A decade ago, more than 60 percent of S&P 500 companies had staggered board terms, and plurality voting in director elections was widely accepted. Today, two-thirds of S&P 500 firms have declassified boards and nearly 80 percent of these companies have adopted majority voting provisions, as many boards have heeded shareholder votes for these reforms.  

As one might expect, the prevalence of majority voting and declassified boards is higher at large-cap companies, which are subject to more public scrutiny and generally have greater institutional ownership. However, there are some practices, such as independent board chairs, that remain more common at small and mid-cap firms. Directors on a typical S&P 500 board tend to be more independent, more diverse, and slightly older on average than at smaller-cap companies.

These are among the findings in ISS’ annual Board Practices study, which examines director elections, board and director independence, and board diversity, among other factors, at S&P 1500 firms. This year’s report, which analyzes board practices and characteristics based on index, includes data as of June 30, 2011, from 1,461 companies and 13,760 individual board seats in the S&P 500, the MidCap S&P 400, and the SmallCap S&P 600. 

Here are some of the key findings from the 2012 edition of Board Practices: The Structure of Boards at S&P 1500 Companies: 

Overall board independence has increased slightly. Board independence levels in the S&P 1500 increased to 80 percent, a record high, and a 1 percent increase over 2010 (in 2010, board independence levels increased by 1 percent from 2009). Board independence at S&P 500 companies has been above 80 percent since 2009, but that level has also remained fairly steady; in the same time period, board independence levels at SmallCap companies has steadily risen each year. Likewise, while nearly all the companies in the entire study had boards that were majority independent, there was a substantially higher percentage of S&P 500 boards that were two-thirds independent than there were MidCap or SmallCap boards.

Independent board leadership structures have gained in popularity, and more companies reported having separate individuals serving in the positions of chairman and CEO. The trend in recent years has been toward independent board leadership, whether in the form of a separation of the CEO and chair positions, or via the appointment of a separate lead director. After climbing from 43 percent to 45 percent of S&P 1500 companies from 2009 to 2010, the percentage of companies with separate CEO and chair positions rose again in 2011. As of June 30, 2011, 46 percent of study companies had separate individuals serving as chairman and CEO at the time of their most recent shareholder meeting—an increase of over 20 percentage points since 2000, and a one percentage point increase since 2010. Overall, approximately 53 percent of the separate board chairs among the study companies are considered independent, as of the date of their last annual meeting, representing a 2 percentage point increase from 2010. 

Independent board chairs are associated with higher levels of board independence. Board leadership has a huge influence on governance factors such as independence levels. While overall independence levels in the S&P 1500 are actually higher at companies when the CEO/chair position is combined (80 percent average independence) than when the positions are separate (78 percent average independence), when the board chair is also an independent director, the average board independence level is 84 percent, as compared to 70 percent when the separate chair is affiliated or an insider.

The number of lead directors continues to rise steadily. While many large-cap firms have resisted separating the roles of CEO and chair, some of these companies have appointed lead directors. Sixty-six percent of S&P 500 companies now have a lead director (up 2 percentage points from 2010), as compared with 54 percent at MidCap issuers (up 1 percentage point) and 45 percent at SmallCap firms (up 1 percentage point), and 98 percent of individuals serving as lead directors at all study companies qualify as independent.

Majority threshold voting nears the 80 percent mark at S&P 500 companies but remains far less common at smaller firms. One of the most significant developments since 2005 has been the shift from a plurality vote standard in uncontested elections to majority voting. Overall, 43 percent of S&P 1500 companies, and 79 percent (a 9 percentage point increase over 2010) of large-cap firms now have a majority vote standard (either with or without a director resignation policy). As of June 30, 2011, 34 percent of S&P MidCap companies and 15 percent of SmallCap companies had adopted a majority vote standard (with or without a director resignation policy), representing a 6 percentage point increase for MidCap companies and a 1 percentage point increase for SmallCap firms. 

Classified boards continue to fall out of favor overall, but rose slightly at smaller issuers.  The prevalence of classified boards (which typically have three classes of directors who serve staggered three-year board terms) decreased by one percentage point to 48 percent of S&P 1500 companies. This decrease is consistent with the gradual move toward annual elections at S&P 1500 companies that began roughly a decade ago. Staggered board elections have become far less prevalent at large U.S. companies as shareholder activists have targeted those firms with proposals calling for annual elections. Currently, more than half of the MidCap and SmallCap companies have classified boards, with a 1 percentage point increase at SmallCap companies to 54 percent in 2011, though these practices could change if declassification proponents shift their attention to smaller companies in the coming years.

The 2012 Board Practices study can be purchased via the ISS Bookstore. ISS is hosting a March 6 (at 1 p.m. EST) webinar: “What You Need to Know: The Latest Trends in U.S. Board Practices,” to discuss the findings in this study. To register, please click here.