Directors' Cut Library

Deloitte’s “Emerging Fraud Risks to Consider: ESG” explains by example how the rapid integration of ESG issues into the business may give rise to new fraud risks, particularly in the context of environments that commonly lack the types of internal controls for ESG information that most companies have had in place for decades to support their financial reporting. The article advises audit committees to be aware of these risks and suggests questions to inform their understanding of the company’s risk exposure and mitigation factors.

The PCAOB’s resource for audit committees suggests topics and questions audit committees may want to consider in their engagements with the company’s external auditors. The topics and questions, which are topical in the context of the current economic environment, include fraud and geopolitical risks, IPOs/M&A, audit execution, auditor independence, audit firm quality control, and technology (digital assets and cybersecurity).

Deloitte's Audit Committee Guide (online here) provides information for public company audit committees and their advisors—including management, internal audit, corporate secretaries, and outside counsel practitioners and consultants working with audit committees—on regulatory requirements, leading practices and trends, and core committee roles and responsibilities, and practical guidance on how to best discharge them. The Appendix includes a sample audit committee charter, an annual calendar of activities, and a performance evaluation questionnaire.

US public and private company directors responding to KPMG’s survey on board diversity identified replacement of a retiring director and strategic necessity/staying competitive as the top two triggers most likely to prompt their board to recruit new directors over the next several years. The report reveals the results of the survey of more than 700 directors worldwide and includes big picture takeaways in addition to region-specific data.

NACD BoardTalk’s “Adding a Director to your Board? Beware of These Six Common Myths” largely addresses the benefits associated with utilizing an outside search firm to assist with identifying new director candidates. Among other things, search firms commonly bring expertise, independence, objectivity, and a pool of numerous, well-vetted, diverse, qualified candidates. Companies have a myriad of choices as respects search firm size, capacity, and expertise in company-specific priorities.

Based on input from seasoned directors, “The Global Board” from Directors & Boards identifies critical differentiators for evaluating international director candidates as compared with other candidates. Among the factors to drill down on are communication and language skills (which, as discussed in the post, can’t be discerned based on paper qualifications alone), culture and board “fit,” and availability for board meetings and calls in a time zone that works for all directors”.

ISS reported on the substantial increase in racial and ethnic diversity on Russell 3000 boards. Among the key takeaways: Just 10% of Russell 3000 boards disclosed no board racial/ethnic diversity as of the 2022 proxy season, compared to 38% in 2020 and 49% in 2016, and all S&P 500 boards disclosed at least one racially or ethnically diverse director this season, compared to 89% that did so in 2020.

Spencer Stuart’s “2022 S&P 500 Board Diversity Snapshot” reveals numerous noteworthy statistics on the representation of historically underrepresented groups on S&P 500 boards. The report also shares practices that purportedly leading boards have adopted to advance their board’s diversity. Key findings are here.

Fortune reported on the rise in mandatory retirement age policies for S&P 500 directors. The article notes an increase from about 50% of companies in 2015 to 70% in 2021 that have such policies, with just over half of those establishing a limit of 75 and older. The prevalence of policies with a 75+ age limit reflects a trend toward proportionally toward higher retirement ages over time. Term limits for directors remain relatively uncommon, with just 6% of S&P 500 boards disclosing established limits. Of those, nearly three-quarters have term limits ranging from 15 – 20 years.

Spencer Stuart’s “2022 S&P 500 New Director Snapshot” supplements its “2022 S&P 500 Board Diversity Snapshot” (reported above). Notably, the number of new directors and the number of companies appointing new directors declined from 456 new directors and 59% of companies appointing at least one new director in 2021, to 395 new directors and 55% of companies appointing at least one new director in 2022. Additional key takeaways are here.

At its meeting on September 21, the SEC’s Investor Advisory Committee expressed its broad support for all key proposed provisions of the SEC’s proposed climate and cybersecurity rules other than the board expertise disclosure requirement, and recommended additional disclosures (see here). The IAC’s bases for encouraging the SEC to eliminate or reconsider the proposed board expertise requirements in both proposals were generally consistent with the concerns raised by the Society in its cybersecurity (p.16) and climate disclosure (p.55) comment letters and other commenters.

