Key Takeaways
- 75% of directors are concerned about political divisiveness in the US.
- 57% say their boards have not discussed company stances on social issues.
- 69% feel confident their management can execute AI strategies.
Corporate boards are at a pivotal moment, facing emerging risks, disruptive technology, and potential shifts in trade, tax, and sustainability policies. In a polarized political climate, board agility and informed decision-making are crucial for navigating these changes effectively.
Navigating Ambiguity: ESG Caught in the Crosswinds
Some boardrooms have seen a declining focus on ESG (Environmental, Social, and Governance) issues over the past three years. Directors report that ESG topics are less frequently part of Enterprise Risk Management (ERM) discussions and regular board agendas. Many acknowledge that “ESG means different things to different people” and that their boards “do not consistently understand it,” adding complexity to addressing these issues effectively.
What Are Directors Saying?
The challenge with ESG lies in its multifaceted nature, pulling together a wide range of topics that mean different things to different people. Conversations on environmental, social, and governance issues have become increasingly complex and fraught. Regulated reporting requirements and polarized political discourse have further complicated the board’s role in ESG oversight.
The vast array of ESG topics affects companies differently, with varying impacts over different timeframes, making it difficult for boards to consistently address and prioritize these issues. Despite the real risks and potentially significant opportunities that ESG presents, only 22% of directors believe it has a direct impact on the company bottom line. Additionally, many directors feel fatigue around the subject, possibly conflating more discussions and data with actual preparedness and understanding.
“Complexity and challenges continue to surround this elusive topic,” the report notes.
What’s Driving This?
Directors on larger boards are more confident in understanding ESG and are more likely to see its impact on company performance. 52% of directors on the largest boards (over $10 billion in annual revenue) say their boards consistently understand ESG, compared to 36% on smaller boards (less than $5 billion in annual revenue). Similarly, 32% of directors on larger boards believe ESG makes a difference to the company bottom line, versus 15% on smaller boards.
The difficulty with ESG oversight is compounded by its multifaceted nature, pulling together topics that impact companies differently. Regulated reporting requirements and polarized political discourse add layers of complexity. The vast array of ESG topics, affecting companies over varying timeframes, makes consistent board attention challenging.
What Should Directors Do?
To effectively oversee ESG, directors need to move beyond the terminology and understand management’s process for identifying the organization’s most important risks and how they may evolve over time. Forward-looking companies recognize the connection between committing resources to sustainability initiatives and achieving long-term success.
Board Actions:
- Confirm Strategy: Understand how management integrates sustainability risks and opportunities into the company’s long-term strategy and how progress is measured and monitored.
- Review Messaging: Ensure that sustainability messaging and activities align with discussions on which topics are linked to risks and opportunities. Keep the board’s communication on these issues consistent and clear.
- Understand the Risk Assessment: Comprehend how identified sustainability risks are incorporated into the ERM framework to determine materiality. Determine whether oversight of these risks is allocated to the full board or specific committees.
- Understand the Disclosure Approach: Be aware of any required disclosures and related responsibilities. Understand management’s process for identifying requirements, drafting disclosures, assessing the quality of published data, and monitoring industry trends.
Directors Concerned but Not Discussing Social Issues
Despite significant concerns about political divisiveness, immigration policy, and economic inequality, over 57% of directors say their boards haven’t discussed these issues in the past year. Even with increased pressure from stakeholders for clear corporate stances, directors are deferring these discussions due to time constraints and broad responsibilities.
Confidence in AI Strategy Execution
As AI becomes intrinsic to business, nearly 69% of directors trust their management’s ability to execute AI strategies. However, only half feel informed about AI-related risks. Competitive pressures, increasing regulatory scrutiny, and ethical concerns around AI usage amplify the demand for educating the board.
Ineffective Board Assessments Fuel Director Discontent
“Ineffective board assessments may be to blame for record-high director discontent with peers.” Historically, nearly half of directors have expressed a desire to replace at least one person on the board. This year, one-quarter say multiple colleagues should be replaced—a high-water mark.
Directors Favor Traditional Skillsets
Boards are prioritizing traditional skills like financial, industry, and operational expertise for new additions, with less focus on AI, sustainability, and geopolitics. Despite pressure for specialized expertise, directors emphasize long-term stewardship over trending topics.
Diversity Valued but Impact Questioned
Directors overwhelmingly acknowledge that board diversity brings unique perspectives, improves culture, and enhances board performance. However, only 40% see a direct benefit to overall company performance.
Boards Taking More Action Amid Shareholder Activism
Boards are stepping up against shareholder activism, with 71% of directors saying their boards have taken action in the past year, up from 65% in 2019. More directors are revising executive compensation, using stock-monitoring services, and hiring third-party advisors.
Shifting to Data-Driven Culture Assessment
Directors are moving from intuition to data in evaluating corporate culture. Now, 76% use employee turnover statistics and 75% rely on engagement survey results, marking a shift toward a data-driven approach for deeper insights.
For an in-depth analysis, read the full report here.
Related Article: Some big companies quietly killing ESG initiatives
