Thus far in the 2023 governance conference and meeting season, several resounding themes have arisen in keynotes, panels, and breakout conversations. Board oversight of management continues to face close internal and external scrutiny as boards face a rapidly expanding landscape of issues. Mitigating risk and capitalizing on opportunities require boards to embrace modern technologies, reconsider stakeholder engagement, and prepare for greater regulatory demands for transparency into execution of corporate strategy. Recurring references to the board’s “courage,” “preparation,” “accountability,” “relevance,” and “purpose” underscore board members’ duties of care and loyalty.
Following are five of the many salient themes that our team took away from the critical discussions among directors during several of this fall’s foremost corporate governance events.
Winning the Talent War While Building a Culture of Accountability to Stakeholders
Fostering a culture of collaboration and accountability within the boardroom and throughout the organization has become a corporate governance necessity. Boards set the tone for an environment in which management and employees can excel and exchange ideas, innovate better products and services, secure relationships with and confidence of stakeholders, and nurture value creation for shareholders. The board’s engagement with the C-suite and broader organization can help establish such an environment.
It is also essential that boards evaluate their own composition and ensure that it reflects the right mix of demographics and expertise to align with the strategic business objectives and brand expectations of its customer base. In the wake of the SEC’s Universal Proxy Card rule, which allows shareholders to vote for individual candidates from different slates, Nomination and Governance committees should be well prepared to defend their board member selection criteria and ultimate election recommendations to shareholders.
Along a similar vein, Compensation and Human Capital committees reviewing C-Suite compensation and benefits packages need to consider these through the lens of what pay equity may mean to the organization. Boards need to continually assess whether and how short- and long-term incentives drive the achievement of corporate objectives. Additionally, directors need to consider whether and how to consider broader human capital needs as they seek to attract, develop, and retain talent.
Prioritizing Disruption, Risk & Opportunity
Current geopolitical and macroeconomic disruption require boards to appreciate the big picture. Directors need to understand how interrelated global politics, rising oil prices, soaring interest rates, disrupted supply chains, access to capital, emerging tech, and global conflicts impact their organization’s ability to make informed business decisions.
Boards have the responsibility to define their risk appetite and risk tolerance while being mindful of the organization’s vulnerabilities. Amid the current shareholder activism landscape, it is essential that boards identify blind spots, review capitalization table movements, and ensure it has a 360˚ view of organizational risks.
Embracing Innovation and Technology Responsibly
Generative AI, blockchain, and the forthcoming power of quantum computing were the talk of the town this governance conference season. ChatGPT, with its ability to generate new and varied data content based on growing data sets, can help leaders navigate complex challenges and devise creative, outcome-oriented solutions. However, it can also exploit private, sensitive data; introduce bias into computations and outcomes; and inadvertently violate data protection and privacy policies and laws.
Directors realize that adequate oversight over emergent technology means understanding not only how their enterprise uses data but also how it safeguards it. Highly evolved methods of data decryption, one of the newest products of quantum computing efforts, can translate to enormous cyber risks for organizations of all sizes, sectors, and regions.
The protective and defensive positioning of organization in the face of these groundbreaking advancements requires directors to remain educated on how the tech and cybersecurity risk landscapes are evolving. Informed boards recognize this takes a multi-disciplinary approach that includes rapid development and communication of fit-for-purpose policies, processes, and procedures throughout the organization and in use when engaging third parties.
Putting ESG (Environmental, Social, & Governance) in the Proper Context
Despite the ongoing debate over ESG risk, there is no denying that every organization faces some degree of exposure to varying risk factors (e.g., extreme weather, worker disengagement, geopolitical disruption, social issues, and data breaches) that impact it mission and business strategy. The corporate governance ecosystem cannot afford to minimize the role that material ESG factors play on the sustainability of the business. The board’s duty in ESG risk assessment is to ensure management identifies material risks and opportunities and prioritizes how best to address them. For stakeholders to trust management and boards’ handling of ESG risks, the organization must communicate transparently and consistently about how the company considers ESG risk when scaling and creating sustainable value in the short- and longer-term.
The year ahead will undoubtedly bring enormous regulatory change as key global sustainability disclosure rules are finalized and take effect. To that end, boards should be mindful that many stakeholders are looking at actions to support words. When planning and reporting on sustainability programs, boards need to connect the dots between what matters most to the company through a strategic lens and explain how that may align or not align with what matters most to their stakeholders.
Staying Abreast of Reporting and Regulations
Whether considering the current regulatory environment in the U.S. – at the local, state and federal levels – or the broader complexities of operating under global regulatory regimes, boards need to remain vigilant to the rules and regulations governing their businesses. Recognizing the lead time that may be required of management to prepare for compliance with the myriad of both rules and principles-based standards, directors need to be monitoring readiness assessments, system updates/implementations and controls, along with development of judgment and estimates that may be required to properly report under evolving standards and rules. Reliance upon continuing education and asking probing questions of advisors and management, while exercising both judgment and skepticism, will help keep the momentum focused on timely and accurate reporting.
The 2023 conference and meeting season highlighted several ways in which corporate governance and board oversight will evolve to keep pace with the rapidly changing risk and opportunity landscape. A winning culture, prudent risk management, responsible technological innovation, contextualizing sustainable operations, and keeping up with reporting compliance are just a few of the ways that boards can embrace the change and position themselves for successful oversight in 2024.