For those boards seeking to add a director with cyber or tech expertise, “Cybersecurity and the Board” from Spencer Stuart identifies critical qualifications to seek in prospective directors and the potential or likely upsides/downsides associated with different candidate backgrounds commonly explored for this role. See the firm’s take on the upsides/downsides of different candidate backgrounds here.

“Board Refreshment and Evaluations” from The Conference Board, in collaboration with ESGAUGE, Debevoise & Plimpton, the KPMG Board Leadership Center, Russell Reynolds Associates, and the Weinberg Center for Corporate Governance, provides benchmarking data and trends, and associated insights, on various board refreshment tools and evaluation practices across S&P 500 and Russell 3000 companies based on public disclosures made as of July 7, 2022. See key takeaways here.

“How to increase the board’s impact in volatile times” from EY and Corporate Board Member revealed interesting insights about directors’ views on their greatest value to the company and chief areas of impact, influence, and effectiveness based on a survey of 251 public company directors. See EY’s release for key takeaways.

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The Society and certain other organizations have long maintained listings of reputable, established director/board education program offerings. The latest Society listing, which was most recently updated in May, is here. See also Gibson Dunn: “Director Education Opportunities” (updated July 2022) and Woodruff Sawyer:”2022 Board Education Resource Guide” (updated December 2021).

Although discussed in the context of ESG, the underlying principles set out in Broc Romanek’s post: “Changing a Board Committee’s Name: Three Practical Considerations” apply equally to other committee name changes. Generally speaking, consider the length of new committee names—and wordy committee names in particular—in the context of the likely use by third parties of acronyms or short-hand references that may be off-putting, and consider each word of the name on a standalone basis and in context to ensure it is necessary and resonates with your board and committee structure.

On its third anniversary (August 19), the Business Roundtable (BRT) reaffirmed in a brief statement its often misunderstood updated corporate purpose statement, which prompted an ongoing debate about whether the BRT CEOs had made a fundamental shift from a stockholder to a stakeholder approach to governance. The release reiterates the fact that the updated statement did not represent a fundamental shift, but rather was aimed at articulating the long-established and widely held view among member CEOs that companies can only succeed over the long-term if they consider the interests of all relevant stakeholders.

Woodruff Sawyer’s “New Director Onboarding: A Roadmap for Boards” suggests companies assign a seasoned director as a board mentor to incoming directors, as well as schedule meetings with the general counsel/outside securities counsel, CEO, CFO, investor relations, and other members of management to review legal “guardrails” associated with director service, corporate strategy, financial statements/earnings releases, the company’s shareholder base, and other critical topics, respectively. The post also suggests resources to include in an orientation binder and other onboarding activities to help bring new directors up to speed such that they are equipped to meaningfully engage from the outset.

Spencer Stuart's annual survey of S&P 500 and MidCap 400 Nominating/Governance Committee chairs revealed noteworthy insights on committee priorities, board evaluations, and board composition and refreshment. See key takeaways here.

“Trends and Updates from the 2022 Proxy Season” from Freshfields includes a wealth of benchmarking information on board practices as they relate to ongoing and trending investor focus areas that include board oversight structure, composition, and refreshment, and board and management diversity, as well as relevant regulatory and other developments, no-action letter statistics, and proxy advisor and major institutional investor policies and positions on board and workforce diversity/DEI, director overboarding, and other hot topics.

“Board Leadership, Meetings, and Committees” from The Conference Board, in collaboration with ESGAUGE, Debevoise & Plimpton, the KPMG Board Leadership Center, Russell Reynolds Associates, and the Weinberg Center for Corporate Governance, provides insights on board leadership; board and committee meeting frequency, format, and timing; board committee structure; and committee responsibilities, among the S&P 500 and Russell 3000 companies based on a plethora of benchmarking data and dialogue with leading in-house corporate governance professionals. See key takeaways here.

