Dynamic governance that addresses expanded and changing oversight requirements
▉ Theme 4
Dynamic governance: 13 questions boards should consider to transform to a new agile and dynamic form of governance in 2022
Boards have both the opportunity and the responsibility to help guide companies in this new era. They can support their companies in incorporating human and natural capital as part of business decisions and strategy and harness risks as opportunities for innovation and a competitive advantage.
However, this can’t be achieved through a historical governance model. Boards should continue their own transformation to a new agile and dynamic form of governance and continuously challenge their composition, committee structure, agendas and ways of working to position their organizations to thrive in the long term.
Below, the EY Center for Board Matters has collected 13 questions that boards should consider around board governance in 2022.
▉ Question 1
How is the board adopting a continual learning mindset and strengthening its education program?
Is the program sufficiently tailored to the company's and individual board member's needs, seeking diverse views from inside and outside the company that allow for challenges to status-quo thinking?
Investors were interested in how boards stay informed and receive ongoing education to meet evolving oversight demands and navigate a rapidly shifting risk landscape. A point we heard consistently is the opportunity for boards to access more external expertise to help management look forward and see how external trends and stakeholder expectations are changing over time. Keep reading.
▉ Question 2
How can the board’s structure be refreshed to be more agile, future-focused and aligned to the risks and opportunities on the road ahead?
Is the board considering the use of ad hoc committees made up of directors, management and third parties to address specific strategic issues?
One component of the traditional business model has remained largely unchanged: the board. New subcommittees may have been added, and diversity may be beginning to prevail, but essentially board operating models still look as they always have. Keep reading.
▉ Question 3
How is the compensation committee evolving its charter to address oversight of broader human capital issues?
How does the board hold senior management accountable for progress against related goals via incentive plans and other reward mechanisms? How is the company preparing for ongoing human capital disclosure requirements?
This year 70% of Fortune 100 companies stated that diversity and inclusion or other human capital matters are overseen by a board committee, up from 44%. Compensation committees have emerged as the preferred oversight structure. Keep reading.
▉ Question 4
How is the company refreshing its investor engagement strategy to be more efficient and productive?
Is it considering new engagement approaches (e.g., more collaborative engagement via working groups or investor days)? Is it leveraging the proxy statement and other disclosures as communication tools?
Boards need to understand the evolving disclosure expectations, engagement priorities and proxy voting guidelines of key investors. Across key focus areas such as workforce and board diversity and climate change, boards should consider whether company communications make clear what the related strategy is, how progress is incentivized and measured and how oversight is executed at the board and committee level. Boards can approach engagement as an opportunity to gain external insights to further develop the company’s strategy and disclosures. Keep reading.
▉ Question 5
How is the board thinking like an activist in considering and proactively addressing the company’s vulnerabilities?
How is the board obtaining an unfiltered view of shareholder feedback on the company’s strategy and pace of performance? Do select individual board members have direct dialogue with shareholders to understand their priorities?
Boards, and individual directors, should view their responsibilities concerning shareholder activism the same way they view their role in overseeing management’s development and execution of the company’s strategy. Boards should consider the following steps:
- Understand shareholder activism developments
- Oversee the identification of activism risks
- Address the risks
- Consider direct engagement with key shareholders
- Oversee a response plan
- Conduct a simulation
▉ Question 6
Are information flows to the board being appropriately challenged to include more forward-looking and predictive insights, coverage of emerging risks, external perspectives and corroborating data from third parties to keep pace with the evolving market, economic and geopolitical developments?
Is a consent agenda used to maximize board discussion of pressing topics?
Risk reporting to boards has much room for improvement. According to our survey, boards’ top priorities are that forwarding-looking and predictive reporting covers emerging and atypical risks, includes external and internal data, covers risk-mitigation initiatives and processes, and includes competitive intelligence and peer benchmarks. Keep reading.
