A company's governance practices offer key insights into its approach to risk management and long-term sustainability, with the composition of its board playing a crucial role. Research, including our own, suggests that having a diverse range of ages on a board may positively impact both operational performance and shareholder returns, emphasizing the importance of multigenerational boards.
The Balance Between Experience and Age Diversity
While experience is invaluable, and directors need a suitable blend of skills and expertise to provide oversight, there's a risk that boards can become too uniform. For example, nearly 70% of S&P 500 directors belong to the baby boomer generation, with only 5% under the age of 50. This lack of age diversity could limit the range of perspectives needed to enhance business performance, sustainability, and leadership succession.
Age Diversity and Performance Improvements
Multiple studies back up the idea that age diversity enhances board effectiveness. Research from the University of New Hampshire revealed that boards including Generation X members (born between 1965 and 1980) were associated with better financial outcomes, especially in companies investing in research and development (R&D). Another study, focusing on over 7,000 banks, found that boards with greater age diversity had better earnings reporting, fewer loan charge-offs, and a reduction in nonperforming loans. The reasoning behind this suggests that age-diverse boards may challenge ingrained management practices, leading to better oversight.
Succession Planning and Leadership Transitions
Multigenerational boards also offer advantages when it comes to succession planning. PwC reports that age-diverse boards facilitate smoother leadership transitions, as they enable a gradual change in leadership while retaining institutional knowledge. Such boards can also expand the pool of future leaders and foster greater collaboration across the organization.
Implications for Investors: Age Diversity and Stock Performance
Our analysis of the Russell 1000 Index revealed a clear link between board age diversity and stock performance. Companies with a broad age range among directors—more than 30 years between the youngest and oldest—consistently outperformed those with less age variability. This trend was especially prominent in sectors driven by innovation, such as technology and healthcare, where R&D is a critical factor.
Rethinking Board Composition
While experience remains a key factor, and we are not advocating for simply nominating younger or older directors for the sake of it, evidence suggests that multigenerational boards have delivered stronger performance compared to more uniform boards in recent years. Despite the growing evidence supporting age diversity on corporate boards, no regulations currently mandate this consideration. As the business landscape evolves, we may see more attention given to this factor in governance codes and board refreshment strategies.
In conclusion, while board composition is only one aspect to consider when evaluating a company, the correlation between age diversity and improved financial performance makes it a factor worth examining closely.
The Balance Between Experience and Age Diversity
While experience is invaluable, and directors need a suitable blend of skills and expertise to provide oversight, there's a risk that boards can become too uniform. For example, nearly 70% of S&P 500 directors belong to the baby boomer generation, with only 5% under the age of 50. This lack of age diversity could limit the range of perspectives needed to enhance business performance, sustainability, and leadership succession.
Age Diversity and Performance Improvements
Multiple studies back up the idea that age diversity enhances board effectiveness. Research from the University of New Hampshire revealed that boards including Generation X members (born between 1965 and 1980) were associated with better financial outcomes, especially in companies investing in research and development (R&D). Another study, focusing on over 7,000 banks, found that boards with greater age diversity had better earnings reporting, fewer loan charge-offs, and a reduction in nonperforming loans. The reasoning behind this suggests that age-diverse boards may challenge ingrained management practices, leading to better oversight.
Succession Planning and Leadership Transitions
Multigenerational boards also offer advantages when it comes to succession planning. PwC reports that age-diverse boards facilitate smoother leadership transitions, as they enable a gradual change in leadership while retaining institutional knowledge. Such boards can also expand the pool of future leaders and foster greater collaboration across the organization.
Implications for Investors: Age Diversity and Stock Performance
Our analysis of the Russell 1000 Index revealed a clear link between board age diversity and stock performance. Companies with a broad age range among directors—more than 30 years between the youngest and oldest—consistently outperformed those with less age variability. This trend was especially prominent in sectors driven by innovation, such as technology and healthcare, where R&D is a critical factor.
Rethinking Board Composition
While experience remains a key factor, and we are not advocating for simply nominating younger or older directors for the sake of it, evidence suggests that multigenerational boards have delivered stronger performance compared to more uniform boards in recent years. Despite the growing evidence supporting age diversity on corporate boards, no regulations currently mandate this consideration. As the business landscape evolves, we may see more attention given to this factor in governance codes and board refreshment strategies.
In conclusion, while board composition is only one aspect to consider when evaluating a company, the correlation between age diversity and improved financial performance makes it a factor worth examining closely.