Questions that should be on the agenda.
With the 2018 proxy season in full swing, directors should be prepared to discuss and, as needed, respond to questions about board oversight on topics of importance to the company's major investors.
Several high-level themes related to board operations and board leadership on environmental, social, and governance (ESG) issues are likely to be top-of-mind for investors this year.
In the decade since the financial crisis, investors have become increasingly attentive to why and how directors come to serve on portfolio company boards and whether directors are carrying out their duties effectively and adding value. Investors continue to scrutinize all aspects of board operations, from board skills matrices, diversity, tenure and succession processes to the efficacy of the board evaluation process.
Corporate culture. In light of #MeToo and other events in 2017, corporate culture and “tone at the top” will remain front and center. Investors will want to understand how the board keeps abreast of company culture.
• Does the board understand the culture at all levels of the company?
• What information does the board need to gain adequate insight into human capital issues?
Board diversity. Last year, the world’s largest money managers announced plans to focus on board diversity and hold directors — particularly nomination and governance committee chairs — responsible for lack of progress.
Boards should expect this focus to intensify because investors typically provide a de facto one-year grace period after such pronouncements. They will inquire about diversity this year and delve into search and succession processes.
For example, BlackRock's 2018 U.S. proxy-voting guidelines state that it, “would normally expect to see at least two women directors on every board.”
The “Boardroom Accountability Project 2.0,” an initiative by New York City Comptroller Scott M. Stringer and the New York City Pension Funds, calls on boards to disclose the race and gender (and, optionally, sexual orientation) of their directors, along with directors' experience and skills, in a matrix format.
• Are we prepared to present a convincing and credible argument that the board has the right mix of skills, backgrounds and personalities?
Board evaluations. Consistent with the desire to understand board performance and dynamics, shareholders are interested in understanding how boards are using the evaluation process for self-improvement and board refreshment.
• What, if anything, should we consider changing to be best-in-class?
• Do we have a compelling story to tell in proxy disclosures and shareholder discussions about our evaluation process?
Recent surveys have shown that ESG is not necessarily high on the list for board and business priorities, but is top of mind for investors. Management and boards must prepare to bridge this gap.
Environmental. Several large institutional investors have expressed interest in gaining a deeper understanding of how companies are managing risks related to issues such as climate change.
The Financial Stability Board's Task Force on Climate-Related Financial Disclosures has published recommendations for disclosure of climate-related financial risks. Also, major institutional investors have shown a willingness to use their proxy votes when they are not satisfied with the disclosures. In some cases, they even supported shareholder proposals calling for greater transparency.
• How are we conveying the board's role in oversight of climate-related risks?
• Is the company prepared to answer questions about decisions regarding disclosure frameworks?
Social. In addition to the #MeToo campaign, there are also the issues of gender pay equity and CEO pay ratio disclosure, catapulting human capital issues to the forefront. Questions about how companies are managing these risks are on investors' agendas.
• How do we effectively inform ourselves regarding the treatment of employees?
• Does the company have the right systems in place to provide these insights?
Governance. While 2018 places a heightened emphasis on environmental and social concerns, governance is also relevant given the commencement of the first stewardship code in the United States. The Investor Stewardship Group, formed by several large U.S.-based institutional investors, announced a corporate governance framework for U.S. institutional investor and boardroom conduct, effective January 2018. The framework details six principles that the group believes are fundamental to good corporate governance.
• Are we aligned with the ISG principles and do we demonstrate such alignment?
• If not, can we explain why?
Stephen L. Brown is Senior Advisor to KPMG LLP's Board Leadership Center. He previously served as head of corporate governance for TIAA.