Perkins Caufield and Byers, we hosted an event last week in Silicon Valley called Why Boards Matter[2].  Our goal was threefold: to educate this market, to help make the case for what both Kleiner and Spencer Stuart deeply believe, that great boards really do help make great companies, and to bring greater efficiency to a fairly inefficient market in the demand and supply for board talent (see accompanying LinkedIn pieces from Kleiner Senior PartnerJuliet de Baubigny and LinkedIn’s New Economy Editor, Caroline Fairchild, who was invited as the exclusive media partner to the event).

To bring data to bear for the conversation, we drew on three sources of information, the aforementioned Spencer Stuart Board Index, our U.S. Technology Board Index, which Spencer Stuart has conducted for the past four years to analyze governance among the top 200 U.S. tech companies, and two SurveyMonkey surveys, among executives interested in joining boards and a cross section of private growth-stage companies.

Our Findings

At a high level, we found some distinct contrasts between the desires of S&P 500, tech company, and early stage tech company boards as well as some mismatches between supply and demand in the market for corporate directors.  To see our presentation, please see the accompanying SlideShare deck.

Specifically we found the following:

  • Over half of S&P 500 and tech companies added new directors in 2015. This was well below the private growth company boards we surveyed, where about eight of 10 added directors in 2015 (and which plan to add directors at a similar rate in 2016).
  • In the S&P 500, there are some disconnects between what boards are seeking and what they are doing. In 2015, 20% of new board members were active CEOs or COOs, 24% were financial experts, and 31% were women.  However, in their goals, 65% of boards reported that they want new directors where are active CEOs or COOs, 58% said they want women, and 54% want financial experts.   Those are the top three backgrounds on their list of desires.  Following that, over half report that they are seeking global experience and minorities (more on diversity below), 41% want tech expertise, and one in five or six want regulatory/government, cybersecurity, and social media, and marketing expertise.
  • The other areas of mismatch arise between the demand for those skills and experiences and the supply (as represented by our survey of boards interested executives; note this was a small sample — we will be doing extensive further research on this point).  Among our sample, there was a surplus of demand (65%) over supply (38%) for active CEOs and COOs, financial expertise (54% demand vs. 29% supply), and minorities (51% demand vs. 24% supply).  But there was also a mismatch between technology and digital and social media expertise.  There was selection bias among our sample given that we conducted our survey for our event in Silicon Valley.  Still, it was surprising to us that whereas 41% of S&P 500 company boards are seeking tech expertise and 16% are seeking digital and social media expertise, 76% and 57% of the boards-interested executives we surveyed had these experiences.  The primary drivers as to why executives are interested in serving on boards are: 1) to expand their portfolio of activities, 2) to expand their experience for their existing roles, and 3) to develop their experience for a potential new role.

The Value of Board Experience

And this brings us to an important point – The value of board experience.

In a world where there has been an unmistakable trend among large companies to promote their CEOs from within (in 2004, 15 of 61 S&P 500 CEO transitions, or 25%, were external recruitments; in 2014 and 2015, only 5 of 42 CEO transitions, or 12%, were external appointments), board experience is a proven way to develop the necessary skills to become a high performing CEO.  First time CEOs with public company board experience have outperformed those with no board experience to a meaningful extent (as measured by total return to shareholders).  Specifically, internally promoted CEOs with board experience have a nine percentage point advantage in their 3 year TSR.  Even more dramatically, externally recruited first-time CEOs, have a nearly four-foldperformance advantage over those with no board experience, as measured by TSR.  This makes good sense.  When a new CEO takes over, the more that she or he has experienced the dynamics of how a board operates, how to communicate with, and most importantly, how to get the most value out of a board, the greater their ability to lead a company effectively to growth and value creation.

Let’s Talk About Diversity

Diversity is an ongoing challenge for and critical objective for companies large and small, public and private.  As it currently stands, over three quarters of the directors of the largest 200 U.S. public companies are non-minorities.  Only 9% are African American, and only 5% are Hispanic/Latino.  There is clearly a lot of work to be done here.  The place to start addressing this, in my opinion, is to make diversity a key priority (over half of S&P 500 company boards say that recruiting minorities is a priority) and to having the courage to do what Howard Schultz did in recruiting Clara Shih.  Of course, most boards would like to recruit someone who is a major public company CEO from technology who is also an African American woman … but there is only one Ursula Burns (the CEO of Xerox, who serves on the boards of American Express, Exxon Mobil, and Xerox, in addition to the MIT Corporation, the U.S. Olympic Committee, and other leading not-for-profits).  So it will take work from all concerned, including board nominating committees, firms like Spencer Stuart that recruit hundreds of board directors,  and VCs like Kleiner Perkins who build private company boards, to develop knowledge of and relationships with prospective directors who have the capabilities and the diversity, but who may not yet be as well-known as non-diverse prospective candidates.

The same holds true for expanding the numbers of women on boards.  In the S&P 500, as I mentioned, 31% of newly appointed directors in 2015 were women.  There are some nuances behind this figure and other gender data.  Perhaps not surprisingly, when companies are led by female CEOs, they have a significantly higher proportion of female directors.  In the S&P 500, 28% of directors are women at those companies that are led by a female (which is only 4% of the S&P 500).  This compares with 19% of directors of companies with a male CEO.  While undoubtedly some of the reason for this is the encouraging attitudes and leadership-by-example of women, it is also due to the fact that all of the female CEOs are on their own boards.  There is roughly the same proportion of independent directors who are female at companies led by women as by men.  However, the technology industry is lagging in appointing women to boards.  There are fully a quarter of large tech companies that have no females on their board, and women represent 14% of the total number of directors on tech company boards vs. 20% for the S&P 500.  So we all have work to do on this score as well.

Positioning Yourself for a Board Directorship

So what should you do if you’re interested in joining a board? How can you do your part to help improve the quality and diversity of boards?  If you’re not yet an executive with a household name, here is a summary of six steps to take (see this LinkedIn piece for a bit more):

  1. Board Bio – Create a compelling and concise board bio, which prominently outlines your skills and experiences.
  2. Target List – Determine what types of boards would be most interesting and relevant for you.
  3. Your Interests – Get the word out; express your interests to colleagues, investors, and people you know who already serve on a board.
  4. Director Events – Attend director education events, which offer the opportunity both to become more familiar with the governance issues and meet well-connected individuals who can offer insights into the director selection process.
  5. Search Firms – Be responsive to outreach by the executive search firms that specialize in board director recruitment (just remember that these firms represent the client company and are likely to only be able to place you on a board if your unique experience matches the criteria that they have been retained to find).
  6. Not for Profits – Get started with a not-for-profit or community board.

In this series, professionals discuss why boards matter for both private and public companies. Read the stories here, then write your own  (use #WhyBoardsMatter in the body of your post).