▉ Question 7
How is the board expanding its director search to maximize diversity and broaden board competencies in critical areas such as technology, human capital management, cybersecurity, and sustainability, and how are those individuals onboarded to set them up for success?
“At some point between 2035 and 2040, we will reach the time when the majority of people in the US are people of color,” says Herman Bulls, Board member at USAA, Comfort Systems, Host Hotels & Resorts and American Campus Communities. “If you don't have that diverse perspective in your boardroom, you’re not going to be as effective and therefore competitive going forward.” Keep reading.
We asked investors what steps they want boards to take to strengthen their effectiveness, particularly in the current environment. Around a third of investors focused on the opportunity for boards to enhance their effectiveness by diversifying across numerous dimensions, specifically including race, ethnicity, gender, skills, and experiences. Key themes of these conversations included the need for challenging groupthink, enabling more robust discussion, setting the tone at the top for the company’s DEI goals, and having diverse perspectives and experiences in the boardroom to stress test ideas in a crisis and more effectively oversee strategy. Keep reading.
▉ Question 8
With increased board diversity, what changes to its protocols are being made to leverage diversity of thought, improve decision-making and create an inclusive boardroom?
Barriers to diverse groups can be both actual, in the form of systems and processes that exclude or limit diverse groups, and perceived, as in environments where diverse groups can be and are present but experience feelings of exclusion, bias, discomfort and prejudice. Both actual and perceived barriers are real impediments to the progress of diverse groups and society generally. Yet all people — even board directors and corporate executives — might understand the feeling of being an “outsider” — someone who does not fully belong, whose voice is unheard, suppresses their true identity and creates one that conforms to applicable norms. Keep reading.
▉ Question 9
Is the board prepared for increased accountability as ESG matters become a multi-stakeholder priority and investors increasingly embrace proxy votes against directors as their most effective tool to accelerate progress on ESG matters?
Investors increasingly see the effective management of environmental and social risks and opportunities as fundamental to long-term value creation and are integrating related considerations into investment decisions and stewardship. Like corporate governance failings, a poor track record on sustainability issues can galvanize shareholders against an incumbent board. Keep reading.
▉ Question 10
With growing scrutiny of sustainability reporting and stakeholder concerns around greenwashing, how is the board — particularly the audit committee — overseeing nonfinancial disclosures made in regulatory filings, sustainability reports, analyst calls and other mediums?
Are internal or external assurance procedures applied to material assertions and data?
As organizations report and disclose more ESG information, they should expect to face more questions around the depth and reliability of their disclosures, risk exposure and resilience, as well as concerns over so-called “greenwashing.” To build trust, companies should ensure that their sustainability reporting has robust processes and controls with a supporting audit trail, similar to what exists for financial reporting. Companies should begin focusing on audit preparedness as a means of building stakeholder confidence and complying with expected regulatory obligations. Keep reading.
▉ Question 11
Is the company progressively reporting on human, customer and societal value to attract capital and meet the increasing demand of stakeholders for consistent and comparable ESG and other nonfinancial related data that aligns with evolving external frameworks?
While the nature of corporate reporting has not fundamentally changed for decades, the world has changed considerably during that time. Today, businesses are under pressure from their stakeholders to be more transparent about what they do and how they do it. Keep reading.
▉ Question 12
What is the board’s policy for timely review of corporate political and lobbying expenditures and any public political positions taken by senior executives?
How is the board assessing the alignment of those expenditures and positions with the company’s values, commitments and strategy?
In the wake of developments around the 2020 US election season, including some lawmakers’ challenges to the results of the presidential election, the attack on the US Capitol and efforts to pass more restrictive voting laws, investors are paying renewed attention to corporate political and lobbying spending and the related risks to companies. While the number of proposals submitted on this topic has dropped from approximately 90 in 2020 to around 80 this year, average support for the proposals has grown from 36% last year to 44% so far in 2021. Around a third (32%) of this year’s voted proposals received majority support, up from just 11% last year. Keep reading.
▉ Question 13