Investors everywhere want to feel confident that the companies they invest in and the boards overseeing them have identified the major potential risks to a company’s performance and sustainability, and are working to effectively mitigate or manage any such risks. Pandemic-related impacts on companies, employees and global supply chains have heightened awareness that possibilities previously considered “remote” must be anticipated and prepared for.
Of course, exposure to various risks and their relative impact varies by industry and includes, but is not limited to, competitive threats, emerging technologies, misconduct or fraud, cybersecurity, environmental impact and potential new regulations that could affect the company or its key business lines.
To make this multifaceted discussion more digestible, companies increasingly use visual formats, clearly showing the risk-oversight roles played by the full board, key committees, senior management and even operating divisions or working groups. These visuals should not be so highly designed as to frustrate the AI data collection methods used by many of the ESG raters and rankers.
Figure 1 is a visual portrayal of Philip Morris International’s risk assessment, management and oversight process in its 2021 proxy.
With interest in ESG and the related topic of human capital management (HCM) intensifying, discussions of risk oversight increasingly include a range of ESG and sustainability issues, as well as the risks and opportunities they present. Some companies include ESG oversight in their overall enterprise risk oversight discussion, while others discuss these topics in more focused ESG disclosures.
Board committees, along with their names and charters, are also evolving to include ESG and sustainability. Previously subjects for annual or quarterly reporting to boards, these topics are becoming regular items on board and committee meeting agendas. Director bios and board skills matrices increasingly identify specific qualifications and competencies necessary for board members to provide effective oversight on an expanding array of issues.
When DFIN surveyed companies over the past three years, it found that in just a single year’s time, a dramatically higher number of companies had begun reporting board oversight of ESG—73% in 2020, up from 56% in 2019. During our 2021 surveys, that trend is continuing to gain momentum, with up to 75% of companies responding “yes” to having board oversight of ESG. Here, as with other topics, companies may have progressive practices, but unless they disclose their board ESG oversight and other admirable practices, they won’t “get credit” with investors, proxy advisors and ESG raters and rankers, among other audiences.
Figure 2 is a visual layout of ESG governance in Global Payments’ 2021 proxy.
You can find hundreds of examples of these and related topics in the DFIN annual Guide to Effective Proxies, 9th Edition, available here on a complimentary basis: info.dfinsolutions.com/proxy-guide-9th-edition.
DFIN is a leading global risk and compliance solutions company. We provide domain expertise, enterprise software and data analytics for every stage of our clients’ business and investment lifecycles. DFIN SaaS offerings, including eBrevia—data extraction powered by Artificial Intelligence, Venue Virtual Data Room and ActiveDisclosure, support critical issues with teams working remotely, specializing in: enhanced security and workflow management tools, and providing innovative ways to collaborate, exchange and manage SEC compliance and transactions.
Ron Schneider is the Director of Corporate Governance Services for DFIN. He can be reached at ronald.m.schneider@dfinsolutions.com.