The Nominating and Governance Committee Chair Has the Most Precarious Seat on the Board

The average level of investor support for the election of Russell 3000 nominating and governance committee chairs fell below 90 percent for the first time in 2023, according to The Conference Board. Additionally, the average support for nominating and governance committee chairs (88.6%) was significantly lower than the median level of support for directors overall (97%) in 2023. More than 100 nominating and governance committee chairs faced dramatic protest votes in 2023: 94 (5.5%) saw support below 70 percent and 14 (0.8%) failed to receive majority support. 

These meaningful shifts reflect a troubling reality for many companies: investors are becoming more comfortable withholding support from directors for supposed governance failures and nominating and governance committee chairs are a common target for a number of reasons, many of which we have catalogued in our NomGov Chair Vulnerability Tracker. 

It is critical that boards pay attention to what’s driving this weakened support and get ahead of evolving investor focus areas.

A Growing List of Reasons Shareholders May Withhold Support

In the past, many investors would only vote against nominating and governance committee chairs for fundamental structural governance issues, such as amending governance documents that may promote board entrenchment or adopting a poison pill without shareholder approval. 

Things have changed. Diversity was not a focus area even in the relatively recent past. For example, BlackRock’s 2014 proxy voting guidelines do not even mention the words “diversity” or “gender.” In the past few years, guidelines evolved to have statements supporting diversity but lacking a commitment to vote against nondiverse boards. Today, several major investors, including BlackRock, Vanguard, and State Street Global Advisors, and proxy advisors Institutional Shareholder Services (ISS) and Glass, Lewis & Co., have set explicit expectations for minimum levels of gender diversity that vary by market and index.  

Racial and ethnic diversity standards have also become more common. ISS’s Proxy Voting Guidelines recommend to vote against the nominating and governance committee chair at Russell 3000 companies if the board “has no apparent racially or ethnically diverse members.” Wellington Management Co. adopted a similar policy in its 2023 Proxy Voting Guidelines for large-cap US companies that have no minority ethnic representation and no “compelling reason for being unable to.”

Investors and proxy advisors are also much more attentive to board refreshment. The board’s average tenure rarely leads to votes against by most significant US institutional investors. The most common exception is when a board appears to be unable to add new members. For example, Glass Lewis’s 2024 Glass Lewis Proxy Voting Policies state that it may recommend withholding support for nominating and governance committee chairs if “the average tenure of nonexecutive directors is 10 years or more and no new independent directors have joined the board in the past five years.”

Three Areas Generating More Investor Engagement

Voting is one of many important and highly visible mechanisms investors use to signal their preferences to companies, but it is not the only one. Most investors have priorities for direct engagement with companies, and these engagement priorities frequently signal potential changes to voting guidelines. Russell Reynolds Associates’s Global Corporate Governance Trends for 2024 report identified three topics that generate numerous engagement requests with companies—and may lead to more voting action.

Board composition. Investors ultimately recognize that their investments are more likely to yield sufficient returns if a company’s board has the right people around the table. While some investors already vote against director election due to a lack of diversity or a demonstrated lack of refreshment, they are also asking questions about other elements of board composition, including tenure, diversity of experience, and recency of experience. In short, they want companies to say, and potentially do, more to ensure that the members of the board have the backgrounds, skills, and experiences that will help the company succeed today and in the future. Expect more questions from investors on this front and increasing pressure for more descriptive and rigorous composition matrices and explanations of the board’s philosophy for refreshment. 

Board evaluations. Concern about board composition has led more investors to ask questions about boards’ evaluation practices, including who leads the processes, whether interviews are used, and what topics are addressed during the evaluations. Internally facilitated, survey-based processes are perceived as ineffective at many companies, especially at supporting board refreshment. A growing number of investors prefer independently led, interview-based processes that gather feedback at the board, committee, and individual director levels. Individual feedback and attention to board composition are especially important to investors, as many are not confident that boards will effectively self-manage. According to PwC, 58 percent of investors don’t trust the boards of companies they invest in to remove underperforming directors.

Oversight of CEO succession planning. CEO turnover is at historically high levels. Data from Russell Reynolds Associates’s Global CEO Turnover Index show that in the first quarter of 2024, 68 CEOs were appointed and 52 CEOs departed the role across the major global indices, the highest quarter one totals since 2018 and 2020, respectively. The number of top executives who fail to reach two years of tenure is particularly troubling, which may suggest a failure in oversight of the CEO succession planning process. Those failures are enormously costly for companies, which is why several major investors are more directly asking about board oversight of CEO succession planning. Expect this to continue and watch for future policies that may demand more disclosure regarding the allocation of CEO succession oversight across the board and its committees. 

Navigating This New Normal

Like it or not, nominating and governance committee chairs are, and will remain, in the spotlight. As attention to governance topics grows, so too will demands on nominating and governance committees and their leaders. We suggest that those leaders do two things: stay current on evolving stakeholder expectations and recognize that going beyond what is legally required—and sharing appropriate details with investors—may be the most effective defense against future trouble.

Russell Reynolds Associates is a NACD strategic content partner, providing directors with critical and timely information, and perspectives. Russell Reynolds Associates is a financial supporter of the NACD.

Richard Fields is the global leader of the Board Effectiveness Practice at Russell Reynolds Associates.

Amy Sampson is a leader within the Americas Board Effectiveness Practice at Russell Reynolds Associates.