There is unprecedented change in the corporate governance world: new perspectives on boardroom composition, higher levels of stakeholder engagement, more emphasis on emerging risks and strategies, and an increasing velocity of change in the digital world. These factors, coupled with calls for enhanced transparency around governance practices and reporting, the very active regulatory and lawmaking environment, and the perceived increased influence of proxy advisors are all accelerating evolution in the boardroom. In some cases, even a revolution.
The following are some of the insights from Boards confront an evolving landscape: PwC’s 2013 Annual Corporate Directors Survey. During the summer, 934 public company directors responded to survey questions. Of those directors, 70% serve on the boards of companies with more than $1 billion in annual revenue.
“Today’s world of corporate governance is impacting boardroom dynamics, prompting corporate directors to reflect on the primary motivation behind their board service,” said Mary Ann Cloyd, Leader of PwC’s Center for Board Governance. “We also find that they take great care in evaluating and acting on board performance.”
At the same time, Cloyd stated that the evolution of corporate governance has caused directors to reconsider their relationships with stakeholders. “However, while some boards believe direct engagement in corporate governance, executive compensation, and director nominations is part of their role, others think director communications in these areas is inappropriate,” she said.
Board composition and behavior
Directors are even more critical of their fellow directors than last year: 35% now say someone on their board should be replaced (compared to only 31% in 2012). The top three reasons cited are diminished performance because of aging, a lack of required expertise, and poor preparation for meetings.
Board service is not driven by money or ego. More than half of directors (54%) say that their primary motivation for sitting on a corporate board is intellectual stimulation, 22% see board service as a way to keep engaged, and 17% indicate they simply want to give something back.
There was a jump in the use of outside consultants to advise boards on IT strategy and risk: from 27% last year to 35% this year.
Almost a third of directors believe their company’s strategy and IT risk mitigation is not adequately supported by a sufficient understanding of IT at the board level.
Boards have become more engaged overseeing nearly every aspect of IT, in both emerging and traditional areas.
This year, 70% of directors say their boards took some form of action in response to the company’s most recent say on pay votes—an increase from 64% in 2012. The most frequent change is enhancing proxy statement compensation disclosures (47% compared to 41% last year). Twenty-seven percent of directors either increased their use of compensation consultants or hired new consultants, an increase from 19%.
Generally consistent with last year, nearly half of directors (47%) say that a shareholder vote of less than 70% approval is their threshold. This is not surprising, as proxy advisory firms more closely scrutinize pay plans of companies that don’t achieve or surpass this 70% benchmark.
There is a dichotomy between directors who believe it’s appropriate to communicate directly with shareholders about governance issues and those who do not. More than 60% of directors communicate with institutional investors— and nearly 30% cite an increase in these dialogues over the past year. However, one-third say the board “does not and should not” communicate with institutional investors; half say the same about retail investors.
Nearly half of directors say their boards either have no policy regarding communication with stakeholders or one that’s not useful. Considering the increasing frequency of stakeholder interactions, it’s not surprising that about one-quarter of those without such a policy believe there should be one.
Strategy and risk management
The number of directors who believe there is a clear allocation of risk oversight responsibilities among the board and its committees improved over the prior year from 63% to 80%. Yet half of those who say that there is clarity reflected that it still could be improved.
Three-quarters of directors said their boards took additional action to oversee fraud risks. Six of 10 held discussions regarding “tone at the top,” a 14 percentage-point increase from last year. Other actions included increased interactions with members of management below the executive level and having discussions about insider trading controls.
Regulatory and governance environment
Nearly two-thirds of directors (64%) believe recent regulatory and enforcement initiatives have not increased investor protections, and 77% don’t believe such actions have increased public trust in the corporate sector. In addition, 73% believe the cost to the corporation of those initiatives exceeds the potential benefits.
Despite their perceived increased influence, proxy advisory firms appear to be losing ground when it comes to their credibility with directors. Directors’ ratings of the firms’ independence, thoroughness of work, and quality of voting recommendations all declined in 2013.