Does Your Board Pass the
"Quality of Board" Test?
By Dr. Donna Hamlin
Research on key governance issues cited recently by Harvard Forum on Corporate Governance* highlight two key ones: 1) increasing skepticism about quality of boards and 2) depth and growth of ESG practices, programs and disclosures.
Board Quality
Influential stakeholders are paying more attention to board performance and are showing deeper scrutiny of board quality, effectiveness and composition. The growing demand for proof of quality and board effectiveness means boards must evaluate themselves thoroughly and ensure the director talent has expertise and commitment to stay current on governance changes.
In the U.S., proxy requirements ahead will include a stronger assessment of director qualification, levels of diversity and formal nomination processes. In European areas, companies face demands for upgrades of board skills and expanded expertise in sustainability for their lines of business.
This puts board quality under a new hot light. Support ratings for directors dropped from the prior proxy period by 4%. The percent of directors with less than 80% support increased from 5.8% to 6.5% and support is expected to decline more as investors raise more reasons base on unacceptable governance practices. Directors, investors and advisors will face more critical assessment of board composition, expertise and factors, including board agility, decision-making thoughtfulness, and individual director specifications, including industry and functional expertise, diversity, tenure and lack of conflicts of interest.
ESG and Sustainability Program Growth
Institutional investors have high expectations for boards to provide thorough processes to oversee ESG risks and opportunities. For this, investors are pushing for full board members to be educated and knowledgeable on ESG, ensure an ESG expert in present and that the board is capable of board oversight, providing transparent reporting and evidence of significant progress on ESG issues.
Directors should expect the SEC to approve the Climate Disclosure Rule in 2023, which would be active in 2024, including likely requirements for emission disclosures. While expectations are that the Task Force on Climate-Related Financial Disclosure (TCFD) will create a framework to guide on climate-related disclosures, companies should focus on clear approaches to address ESG issues and explain clearly their processes and oversight protocols.
What Does This Mean for Directors
and Aspiring Directors?
Keeping up with ever changing trends in global corporate governance is no easy task. Countries and regulators introduce new governance rules which cause other countries to consider and make changes that may be similar but quite different.
Staying ahead of change is a challenge. As we say, it takes two things to succeed. One is never go to sleep, since changes happen overnight. The second is to be your own version of Yoda, seeing the future and managing change with a long-term context.
To help prepare for director duties to address key topics, we invite you to join the Boardwise board certification program which begins on September 1st.
* corpgov.law.harvard.edu/2023/03/10/global-corporate-governance-trends-for-2023/
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