The Advisors' Blog

A recent academic paper featured in the CLS Blue Sky blog reported on the results of a study that sought to determine whether and how board refreshment impacted board decisions. As the latest Semler Brossy newsletter highlights, the authors found that refreshed boards are more likely to replace underperforming CEOs and more likely to pay for performance. The blog concludes:

[T]he results suggest that refreshed boards do not just look different. They appear to monitor differently. They are associated with stronger CEO dismissal discipline after poor performance and with stronger CEO pay structures that better connect performance and risk.

We also find that refreshment is associated with stronger pay-for-performance sensitivity. CEO wealth becomes more closely tied to stock price performance, and the difference is not trivial: It corresponds to tens of thousands of dollars in additional pay sensitivity for a board that has refreshed more than a typical peer. At the same time, refreshment is positively related to pay-for-risk sensitivity. This balance matters. Compensation should reward performance, but it should also give managers incentives to take appropriate risks rather than avoid valuable long-term projects.

The blog also shares questions that investors should ask and says companies should make their refreshment disclosure more visible. I’d also add that investors may be interested in compensation committee refreshment specifically, so it may be valuable to highlight that.

– Meredith Ervine