Board leadership structure practices and perceptions across public companies and private companies are aligned in certain noteworthy respects and not in others, according to Spencer Stuart’s director survey on board leadership, which surveyed 654 public company directors and 411 private company directors. See key takeaways here.

Corporate Secretary’s “Executive Compensation: Insight on companies’ governance” reveals benchmarking data on the board’s oversight of executive compensation and related topics based on the results of a recent survey of governance professionals worldwide (59% North America) across predominantly public companies. See North America-specific findings here.

“The Expanded Role of the Compensation Committee” from the HR Policy Association discusses how the compensation committee is evolving based on institutional investor scrutiny, regulatory pressures, and other developments, and shares common and leading practices to help manage the changes. The guide also touches on the use of consultants for talent, diversity, and culture advice; meeting/agenda efficiencies; and committee composition and training. The Appendix includes sample meeting calendars.

Nearly all of the public company compensation committees represented by the respondents to this Society member-requested Quick Survey retain an independent compensation consulting firm. Of those, a plurality of such consulting firms have served in that capacity for over 10 years. Most respondents indicated that their compensation committee periodically considers whether to retain a different consulting firm; however, periodic rotation of the principal consultant on the engagement is uncommon and a formal consultant or firm rotation policy is rare.

Semler Brossy's "ESG + Incentives report" benchmarks the prevalence and types of ESG metrics used by the S&P 500 in their executive compensation programs. Based on April 2021–March 2022 proxy disclosures, 70% of companies included an ESG metric in their annual or long-term incentive plan. Of those, more than 95% included human capital management metrics in their incentive plans, compared to 23% that included environmental metrics, and 41% that included other metrics (e.g., community engagement, customer satisfaction, cyber security, product quality).

Spencer Stuart’s analysis of director compensation for S&P 500 companies based on 2022 proxy statements revealed notable benchmarking statistics and year-over-year trends. See key takeaways here.

State Street’s global head of asset stewardship, Ben Colton, told Responsible Investor (subscription required) that voting against directors was a much more effective stewardship tool than supporting precatory shareholder proposals, many of which State Street finds too prescriptive. Consistent with its other asset stewardship publications wherein State Street makes clear that it does not view divestment as a viable or effective stewardship tool for passive investment funds, Colton touted State Street’s escalation policy for ESG issues (e.g., engagement, proxy voting) in lieu of divestment.

BlackRock's 2022 voting spotlight and 2022 voting spotlight summary, which capture its proxy voting-focused stewardship activities for the 12 months ended June 30, reveal a plethora of noteworthy statistics, engagement examples, and instructive commentary that should help inform companies' engagement and disclosure going forward. Key takeaways are here.

Common Retirement Fund announced its request for information from 28 integrated oil and gas companies about their climate transition plans. Companies that the Fund deems not sufficiently prepared to transition to an “emerging” net zero economy may be subject to divestment.

Norges Bank Investment Management’s resource on human capital management (HCM) sets forth its expectations of companies and boards on how to manage and oversee their human capital resources. The expectations address: (i) the integration of HCM into corporate policies and strategy; (ii) the integration of material HCM risks into the company’s risk management framework; (iii) the disclosure of material HCM information; and (iv) workforce engagement.

BlackRock’s commentary: “Our approach to data privacy and security” expresses its approach to engagement on data privacy and security issues and outlines the types of questions companies may expect to address in an engagement with BlackRock on these topics. While aimed primarily at companies with extensive access to customer data, the engagement questions may be instructive for all companies that use or rely upon any measurable amount of customer and employee data.

