Boards of directors have always had significant responsibilities that have increased over time, with a range of emerging risks joining previously identified risk sources. The scrutiny of boards is also increasing by a broad range of investors, proxy advisors and other stakeholders.
While companies—management teams and boards—may be understandably reluctant to broadcast various sources or avenues of potential risk, they recognize the importance of signaling to the world that they have a handle on the risks facing the company, have processes in place to monitor and mitigate these risks, and that these processes are actively owned and overseen at the board level.
Traditional sources of risk include:
Joining these traditional topics are concerns over:
Additionally, the growing concern surrounding climate change is further impacting this list of risks, including the company’s business model, strategies, suppliers and customers. Market and regulatory responses may also have an impact, and force companies to grapple with a new set of ESG-related “risks and opportunities.”
Long-term investors, in turn, are asking their portfolio companies how sustainable they are in the face of these forces. As a result, companies are responding with expanded discussions of their processes for identifying and managing these ESG-related risks and opportunities.
On this page and the next are two examples of risk oversight disclosures from 2019 proxy statements.
In the first, Verizon Communications (Figure 1) presents a detailed description of the roles, responsibilities and interactions between the board and its respective committees.
They then go on to both ask head on—and answer—two significant questions: “What about data privacy and cybersecurity risk?” and “What about reputational risk?” (Not shown in Figure 1.)
Please note that Verizon’s proxy also includes discussion of sustainability, corporate responsibility and board oversight, diversity and inclusion, human rights, and environmental considerations.
In the second example, Edwards Lifesciences Corporation (Figure 2) utilizes an eye-catching visual format to highlight and detail their Board Oversight Over Environmental, Sustainability, and Corporate Social Responsibility program.
Their proxy also includes additional discussion of their Corporate Social Responsibility program.
These disclosures help investors feel confident that these companies have appropriate programs in place to identify and manage the risks they feel are most relevant to their company—and that the boards provide active oversight of these processes.
Ron Schneider is the Director of Corporate Governance Services for DFIN. He can be reached at firstname.lastname@example.org.