The responsibilities of a corporate board of directors have evolved significantly over the last several years. Traditionally, the role of the board has been to protect the assets of the company’s shareholders and ensure that they receive the highest possible return on investment. While this certainly still stands true, a variety of factors, including new rules and regulations, have led to a more complex boardroom dynamic.
This feature examines the most pressing issues corporate boardrooms will face going into 2020, given the trends seen today. More than ever, investors are placing greater emphasis on board transparency and accountability, and as a result, today’s boards face a seemingly never-ending set of risks and governance decisions. Ultimately, corporations must adapt to the needs of shareholders and put forth a set of strategic initiatives to adequately operate at a high level.
One of the greatest challenges for a corporate board is building and maintaining a strong pipeline of candidates. A director seat may become vacant for one of several reasons, including retirement, term completion, forced resignation and more. While boards may have a plan in place to prepare for departures, it’s often the unexpected departures that prove to be a challenge to address. Therefore, it is essential that boardrooms prepare accordingly.
When a director seat is vacated, the traditional protocol for filling that seat has been for board members to look around the table and come up with a list of potential names. While this mechanism for succession planning is still often implemented, and to an extent effective, there is much more that goes into the process that boards must take into account. For one, aligning the skill set of new directors with corporate strategy is more critical than ever before.
At a recent Equilar and Nasdaq Board Leadership Forum in San Francisco, industry experts gathered to share insights into strategies and processes that boards may implement for higher-performing boardrooms. Among the many topics discussed was succession planning and building a pipeline for candidates, and how developing a skills matrix plays a pivotal role in this process. Essentially, boards must assess where they want to be, strategically, in the next three to five years, and then identify the appropriate skills needed for them to reach those goals. By creating a skills matrix, boards can easily determine whether the current slate of directors possess those necessary skills, or if they need to make an effort and find candidates that satisfy those needs. Regardless, the key is aligning desired skills with corporate goals.
For several years now, corporate America has faced heightened pressure from many directions to bring diversity to boardrooms. Alongside finding the right skills when building a board, bringing diverse perspectives to the table is another critical factor indeed. The ultimate goal for boards should be to find the best candidates who will bring value and expertise to drive high performance. However, corporate directors also recognize the value that diversity brings to the table. According to PwC’s 2018 Annual Corporate Directors Survey, 84% of directors believe that diversity enhances board performance.
The question then becomes how do companies better address the need for diverse candidates? While there is not a definitive answer, it ultimately boils down to expanding the pool of candidates to include backgrounds from a wide spectrum. Experts at the Board Leadership Forum argued that the most effective boards develop a slate of diverse candidates and then select the best candidates from that slate.
Several legislative efforts across the United States have also led to greater pressure to bring diversity to corporate boards. The state of California passed a piece of legislation that requires public companies operating within the state to have a minimum of one woman on their board of directors by the close of 2019. That minimum will be raised to at least two female board members for companies with five directors or at least three female board members for companies with six or more directors by December 31, 2021. Illinois followed the path of California and passed a similar piece of legislation in April 2019 that will require any publicly traded companies based in Illinois to have at least one woman and one African American on its board of directors by the end of 2020.
Boardrooms must prepare to address legislative pressure and get ahead of gender diversity initiatives. Ultimately, companies want to avoid turning the search for diverse candidates into a “check the box” exercise, while at the same time discover diverse candidates who fit the needs of their boards, both demographically and experientially.
Over the last few years, there has been a significant amount of attention given to environmental, social and governance (ESG) issues across the corporate governance world. It appears corporate America is paying closer attention to these issues, particularly with invested interest from shareholders. Several topics may be classified as ESG issues and include, but are not limited to, climate change disclosure, lobbying and political campaign contributions, gender pay equity and employment diversity. It has become clear that institutional investors expect corporations to take a proactive approach when it comes to ESG initiatives and the messaging around them.
According to the 2019 Equilar Corporate Governance Outlook report, shareholder proposals across the Equilar 500—a subset of the largest public companies—that focus on ESG topics have remained the most prevalent over the last five years, indicating the importance investors are placing on these issues. Consequently, companies have responded by showcasing a greater effort to disclose their commitment to ESG issues within their proxies. Additionally, according to Equilar data, 68% of corporate governance professional respondents have had a personal interaction with investors about ESG over the past year. Investors want to see how companies are making an impact on these issues, and the proxy statement and engagement efforts are effective vehicles to do just that.
Nevertheless, ESG is known to be at the heart of what great companies do. In an effort to avoid an activist attack and scrutiny from investors, boards should prioritize the most pressing ESG issues at their companies and plan to clearly explain how they will address them with actionable goals in place. Investors want to know the “why” and “how” companies are driving ESG initiatives, not just the “what.” For instance, for one corporation the “social” portion of ESG might be the focus, whereas the “environmental” aspect would be for another. The goal should be to identify what is unique to each company and zone in on the “why” and “how” they will address them. This will not only satisfy shareholder needs, but also create a competitive edge for those companies that address them well.
In 2018, there were 80 CEO departures across the Equilar 500—through Q3 2019 alone, there have already been 59.
In 2018, there were 80 CEO departures across the Equilar 500—through Q3 2019 alone, there have already been 59. Corporate America has witnessed a rise in CEO departures over the last few years, and the reasoning for these departures varies from retirement, poor performance, a change in corporate direction and CEO scandals. While a number of these departures may be planned, boards must have some level of structure in place to address the unexpected departures in an adequate and timely fashion.
In 2018, 36.2% of Equilar 100 companies—the 100 largest public companies by revenue—disclosed a CEO succession plan. This is an increase from 20.6% in 2014, indicating progress at the very least. While boards and management teams are making a more concerted effort to plan for a CEO departure, there are several factors that may be overlooked.
For instance, aligning a new CEO with the company’s culture and values is critical in today’s corporate world. A corporation that has an established culture and set of values will thrive best when those aspects remain consistent upon a CEO transition, particularly if the company was performing well at the time of the departure. Corporations want to avoid disturbing strong morale, but at the same time must consider strategic direction. If a poorly performing company is in need of a shift in culture, then the new CEO must fit the scope of that direction. Ultimately, the manner in which the new CEO operates, from the standpoint of culture and value, should be in line with the direction the company is heading. This is an aspect of succession planning boards must carefully consider when making the transition.
Furthermore, it is of the essence that the new CEO approaches the role headfirst with a communications plan in place. A panel at the Board Leadership Forum emphasized the importance of that new CEO having both an internal and external communications plan. Not only will this individual be thrown into the spotlight with outside stakeholders, but it is equally important that the new CEO come prepared to address the employees who will be working for this individual. Boards must clearly communicate this to a new CEO and ensure the role that this individual will play meets the needs of both internal and external stakeholders.
Ultimately, there are a wide range of topics that boards should prepare to address in 2020. Approaching these issues strategically and in a timely manner will not only ensure that companies satisfy investor needs, but also operate at a high level.
Amit Batish is Content Manger at Equilar and Editor-in-Chief of C-Suite.