Are expectations on corporate boards today too high? Many board directors think so.
A recent global board survey found that 60% of corporate board directors believe that there is a gap between the expectations placed on boards by their stakeholders, and the reality of the board’s ability to oversee a company*. Sixty-four per cent see a moderate gap between expectations and reality, and a striking 25% say that expectations far exceed reality.
Underlying this “expectations gap” are various factors—from structural changes in regulatory reporting, to growing calls for greater boardroom transparency from both more traditional as well as activist investor groups and the media.
Balancing these demands with the time required for normal governance of a company has been challenging for directors, who must do all this while navigating everything from new risks and geopolitical realities to evolving cyber-security threats and global markets.
In the UK, companies have had to grapple with governance prescriptions on both the national and EU level. The FRC’s Stewardship Code (issued in 2010, then revised in 2012) and the EU’s Shareholder Rights Directive (adopted in 2007, with multiple amendments since), for example, both push for greater shareholder engagement, increasing pressure on boards to meaningfully engage with investors in company stewardship.
Indeed, 40% of board directors in our survey reported that relations between investors/shareholders and the board have changed in the past five years, and investors/shareholders are seen by directors as exerting the greatest influence on the company—even greater than customers.
An area that epitomises the growing influence of shareholders is the issue of compensation. The year 2016 saw some of the biggest waves of shareholder protests around executive pay in years, with multiple FTSE 100 companies having “no” votes from investors at annual meetings this year—including BP, Anglo American, and Smith & Nephew.
In the US, Citigroup received a significant protest vote against its pay packages (although the pay plans did end up passing), fuelled by support from ISS and Glass Lewis. All of this dissent is covered extensively in the media and across social media, raising the stakes for boards even further amid this greater public scrutiny.
Board recruitment, evaluation, and education
Responding to pressure from regulatory authorities, investors and the public, boards are making changes in everything from the nomination of board candidates to removing board directors who don’t perform.
Nomination committees are increasingly under the spotlight, as the FRC has voiced the board committee’s critical role in succession planning and indeed the effective operation of the board as a whole.
Companies are professionalising their director candidate selection process, and, working with search firms and asking board member organisations like WomenCorporateDirectors for nominees, are looking beyond their own networks for candidates who can bring diversity to the table.
Boards are also being more strategic about matching the skills that they consider most important for board service to the skills that they look for in board appointments. In our board survey, for instance, “industry knowledge” and “financial/audit skills” were two of the top three skills cited as “most important for board service today,” and these were also skills sought after in recent board candidates.
Also under scrutiny is how board directors are performing once they get to the boardroom—are they delivering value in their board seat? Companies are increasingly adopting performance evaluations to measure this value, and 77% of survey respondents on boards in Western Europe said that their companies conduct performance evaluations of board directors (versus 68% of directors globally and in North America).
The consequences of underperformance, however, do appear to vary by geography: while 42% of North American board directors said that they had served on a board where a negative evaluation was used to move a director off the board, only 27% of respondents in Western Europe said this was true.
But, even with some directors not really living up to their original promise, most directors are truly committed to high performance, and doing what it takes to get them there. Board education is a high priority for directors, as is preparation for board meetings.
Also valued among directors is networking, which increases opportunities for both gaining knowledge and recruiting new board candidates; directors in our global survey spend an average of 9.4 hours per month on networking with their peers.
The “expectations gap” isn’t likely to close soon—stakeholders are feeling more and more empowered to demand more of both boards and management teams. Directors know this: good is no longer good enough for most boards; boards want to be visionary.
And the path to “visionary” is one that is constantly evolving. Boards must adapt to changing expectations and regulations and even the very definition of what constitutes “good governance” today, which may very well change tomorrow, and again after that.
*Source: 2016 Global Board of Directors Survey conducted by the WomenCorporateDirectors Foundation, Spencer Stuart, Professor Boris Groysberg and Yo-Jud Cheng of Harvard Business School, and researcher Deborah Bell. The survey polled directors on issues ranging from the economy to quotas to director skills, with responses from more than 4,000 male and female directors in 60 countries around the world.