T. Rowe Price's 2022 aggregate proxy voting summary largely reflects its company-specific approach to evaluating proxy proposals in light of particular facts and circumstances. Overall, the investor supported 90% of management proposals and 12% of shareholder proposals globally on the most prevalent and significant voting issues. The report provides voting data and associated insights on T. Rowe's approach across a number of key topics including social, environmental, and political proposals, director elections, executive compensation, equity compensation plans, poison pills and other takeover defenses, and board leadership.

announced board approval of a series of emissions reduction measures aimed at furthering its progress toward attaining the net zero pledge it made last year. Among other actions, CalSTRS plans to allocate 20% of its public equity portfolio to a low-carbon index.

Spencer Stuart’s and Diligent’s report: “Sustainability in the Spotlight: Board ESG Oversight and Strategy,” reveals the results of their recent survey of 590 directors worldwide (72% US) across industries and company types (78% public companies). Key US-specific takeaways are here.

Broc Romanek’s post: “Forming a Standalone E&S Board Committee: 4 Things to Consider” provides practical advice on how to go about creating a new standing board committee dedicated to ESG/sustainability oversight. His prior post: “Should You Create a Standalone E&S Board Committee?” addressed considerations relative to whether creating such a committee makes sense for the company.

Among the noteworthy takeaways from EY’s “Four key takeaways from the 2022 proxy season” are the Fortune 100 proxy disclosures on board ESG oversight (p.6). Companies increasingly are disclosing a “shared” ESG oversight approach that describes the allocation of different responsibilities across multiple committees for issues that fall within their charter mandates or areas of expertise. However, the trend toward delegating primary oversight of ESG to the Nominating/Governance Committee continues, with 57% of companies reporting that approach this year compared to 52% last year and 50% in 2020.

“ESG Board Oversight Considerations: What Board Committee(s) Should Oversee ESG in the Current Environment?” from Bass Berry & Sims addresses considerations relevant to structuring the board’s oversight of ESG issues and current board oversight structure practices and trends. The memo also suggests “best practice” documentation and disclosure tips to ensure that the board’s oversight structure is properly reflected in the company’s governance documents and consistently described across the company’s various disclosure channels.

Deloitte’s “A new chapter in cyber” discusses the board’s cybersecurity oversight responsibility and suggests tangible action items the board may wish to consider to bolster its oversight in a manner commensurate with the risk. The article includes suggested questions for the board to consider asking management to inform its understanding of the company’s cyber risk and cyber risk management posture, with the caveat that the list of potentially relevant questions is expanding and evolving as new risks emerge. See key takeaways here.

PwC’s “The corporate director’s guide to overseeing deals” advises boards to approach potential transactions (M&A, divestitures, alliances, and joint ventures) proactively and holistically, rather than reactively and in a piecemeal fashion. Boards are advised to adopt—vis-à-vis management oversight—a disciplined approach for deal consideration and review, and to query and monitor post-transaction integration. The guide identifies big picture considerations for boards to improve the likelihood that any particular opportunity ultimately pursued will be successful in the context of the company’s overall strategy.

Assessing Corporate Culture: A Practical Guide to Improving Board Oversight” from LRN and Tapestry Networks offers a solid framework for boards to attain and preserve a corporate culture that supports the company’s objectives and performance. The framework components are accompanied by practical guidance, suggested action items, and examples. The guide also suggests numerous questions for the board to ask itself and management to inform its understanding of the company’s current culture and potential management and oversight gaps and opportunities.

Rather than focusing solely on the financial-related implications of strategic and other decision-making, KPMG advises boards (p. 6) to “walk the talk” on the value of the workforce to the company’s performance and success by regularly integrating employee expectations and implications into their board discussions. More than 80% of 238 directors participating in the firm’s June 2022 roundtable discussion indicated that their board or a board committee regularly or sometimes discusses employee expectations. While the vast majority of 311 directors rely at least to some extent on management for information about employees, nearly 40% get information from employees themselves, and 30% get information from third-party sources.

Woodruff Sawyer’s “Outside Director Communications: Attorney-Client Privilege” summarizes recent case law and the associated “expectation of privacy” framework regarding the maintenance of the attorney-client privilege in conjunction with director email communications; shares best practices; and provides practical guidance to mitigate the potential for discovery and an inadvertent waiver. Directors are encouraged to understand the risks and to be thoughtful and deliberate about the content and channels used for sensitive communications that may relate to litigation or potential litigation.

