A recent survey by PwC highlights several areas corporate directors indicate their boards should consider changing or are making significant change. In an interview, PwC Governance Insight Center Leader Maria Moats addressed three of the survey’s most interesting findings and what directors could do to adopt changes that could improve their board’s effectiveness:
Roughly 45% of directors surveyed said one of their colleagues should be replaced, but 39% said their boards have not made changes since the last board assessment.
Moats said this finding is interesting because the percentage of directors that say someone on their board should be replaced has remained relatively consistent from year to year, but turnover on corporate boards is relatively low.
“I’ve noticed over the years that directors are reluctant to replace directors,” she said. “Boards are leaning into individual board assessments—that is a tool that can provide feedback, and then they can either act on the feedback or not. And assessments would be a tool for replacement instead of term limits and age limits and the like. But there’s a reluctance because it’s hard to tell your colleague and your peer that they need to go.
However, she added, “to get change on boards faster you need strong leadership from the lead independent directors. If a lead independent director prioritizes refreshment—the replacement and succession planning for new directors coming onto boards—they can drive it, and it will tend to get done faster.”
More directors say they are prepared to oversee ESG disclosure, but only half see the link between ESG and company strategy.
Moats said this was a significant finding because the percentage of directors that felt their boards were prepared to deal with ESG jumped from 25% last year to 51% this year. But how can directors be confident about what’s in their disclosures if they don’t understand how ESG impacts the company strategy?
ESG applies differently to every company and is many things at once. Moats says ESG can be sliced into sustainability, diversity issues, climate issues and social issues. This is a very complex subject and directors need to collaborate with management to make sure disclosures show how ESG goals are complying with the law, are attainable and are connected to and driving the company strategy.
“There’s still a disconnect when directors are asked about ESG being linked to strategy and why it matters… It’s really important to say, ‘What about ESG are we talking about?’ If it’s sustainability, then which elements within that? Then you get a better conversation going and better engagement,” says Moats.
“The management team must take the lead when talking about all these elements within ESG and explain how these elements are linked to the strategy that the management team is trying to drive for the business. But management has to give directors context first on any topic. What are we talking about and why are we talking about it? If you ground the board in the why, then they can quickly get into giving good advice on whatever it is you’re talking about. So, I believe that management teams have a responsibility to really help these directors link all these ESG elements to the overall strategy, grounded in that context first, then go from there.”
Boards can continue to directly – and productively – engage with shareholders.
Years ago, investors and stakeholders communicating with directors was rare. Moats said the survey says this is changing with positive results. According to the survey 54% of directors said someone on their board other than the CEO engaged with shareholders in the past year, and 87% said the discussions were productive.
“Directors are engaging with investors and stakeholders, and that engagement is good,” says Moats. “For example, if ESG matters a lot to the investors, they can tell the directors firsthand, then they can have better conversations about it when they return to discussions with their own board. This engagement is very positive. Boards are finding value in their engagement with investors.”
These three findings from the PwC survey may offer opportunities for boards to change for the better.