As we near the end of yet another unprecedented year, corporate boards are engaging in fourth-quarter reflection: looking back to see how well they tackled the challenges of the last 12 months and looking ahead to see where they should focus and how they can improve.
What priorities should boards put on their radar in 2022? An end-of-year tradition, the 2021 PwC Annual Corporate Directors Survey, provides some guidance. Here are five key takeaways from this year’s report, along with commentary from Leah Malone, a director in PwC’s Governance Insights Center, excerpted from a recent episode of Inside America’s Boardrooms.
1. Consider the Impact of Hybrid Work on Board Culture
As vaccines continue to roll out and travel restrictions taper off, nearly all directors (96%) said their boards plan to meet in person by the end of the year. But more than half (54%) plan to continue to meet virtually some of the time. Over the past two years, boards have adjusted to remote collaboration and have been using remote communication tools to their benefit. During this time, they’ve experienced remote work’s pros and cons. On one hand, video meetings are significantly shorter and don’t require time-consuming travel to other cities or countries. Yet virtual conversations, though perhaps more efficient, may not be as robust or effective. More than half of survey respondents (61%) said the shift to virtual meetings has had a negative impact on board culture. It’s vital to “not let the negative impacts of the technology overtake the positive efficiencies,” Malone said. She emphasized the importance of prioritizing a board culture “in which every director feels like they can voice dissent, ask questions and feel that they can have an impact.”2. Escalate Talent Management on the Board Agenda
What areas need more time and attention in the boardroom? For the first time, talent management, not strategy oversight, topped the list of directors’ most pressing concerns — an indication of how profoundly COVID-19 has transformed the workplace and of how complex and critical the task of talent management really is. “I think it’s reflective of the moment that we’re in and economically tight labor markets,” Malone said. Asking the right questions is critical. What is the company doing to respond to this situation? Is a company’s talent strategy making it a workplace of choice? “The board needs to be involved in decisions about how the company’s workforce strategy may evolve in the future and ensure that strategy maps the way to greater diversity and inclusion among the workforce,” the PwC report states.
3. Be Proactive About Gender and Racial/Ethnic Diversity
The percentage of female directors on S&P 500 boards has increased from 16% to 28% in the past 10 years. But the percentage of corporate directors from racial minority groups remains extremely small. At the country’s largest companies, only about 5% of directors are Black and only 3% are Latinx. -The 2021 PwC Annual Corporate Directors Survey“A couple years ago there was such a strong focus on gender diversity and the thought that we really need to find more women to be serving on corporate boards. Obviously, that was true and it resulted in some nice progress,” Malone said. “I think the conversation is very much shifting now towards the recognition of the really tiny percentage of directors who come from non-white backgrounds serving on corporate boards.” Concurrently, more and more board members are recognizing that diversity requires focused action. In 2020, 71% of directors believed that board diversity would “simply happen naturally.” This number has since shrunk to 32%. Both the need for more non-white directors and the necessity of proactive action have been playing out in boardroom conversations. For example, racial/ethnic diversity (25%) now leads industry expertise (20%) and operational expertise (14%) as the top search criteria for new directors. And over half (52%) of survey respondents said they support tying executive compensation to diversity and inclusion goals — a 13-point jump over the past year.
4. Strengthen Board Composition Through Stronger Assessments
Directors agreed that board diversity improves relationships with shareholders (90%), enhances board performance (85%), improves strategy/risk oversight (76%) and improves company performance (75%). When it comes to achieving a more diverse board, replacing retired directors and expanding the number of board seats are only part of the story. Proactive refreshment is also critical — not just for underperforming board members but for those who are not the right fit. Nearly half (47%) of survey respondents said that at least one fellow board member should be replaced. Nearly one fifth (18%) wanted to replace two or more. So why aren’t these measures happening? While 88% of directors said their board has an effective director assessment process, two-thirds of directors (67%) said it is difficult to be frank, and more than half (52%) said this process is too much of a “check the box” exercise. “What’s the point of the evaluation if it’s not to figure out whether each of the directors around the table is contributing to the board and continues to be the right fit for the company?” Malone asked. “There’s clearly a bit of a mismatch between the folks around the table making sure that board composition is at its highest and best and how assessment processes are really being used.”The full board should think about what its composition should look like two, three, or four years from now, and create a plan to get there. -The 2021 PwC Annual Corporate Directors SurveyIt’s incumbent upon board leadership to set the right tone around board assessments – to encourage open and honest feedback – and to establish expectations with all directors of regular skills assessments against corporate strategy and the evolving business landscape.
5. Take the Time to Truly Understand ESG — and How It Links to Strategy
“We can hardly have a conversation around corporate governance these days without talking about ESG,” said Malone. “It’s the number one thing the directors tell us shareholders want to discuss.” Nearly all (94%) respondents said their companies are offering some ESG disclosures, and 64% agreed that ESG is linked to corporate strategy. Yet only 28% of respondents said their board has a strong understanding of the company’s ESG/sustainability messaging, and only 25% said their board understands ESG risks. Closing this gap is critical to stakeholder trust — and long-term business success. “Because the board of directors can (and should) take the long view on company strategy, their view on these long-term pressing issues will impact how companies incorporate these issues into their future planning,” the PwC report states. “Organizations must build [trust] with an expanding set of stakeholders on a variety of topics, including diversity, taxes, customer data protection, ESG, and more. The pressure to deliver business outcomes for all stakeholders is high and it’s a complex endeavor.” Download the full 2021 PwC Annual Corporate Directors Survey.
