The Harvard Forum on Corporate Governance cites two new important trends: an increasing skepticism about the quality of boards of directors and a deepening focus on Environmental, Social and Governance (ESG) practices, programs and disclosures.
On Board Quality
Educated and influential stakeholders are paying more attention to board performance and are showing deeper scrutiny regarding board quality, effectiveness and composition. The growing demand for proof of quality and board effectiveness means boards must evaluate themselves thoroughly and ensure the director talent has expertise and commits to staying current on governance changes.
In the U.S., proxy requirements will now include a stronger assessment of director qualifications, levels of diversity and formal nomination processes. In Europe, companies face demands for upgrades of board skills and expanded expertise in sustainability.
Board quality will be under increased scrutiny. Support ratings for directors have dropped from the prior proxy season by 4%. The percent of directors with less than 80% support increased from 5.8% to 6.5% and are expected to decline more as investors raise more reasons based on unacceptable governance practices. Directors, investors and advisors will face a critical assessment of board composition, expertise and the board’s agility, thoughtful decision-making and individual director factors, including industry and functional expertise, diversity, tenure and the absence of conflicts of interest.
On Environmental, Social and Governance Expectations and Practices
Institutional investors have high expectations for board to provide thorough processes to oversee environmental, social and governance (ESG) risks and opportunities. For this, investors are pushing for board members to be educated and knowledgeable on ESG issues and capable of board oversight, transparent reporting and measurable progress.
Directors should expect the Securities and Exchange Commission (SEC) to approve the Climate Disclosure Rule in 2023 which would come into play in 2024 with likely requirements for emission disclosures. While expectations are that the Task Force on Climate-Related Financial Disclosure (TCFD) will create a framework to guide on climate-related disclosures, companies should focus on clear approaches to address ESG issues and be able to clearly explain their approaches and oversight protocols.
What Does This Mean for Board Directors and Aspiring Directors?
Keeping up with ever-changing trends in global corporate governance is no easy task. Countries and regulators introduce new governance rules which cause other countries to consider and make changes that may be similar but can be quite different.
Staying ahead of change is a challenge. As we say, it takes two things to succeed. One is to never go to sleep, since changes happen overnight. The second is to be your own version of Yoda, seeing the future and managing change with a long-term context.
To help prepare directors for their duties in addressing key topics, we invite you to join the Boardwise board certification program. The next cohort begins on September 1st. Or, consider our board evaluation program.
