From pandemic recovery to economic, political and social changes and activist investors, boards of directors are widening their duties and problem-solving as they address how to navigate obstacles and opportunities for the future. Staying aware of these trends is crucial. Here are four key areas boards need to consider this year.
Surges in Activism
2022 had the highest record for activism activity in history. Activists investors’ agenda was to take advantage of low stock prices and stressed financial forecasts of struggling companies. Their focus was on company strategy and operational performance, when in past years the focus was more on M&A and capital allocations. This noted, the jump in activity produced higher success for activists. 2022 showed a 200% increase in adoption of shareholder rights plan from 2021. Preparing and defending against activism has boards busy with updating their bylaws with amendments regarding voting and decision-making abilities.
Expanded Focus on Risk Management
Areas for coverage in risk management are broadening. To address this, some boards are separating Audit and Risk Committees into separate committees. Others are revising their committee charters to include the new duties and systems to monitor critical functions, safety issues, oversight of the strategies and policies and practices adopted to address risks. These new areas include cybersecurity, cryptocurrency, ESG, climate, new laws permitting officer exculpation from personal liability for monetary damages expands the committee work. This requires new areas expertise on boards, and the SEC has proposed new rules regarding cyber expertise on boards.
Investor expectations for board diversity includes firm investor voting policies and proxy advisory guidelines. The influence from such groups as Blackrock, Vanguard, Fidelity International and ISS has impacted practices. For example, ISS recommends against the Nom and Gov committee and other directors at a company that has no women on the board. The disclosure rules regarding diversity are underway. Nasdaq-listed companies must provide annual public disclosures of diversity statistics with a board diversity matrix to comply or disclose their explanation as to why they do not meet the objectives.
The Relationship Between the Board and Management
With the expansion of responsibilities, the board and executive leadership are dealing with new pressures. Directors must get more involved in understanding of company operations, challenges and fiduciary expectations. Directors and executives are now encouraged to come together to define their respective roles and responsibilities and authority to ensure the check and balance between governance and management and to uphold a healthy collaborative partnership. Based on our research in 34 countries, the most highly correlated factor for a high performing board is the functionality of the group dynamics.
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