The challenges and opportunities posed by business-model disruption, environmental, social, and governance issues (ESG), corporate culture, investor scrutiny, regulatory demands, cyber risk and more are reshaping the business and risk landscape and adding to already heavy board agendas.
As demands on directors' time increase, the board's ability to prioritize and take deep dives into the substantive issues facing the business becomes more vital — and challenging.
Is the board focusing on the issues that are most material to the company's success — e.g., strategy, risk, talent, compensation, key performance indicators, and corporate culture? Does the board have the skills, leadership and processes necessary to make the most of its time together and position the company for the future?
To answer these questions, governance observers point to the need for a robust board and individual director evaluation processes. Yet, according to recent surveys, many directors and proxy voters are dissatisfied with the board evaluation process. In fact, only one-third of proxy voters believe directors take the evaluation process “very seriously,” according to a Rivel Research Group study.
These survey results, coupled with recent governance failures at major corporations, raise questions about how boards evaluate themselves and whether they are asking the tough questions.
As directors reflect on the value and effectiveness of their board's evaluation process and whether the process is helping the board keep pace, we recommend they consider the following questions:
Is the board's agenda evolving to stay focused on the “right” issues? According to McKinsey, many boards spend the bulk of their time on quarterly reports, audit reviews, budgets and compliance — some as much as 70% — instead of on matters crucial to the future prosperity and direction of the business. Leading boards are adjusting their agendas to focus more on strategy, risk, talent, succession, innovation, incentives, and culture, and improving the board's effectiveness. In fact, the board's role in overseeing strategy, ESG issues and corporate culture, among other issues, is commanding substantially more agenda time.
How is the level and nature of the board's engagement changing? To devote more time to forward-looking or value-creating issues — while remaining focused on compliance, operations and so-called rearview mirror agenda items — boards need to increase their time commitment and/or change the nature of the board's engagement.
A recent National Association of Corporate Directors’ survey reported that directors spend an average of 245 hours per year on board work — e.g., preparation, board and committee meeting time, and informal contacts with management and directors. Some argue directors should commit even more time, including between board meetings, engaging with other directors and management to gain a deeper understanding of the business, its key risks and opportunities, and its leadership team.
How effective is the board at addressing board composition and succession planning? Shareholders are focusing more on board composition to ensure that the board is comprised of directors who can guide the company now and think strategically about the future. They are concerned about low director turnover and long tenures. Indeed, investors are becoming increasingly vocal about director nominations if they feel boards have not been responsive to their concerns and there is mounting pressure to diversify boards based on age, gender, race and ethnicity.
Have we enhanced our engagement with major institutional investors on strategy, board composition, transparency and other issues of importance to them? Institutional investors' influence is at an all-time high, with major institutional investors such as Black Rock and State Street focusing on supporting long-term investment and value creation, and articulating their views and expectations on corporate governance matters ranging from engagement and board composition to long-term strategy and transparency. A key question for every board is if it is satisfied with the company's engagement with its large institutional shareholders.
Consideration of these questions may help directors assess the value and effectiveness of their board's current evaluation process — as well as the adequacy of disclosures about the process.
Dennis T. Whaleen leads the KPMG Board Leadership Center.