Examining 2023’s Most Pressing Governance Concerns
Directors believe the economy, the workforce and inflation will be the most impactful challenges as 2023 marches on.
At the end of each year, the National Association of Corporate Directors (NACD) conducts a survey to gain insight into the key trends that will impact boards the following year and how directors plan to adapt. Some of the results were highlighted in NACD’s 2023 Governance Outlook: Projections on Emerging Board Matters, which also covers business and governance risks that will require board focus over the coming year.
Most Impactful Trends for 2023
The threat of an economic recession topped the list, with 64% of respondents rating it as a top business concern. Fifty-seven percent expressed ongoing concern about growing inflation.
It’s no surprise that 59% of directors saw the increased competition for talent as a top issue for 2023. Boards are recognizing the need to enhance their governance practices in this area. Sixty-three percent of directors indicated that improving their board oversight of human capital is a critical priority in the next 12 months.
Respondents Are Prepared for Recession
The majority of respondents (65%) anticipated a U.S. recession in 2023, while about a quarter (29%) projected that the economy is heading for a soft landing. Only about 6% expected a severe recession or depression. Of those who selected “threat of recession” as a top trend, 58% indicated that they were confident or very confident in management’s ability to respond to the threat of an economic recession.
Areas for Board Improvement
As was discussed in NACD’s The Future of the American Board: A Framework for Governing into the Future, today’s tumultuous environment and unpredictable, ever-accelerating change require an increasingly agile and well-informed board. An effective board/CEO relationship is critical to good governance and stewardship of long-term value amid so many short-term challenges. However, 56% of directors reported that improving the relationship between the board and the CEO is an “important” or “very important” improvement goal for 2023, suggesting that this dynamic relationship may be under some stress. Perhaps reinforcing that point, 37% of respondents indicated that their boards did not spend enough time in meetings on CEO succession planning over the last 12 months, and 63% indicated that improving this process would be important or very important over the next 12 months.
The Duty of Oversight
In line with prior years, a majority of directors (70%) reported that improving board oversight of strategy development and execution is a top priority for 2023. This is likely driven by shortened strategic planning cycles, increased scrutiny by activist investors, intense pressure to deliver short-term results and the increased difficulty of getting strategy right in the face of disruption. Fifty-six percent of respondents expected to see much deeper and more frequent board engagement on strategy over the next three years.
Interestingly, improving climate governance was last on the list, with only 28% of respondents indicating that it was important or very important for their boards. Although the focus on climate risks has increased, climate change has a longer time horizon, and other surveys have found that directors look three to five years out when planning for the long term.
Emerging Risk Readiness
Overall, most respondents (74%) believed that their boards have the right composition to support the shifting needs of the business in coming years. However, when asked about specific emerging risks, they were less confident. Forty-one percent of respondents indicated that their board lacks the capacity and expertise to oversee climate, and approximately one-third saw an opportunity with oversight of cybersecurity (34%) and geopolitical risk (31%).
One way to mitigate this lack of expertise (aside from board refreshment) is through director education. However, 49% of respondents felt that their board did not allocate enough time in meetings to director education over the past 12 months.
In addition to improving board succession planning practices, directors are focused on improving the rigor of board decision-making (32% felt it was important and 15% responded very important) and the candor of conversations between directors (24% responded important and 21% responded very important).
Sixty-nine percent of respondents indicated that a candidate from an underrepresented group was appointed to their board in the past 12 months (the majority of these reported ethnically/racially diverse and/or gender diverse appointments). Integrating diverse candidates into the boardroom requires inclusivity. Respondents indicated that inclusive board practices can lead to richer dialogue in the boardroom (76%), a better collective understanding of the full range of company issues (64%) and higher-quality decision-making on key governance issues (61%). However, 42% of respondents felt that their board has limited time to discuss inclusion at the board level given other priorities.
Friso Van der Oord is senior vice president, content, for the National Association of Corporate Directors.