What are the big topics in governance today? Diversity in the boardroom, board composition and shareholder engagement are just a few. What do directors think about these topics and other issues that are important to investors? Read six key findings from our survey to find out:
With the business landscape changing, more topics to oversee and technology pervading nearly every industry, the bar continues to get higher for corporate directors. Every board member must be high performing to meet the ever-rising expectations. So it's increasingly important for boards to take a hard look at who's sitting around their board tables. And many directors aren't happy with how their fellow board members are performing: 46% of directors say someone on their board should be replaced. And 21% say two or more people should go.
Are boards doing anything to improve this? Some boards are using results from their self-assessments to better gauge how their directors are doing. In fact, 68% of directors say their board took action in response to their last assessment process – an improvement from the 49% who said the same a year ago. But 15% say their board leadership did not re-nominate a fellow director or provided counsel to a fellow board member.
When it comes to diversity on the board, most directors agree. It improves board performance and brings a unique perspective to the boardroom. But some directors seem less enthused by the topic. Nearly one in five (18%) say diversity has had no benefit on their board. And less than two-thirds (59%) believe it enhances company performance – despite a number of studies that show a correlation between women on boards and strong company performance.
The bigger story is the difference in opinion when you compare what male and female directors say. Women are much more likely to say that diversity has benefitted the company and the board. And then there's the debate over how quickly – or slowly – gender diversity is happening. While 80% of female directors say the pace of diversity on boards is too slow, only 33% of male directors agree. More often, many male directors say it's just fine.
Executive compensation is one of the many important topics that fall under the board's purview. To be effective, executive compensation plans should align the interests of executives and shareholders and tie pay with company performance. Directors review and approve pay plans for the CEO and other company executives. Nearly all directors (97%) say incentive plans promote long-term shareholder value and achieve appropriate total compensation levels. But 70% of directors say US executives are overpaid. And 66% say executive pay promotes income inequality.
What gives? The fight for top talent is one factor that drives up pay. Peer group comparisons are another, as most companies strive to pay just a little more than each of their peers. And a heavy emphasis on incentive pay can result in big paydays when the market performance is up.
Not too long ago, engagement with shareholders was a job for the CEO, CFO or investor relations team. Today, investors expect to engage with directors more often and on more topics. Forty-two percent of directors say someone on their board (other than the CEO) directly engaged with investors during the past year. Some directors believe certain circumstances should trigger engagement: when an activist takes a stake in the company, if there's a crisis or if the company receives a negative say on pay recommendation. But not all directors are buying into the idea: 23% say no director (other than the CEO) should directly engage under any circumstance.
So what's the consensus among directors who do engage? Most think it's beneficial. And they have a better impression of the experience and the investors they're engaging with than they did a year ago.
Many directors think environmental, social and governance (ESG) issues are not a big deal for their companies. In fact, 42% say they won't need to change their company strategy in the next three years because of environmental concerns. And many directors don't think ESG issues should be taken into account at all when forming strategy: 40% say they don't think climate change should play a role, and 29% say the same about resource scarcity. But they may want to think again. A number of large institutional investors are focusing on ESG. They expect boards to be able to convey how climate risk affects the business. And they believe that ESG issues are long-term governance issues that directors need to pay attention to. Support for environment-focused shareholder proposals is also increasing – up to 32% in the 2017 proxy season, from 24% last year.1
Risks associated with climate or other sustainable issues tie directly to strategy. These ESG issues can present serious risks to a company's ability to create long-term value. They can also present growth opportunities. Directors need to understand how the company addresses ESG issues in its risk mitigation and long-term growth plans – and be ready to talk to investors about it.
1 Ipreo, "S&P 500 AGM Voting Results, 1/1/17 - 6/15/17," 2017; https://zb0424r0tp2b5a4330y5mh7a-wpengine.netdna-ssl.com/wp-content/uploads/2017/06/Ipreo-Corporate-Governance-SP500-AGM-Voting-Results-6.15.17.pdf.
Directors have a lot more to oversee when it comes to technology. Companies are undergoing digital transformation and investing in new technologies to get ahead. These technologies present new opportunities and new risks and are changing business models across industries. In fact, 91% of directors say they'll need to modify their company's strategy in the next three years because of the threat of the speed of technological change. Change has come fast and furiously in recent years and will continue.
It's not just new technologies that have directors on their toes. It's the ever-present concern about cybersecurity. Cybersecurity underlies digital transformation and is a major concern for companies and boards alike. It's also a key strategy and enterprise risk management issue. Directors we surveyed seem to have a handle on certain aspects of cybersecurity and what the company is doing from a protection front. But respondents to our 2018 Global Information Security Survey say their companies’ boards are only somewhat actively involved in security areas. The most active board involvement was around the security budget. Cyber risks still run rampant – and boards need to stay on top of it.