Keeping up with the ever-changing trends in global corporate governance is no easy task, as countries introduce new governance rules that trigger knock-on effects around the world.
For the eighth consecutive year, my colleagues and I recently interviewed dozens of global institutional investors, shareholder activists, pension fund managers, regulators, proxy advisors and other corporate governance professionals to identify the most pressing corporate governance issues that boards and directors are likely to confront in 2023 and beyond. Here's what we found happening around the globe.
Skepticism about board quality. The year 2023 will see further scrutiny of board quality, effectiveness and composition around the world. The United States is entering a new universal proxy era that will invite a more assertive approach by shareholders on director qualifications and disclosure. Major events like the failure of Silicon Valley Bank will only cause more board scrutiny about oversight, expertise and skills.
CEO in the crosshairs. The governance landscape around the world is impacted by current economic unrest and market turbulence. The war in Ukraine, COVID-related supply chain issues and higher-than-desired inflation rates are putting pressure on companies and leaders. As that occurs, so, too, does the need for strong, capable board oversight of CEO performance and succession planning efforts. Executive compensation will also be increasingly scrutinized.
Maturation of ESG programs and disclosures. ESG has been a hot topic in boardrooms for several years now, but increasingly global investors are demanding enhanced sustainability reporting and environmental responsibility activities. In the European Union, boards can expect the Corporate Sustainability Reporting Directive to harmonize standards and shape the reporting environment for years to come. Elsewhere, the say-on-climate movement is shaping up to be the next big thing in the United Kingdom.
Corporate Boards in the United States
While skepticism about board quality, finding the CEO in the crosshairs, and a maturation of ESG programs and disclosures will be seen worldwide, there are several specific issues we expect to see play out in American boardrooms.
Board quality will be under the microscope. This past year, only 69.7% of directors received more than 95% support (down from 73.7% in the prior proxy season). We expect support to decline further as investors give more reasons to withhold support from directors, from disfavored governance practices, lack of board diversity and attentiveness to shareholder voting. The beginning of the universal proxy era will only add more fuel to the fire. Investors will expect boards to be agile, deliberative, thoughtful and fit for purpose. They'll assess individual directors across a range of factors, including industry and functional expertise, tenure and diversity. Additionally, attention on board interlocks and potential conflicts of interest will continue to grow.
Expect headlines about CEO performance and board oversight of succession planning. According to The Conference Board and ESGauge data, 2022 saw more than double the number of forced CEO successions than 2021. Some believe this is part of a broader trend that will rise sharply next year, as stakeholders become less patient with middling or subpar performance. All of this will test recent board attention on CEO succession planning. Investors and other stakeholders will likely be even more inquisitive about succession planning activities in 2023, with the activists among them feeling emboldened to demand change more swiftly than usual. We anticipate boards will invest even more time in succession planning activities in this environment.
Pressure from all sides on executive compensation. Given the focus on CEO performance, it is unsurprising that many experts predicted even greater attention on, and skepticism of, executive compensation in 2023. Outsize payouts will likely generate meaningful scrutiny, more engagement requests, lower say-on-pay support and votes against director nominees. Recent SEC rule updates will also bring more attention to CEO pay. In August 2022, the SEC finalized rules requiring public companies to disclose information reflecting the relationship between executive compensation and the company's financial performance — the so-called “pay-versus-performance” rule. And in October 2022, it adopted the final clawback rule, which requires public companies to establish policies for recovering excess incentive payments from executive officers if material misstatements elevate the amounts. In response to these rule changes, some experts expect pressure from executives to sidestep some potential impact of the rules by moving from more rigorous financial performance-based targets to strategic targets or cash. Such moves would invite additional investor scrutiny, which boards should consider before changing a company's incentive structures.
Stakeholders expect continued maturation of sustainability initiatives. While specific expectations vary, institutional investors expect all boards to have thoughtful oversight processes for material ESG risks and opportunities, and boards should expect regular ESG engagement from their investors. Most expect the SEC to finalize the long-anticipated (and, in some circles, dreaded) climate disclosure rule in 2023. If this occurs, the rule will come into force in fiscal year 2024, likely with scope 1 and scope 2 emission disclosure requirements. Experts told us that companies that wait for regulation will lag as the broader market acts on what they anticipate. The debate over ESG's value will continue in 2023, amid a small but growing anti-ESG movement and the tumultuous economic environment. However, this puts an even greater premium on thoughtful approaches to truly material ESG issues and oversight.
The aperture on human capital management issues will grow wider. In 2022, investors engaged with a broader range of human capital topics. Indeed, a growing number of stakeholders, from single-issue activists to traditional pension systems, have begun to press companies to reexamine their workplace policies. Recent shareholder proposals calling for labor rights audits at Apple and Starbucks suggest investors increasingly view companies' human capital management practices as inextricable from long-term value creation. Coupled with a significant rise in shareholder proposals related to DEI, the implication is clear: companies will continue to face new pressures that extend well beyond financial performance. As SEC Chair Gary Gensler remarked in June 2022, “Investors have said that they want to better understand one of the most critical assets of a company: its people.”
The Only Constant is Change
Keeping up with the ever-changing trends in global corporate governance is no easy task, but boards have repeatedly demonstrated an ability to transform themselves — and how they work — to meet new challenges.