The list of issues in directors’ purview seems to grow longer year after year. While financial performance continues to top it as most important—to directors, leadership and shareholders alike—Corporate Board Member’s 2021 What Directors Think survey, conducted in partnership with Diligent Institute, shows discussions about ESG matters are continuing to gain prominence.
There’s been—and continues to be—great pressure placed by larger shareholders calling attention to a company’s footprint on the community it serves. Most directors agree that it’s important for a company to be a good and fair employer and a good corporate citizen, but financial performance remains the higher priority—a perspective very few, if any, shareholders would refute. Almost all (99 percent) directors surveyed in our 18th edition of What Directors Think said overseeing financial performance is of high importance for a board, compared to 88 percent who feel the same about the company’s fair employment practices and 75 percent about its corporate citizenship.
Despite its importance, ESG remains a challenging area for directors, who say, anecdotally, that many of the issues don’t apply to them and that these matters should not be clumped under a single umbrella. They say doing so is causing boards to look at ESG as a check-the-box exercise rather than striving to seize opportunities to improve long-term value creation. The amalgam of variables that the term ESG coins has a reductive effect on its efficiency, according to directors, and the three topics require separate guidance.
The survey also indicates that there is concern and confusion in boardrooms about the metrics and standards used to evaluate companies’ efforts. Numerous respondents voiced their discontent with the lack of guidance and standardization in reporting, which, they say, are necessary to properly and fairly assess and compare corporate performance among corporations and peer industries.
According to the survey data, directors are much more comfortable measuring Governance aspects of ESG, unsurprisingly. Eighty-two percent report having been successful in measuring G initiatives compared to 60 percent and 55 percent for S and E efforts, respectively. Similarly, reporting on G has been successful for a full third of survey respondents vs. 56 percent and 50 percent for S and E initiatives, respectively. Overall, boards are demanding more transparency and consistency in the measuring metrics, and the ability to provide input and to challenge ESG scores.
Diversity, Equity & Inclusion
At the beginning of December 2020, Nasdaq passed a mandate requiring listed companies to have, or explain why they do not have, at least two diverse directors on their board. This came on the heels of California passing dual laws requiring publicly held companies headquartered in the state to include at least one woman and a member of an underrepresented community to their board. Historically, according to our research, directors have never been in favor of mandates and quotes, preferring instead to self-regulate. In early 2019, for instance, CBM asked directors whether they approved of California Senate Bill 826, which required gender diversity in the boardroom for all public companies headquartered in the state. Of directors polled, 66 percent opposed the measure, and just 24 percent approved of it.
Among What Directors Think survey respondents, we found 42 percent of directors believe U.S. boards are doing enough in their efforts to broaden diversity among their ranks—and another 34 percent is on the fence. Less than a quarter say there is progress to be made.
But in a reversal of trends, nearly half (46 percent) of directors participating in our December Director Confidence Index poll said they are in favor of diversity mandates, arguing that it’s becoming clear that without them, many companies are not “doing the right thing.” Just 38 percent said they opposed mandates; 16 percent said they were not sure or “it depends.” That’s a sea change from earlier Corporate Board Member polls.
The difference in approval between female board members and male board members is also worth noting. A whopping 86 percent of female director respondents are in support of the mandates versus 31 percent of male directors. Only 4 percent of female directors are against the mandates; in contrast, 51 percent of male directors are against it.
But diversity on the board level exists in many forms besides gender, and achieving skillset diversity remains a top priority for 68 percent of directors when selecting their next board member. CEO experience, which had long been considered a deterrent to diversity, dropped in importance this year below racial diversity and industry expertise. Also part of the diversity discussion for boards: age and term limits.