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Hess Corp. (HES), The Coca-Cola Company (KO): Snoozing Boards Can Stunt Your Stocks

Corporate governance debates include the woeful fact that America’s boards of directors lack diversity. However, there’s another element too easily overlooked in the argument: the hunger and excitement of youth. Aging, entrenched boards consisting of the same types of people can transform venerated companies into dinosaurs.

GMI Ratings recently released a report that digs a little deeper into the board diversity issue. It highlights one commonsense culprit that’s too easily thrown into a different category but correlates well with why different candidates can’t find seats in corporate boardrooms.

Hess Corp. (NYSE:HES)

Same-old, same-old, same-old
GMI Ratings’ analysis highlights some interesting factors explaining why diversity isn’t a faster-moving improvement in corporate board composition. Of all the board seats in the U.S., more than a quarter are held by men with at least a decade’s worth of tenure.

No wonder progress for women and minorities on corporate boards has been glacial. Too many old buddies are sitting around on stagnated boards, sometimes for decades.

GMI Ratings’ 2013 Women on Boards report earlier this year revealed that since 2001, the number of female directors on S&P 1500 boards rose by less than 5 percentage points. Obviously, though, it’s difficult to obtain a board seat when current occupants simply aren’t budging.

The new report brings up some interesting points. If you took the S&P 500 and removed 46% of the male directors who’d been serving for more than 10 years and put female directors in their seats, the results would be astounding: 30% of the index’s seats would be held by women.

Sitting back in the Naugahyde recliners
Entrenched boards can lead to company-stunting problems. CEOs are overcompensated, risk is poorly addressed or managed, new consumer trends are missed, stagnant bureaucracies petrify, and terrible disasters like the financial crisis happen. The beauty of a system with checks and balances fails.

Blame usually falls on the public-facing corporate managements, but the boards of directors should have been pushing back against excess, poor management decisions, and risk oversight, and in such cases, they most likely didn’t make a peep. Even so, many were paid handsomely to successfully execute this side job.

GMI Ratings’ report also points out that long tenures deteriorate supposed “independence.” Even if long-tenured directors aren’t company employees, attending board meetings for such long periods of time must feel like a reunion of best buddies. A decade is nothing to sneeze at.

Given that backdrop, it becomes far more difficult to have an unbiased attitude or an independent frame of mind as time goes by. The relationships between directors and management at public companies probably shouldn’t be too warm and fuzzy. Board meetings aren’t intended to be BFF reunions, and when they’re homogeneous groups, they’re all preaching to the choir anyway.

Man, those seats are warm
BusinessWeek recently reported that 64% of the directors at S&P 500 companies have served for 10 to 15 years, and 5% more have been seated for more than 15.

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