In addition to explaining the board’s risk oversight role and leading risk management practices and tools, PwC’s “Risk oversight and the board: navigating the evolving terrain” includes an instructive sample risk allocation matrix for the board and yellow flag indicators of a potentially deficient enterprise risk management program.

Among the many noteworthy findings revealed in EY's annual review of 74 Fortune 100 proxy statement and Form 10-K disclosures (filings through May 31, 2022) on board cybersecurity oversight, cybersecurity and data privacy risks, and cybersecurity risk management: 88% of companies disclosed that at least one board-level committee was charged with cybersecurity oversight. Of those, 70% disclosed audit committee oversight (memorialized in the audit committee charter by 69% of those companies) and 28% disclosed non-audit committee oversight (memorialized in the relevant committee charter by 86% of those companies). Additional key findings are here.

Broc Romanek’s guide: “Shareholder Engagement” includes many practical tips for securing, preparing for, and conducting effective shareholder engagements. In addition to plenty of do’s and don’ts, the guide offers creative solutions to unexpected or unfavorable predicaments that can go a long way toward enhancing what could otherwise be perceived or experienced as an unsuccessful engagement.

Wachtell Lipton's "Dealing with Activist Hedge Funds and Other Activist Investors" offers a sobering but realistic checklist of action items and processes companies should consider to mitigate the potential for—or respond to— a hedge fund activist attack. Suggested advance preparation tactics include creating a standing internal "shareholder activism management" team, ongoing and extensive shareholder relations activities, and board positioning/readiness. Instructive response tips cover both non-public and public activist communications.

PwC’s “The director’s guide to shareholder activism” portrays and explains shareholder activism in a way that takes into account the significant pressures companies are facing from all types of investors, with activism taking the form of not only traditional proxy contests, but also less aggressive activities including shareholder engagement, shareholder proposals, and “vote no” campaigns. The guide explains the activist tactics most commonly used by each of the main activist types (including retail activists, advocacy groups, institutional investors, and hedge funds), common activist triggers, and how companies can mitigate their risks.

Insightia’s “ESG Activism 2022” includes a plethora of noteworthy US and international ESG activism-related trend data, including the results of a focused analysis of environmental proposals and social proposals by industry sector (p.15).

UK non-executive director-launched network "Chapter Zero, the Directors’ Climate Forum" released an updated version of its climate change boardroom toolkit designed to help directors worldwide understand—and meaningfully engage and act on—the business risks and opportunities associated with climate change. While the toolkit has an obvious leaning toward the UK culture and regulatory climate, US-based company management and directors seeking to understand and perhaps borrow from certain non-US leading practices may benefit from this guidance.

Informed by an analysis conducted by Georgeson, the WSJ (subscription required) provided statistics on institutional investors’ votes against management-supported directors (an increasingly common tactic) based on companies’ climate change-related responsiveness or performance. Institutional investors disclosed votes against 225 US directors based on climate-change related issues during the 2022 proxy season through July 7, compared to 157 in 2021 and 83 in 2020. While those voting against directors for climate change-related issues consist largely of European and sustainability-oriented investors, the group also includes some US investors.

Goodwin’s “ESG Considerations for Public Companies” provides an informative tutorial and overview of ESG and the ESG landscape, including ESG drivers and influences, regulatory developments, legal considerations, board fiduciary duties, investor and proxy advisor perspectives, disclosure, and more.

Sixty-four institutional investors that signed onto a new Ceres-coordinated initiative—dubbed the Valuing Water Finance Initiative—plan to engage with 72 companies “with a high water footprint” to address water-related risks. Participating investors include As You Sow, CalPERS, CalSTRS, Boston Common, and the New York City Comptroller’s Office. While not expressly included among the expectations, companies are expected to disclose meaningful information about their water management, goals, and performance, to inform investor engagements and engagement progress.