Bed, Bath and Beyond, the U.S. home good retailer announced in April 2019 a complete shake up of its Board’s composition thanks in part to pressure from an activist investor. The decision of the board to appoint 5 new independent directors has come after private equity firms Legion Partners, Macellum Advisors, and Ancora Advisors confirmed that the previous board had allowed the market value of the company to decrease by an alleged $8 billion in market value. The debate about board composition is not lessening by any means. But why should boards be making a point to prioritise this activity?
Bed, Bath and Beyond may serve as a warning example to other U.S. public companies and indeed companies worldwide. Shareholders were influential in fighting for board refreshment, which saw 9 independent directors and 6 women take seats on its board. The companies newly named independent chairman Patrick Gaston, noted that these changes were in part due to ‘significant shareholder input’, while also “underscore our commitment to ensuring we have best-in-class governance”.
Board composition should be a clear priority as research clarifies that a refreshed governance structure increases accountability, transparency and collaboration between board members.
5 Reasons Why Board Composition Matters More than Ever
1: Increased Scrutiny
Directors face increased scrutiny around how equipped the board is with industry knowledge, capital allocation skills, and transformation experience. Boards today are being scrutinised through a finer lens in the age of #metoo and the ensuing 24/7 media trials of disgraced companies. According to corporate governance experts, organisations around the world can expect increased pressure to disclose how they prioritise board competencies, board succession plans and potential director candidates.
2: Institutional/Activist Investors
Institutional investors are pushing to further encourage robust, independent, and regular board evaluation processes that may result in board evolution. 2018 was a record year for shareholder activism as research firm Lazard confirmed that 226 companies in the U.S. were targeted compared to 188 companies in 2017. Boards need to remain cautious and consider encroaching activist investors. Kai Liekefett, head of shareholder activism at law firm Sidley Austin advises that stakeholders need to be engaged further with to be sure that they do not become activists. Read our blog here to find out more ways to avoid falling into an activist trap.
Boards will need to be wary as they consider individual tenure, director overboarding, and gender imbalance—all of which may provoke votes against the board chair or nominating commitee. Board composition is crucial to both anticipating and measuring the extent of current issues.
4: Gender Diversity
Gender diversity continues to be an area of focus across many countries and investors. Placing more women on boards means increased profitability, productivity and long-term value creation. An MSCI study in 2018 found that average employee productivity growth was higher for companies that employed three or more women at board level between 2012 and 2016 than those who had one or no female directors. This study also found that overall, firms with more women on boards with stronger human capital policies showed higher productivity growth overall.
5: Full Disclosure
Companies can expect increased pressure to disclose their prioritization of board competencies, board succession plans, and how they are building a diverse pipeline of director candidates. PWC in their 2018 Annual Corporate Directors Survey noted that ‘only 17% say they have revised compensation plans’ even ‘though 67% say that those plans can drive bad behaviour when poorly designed’.
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