July 21, 2022
July 21, 2022
NACD released findings from the 2022 NACD Public Company Board Practices and Oversight Survey in late June. Despite many pressing economic and political challenges, the competition for talent remains at the top of many directors’ lists of key trends for the next 12 months.
The increased competition for talent tops the list of issues of concern for responding public company directors for the second year in a row while the next two highest-ranking issues, “growing inflation” and the “uncertain pace of the economic recovery,” highlight growing economic concerns.
“Each year, our Board Practices and Oversight Survey reveals trends that are driving public company directors,” said NACD president and CEO Peter R. Gleason. “The changes companies have endured this year have had broad impacts on board members. The disruption in the workplace has created pressure on management, which has resulted in more time and oversight required from boards.”
Below are other key trends from the 2022 Public Company Board Practices and Oversight Survey.
Boards get organized and formalize their oversight of human capital. Human capital is a growing point of focus on the boardroom agenda, and many boards have begun to formalize their governance structure, processes, and practices to oversee this critical asset. For example, a majority of boards now discuss an enterprise-wide talent development strategy (68 percent, according to survey respondents) and a majority of respondents indicate that their boards discuss human capital strategy on a more regular basis as a recurring agenda item (57%).
These discussions are perhaps a precursor to more targeted practices adopted by leading boards, such as delegating human capital oversight to relevant committees (43 percent of respondents’ boards do this) or communicating reporting expectations to management (45%). Human capital oversight is most likely to find its home in compensation committees (57%), which is increasingly transformed into a human capital committee with oversight over a much broader array of talent-related concerns.
Faced with increasing cyber risk, directors warm to the idea of adding a cybersecurity-savvy director to their boards. Eighty-three percent of respondents indicate that their boards’ understanding of cyber risk has significantly improved compared with two years ago. Yet, amid the growing speed and sophistication of cyber threats, as well as the increased scrutiny of regulators, directors increasingly see a benefit in adding a cybersecurity-savvy director. Forty-two percent of respondents indicate that recruiting a cybersecurity-savvy director would benefit their boards, compared to 36 percent of public company respondents saying the same last year.
Environmental, social, and governance (ESG) oversight is forming and norming at most boards, yet challenges remain. This includes efforts to improve board reporting (70 percent of respondents say that their boards are doing this) and delegating ESG oversight tasks to specific committees (64%). Yet, developing clear ESG priorities presents a major barrier for boards and management teams. Forty-four percent of directors indicate that the lack of uniform disclosure standards presents the greatest challenge to the oversight of ESG issues. Feeling the pain of their management teams, boards find themselves grappling with defining what the E, the S, and the G mean for their companies. Respondents indicate that defining scope (23%) and materiality (9%) are among the most challenging aspects of ESG oversight.
Most directors indicate improvement in their boards’ understanding of diversity, equity, and inclusion (DE&I) issues. Nearly 3 in 4 boards (74%) now receive key DE&I metrics from management and 69 percent hold discussions on their organizations’ DE&I priorities. These practices enhance the understanding many boards have of DE&I within their organizations, but much work remains. Fifty-eight percent of respondents indicate that their boards’ understanding of DE&I issues has significantly improved compared to two years ago when the social justice movement, sparked by the murder of George Floyd, intensified rising societal and investor expectations. Similarly, 59 percent of respondents agree that their boards understand how DE&I is connected to other board issues such as strategy, human capital, and technology. But only 29 percent of respondents have moved beyond traditional human capital issues to discuss DE&I issues in relation to vendor selection, supply chains, and corporate purpose.
Discussion of climate change has increased at most public company boards. Fifty-four percent of public company respondents indicate that the frequency of climate change discussions increased on the board agenda in the last two years. For 37 percent of those indicating discussions have increased, the main factor prompting increased discussion was the perceived relevance of climate change to the long-term growth prospects of the business. Twenty-five percent stated that disclosure requirements were the primary driver. As director awareness of issues related to climate change increases, and as it is figured into more board discussions, it is likely to become more of a key consideration in strategy, risk management, executive pay, accounting, and reporting of performance.
Quality of board discussions is seen as the most important driver of board performance. More than half of public company directors (57%) rate the quality of board discussions as the most observable indication of board performance. Quality input from management was the most widely selected key driver of exceptional board performance, identified by 59 percent of respondents.
While boards are growing more accustomed to discussions about less traditional areas of focus and are modifying board operations, structures, and agendas to meet this new reality, they’ll be keeping their eyes on the competition for talent, growing inflation, economic recovery, increasing pace of digital transformation, and changing cybersecurity threats in the year ahead.
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