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According to the 12th Annual What Directors Think survey conducted by NYSE Governance Services and search firm Spencer Stuart, the changing nature of enterprise risk and oversight is dominating boardroom discussions.
“At the board level, risks are a focus of every meeting and, in fact, every committee," said Charles Rossotti, nonexecutive chairman at AES Corp., in the survey report. “In the last few years, focus on risk has been elevated to adopt a more strategic focus that looks across the whole portfolio for themes and correlations.”
With technology introducing new risks and altering traditional exposures, for instance, 55 percent of board members says it's not reasonable to expect a board to fully understand the different aspects of risk they face in today's dynamic environment.
“The expectations placed on boards in terms of what they are asked to oversee is much greater today due to many factors...,” said Spencer Stuart CEO Kevin M. Connelly. “Directors find themselves needing to be knowledgeable in areas they may or may not have had much past exposure to or experience in, such as cybersecurity.”
Responding to a question about how frequently they discuss risk within the company's system of values, 44 percent of respondents said they always use that context, and 51 percent said the company's risk culture is evaluated "sometimes."
Because risk is becoming so ingrained in board discussions, 54 percent of directors saw no need to form a designated risk committee (a move mandated for financial services providers under Dodd-Frank legislation).
Strategy and Performance
Although risk management is growing in importance, board members said monitoring and enhancing organizational strategy and performance remain central to their discussions.
Demonstrating the linkage between executive performance and effective strategy, 96 percent of the board members cited regular evaluation of the CEO as a "very important" board function.
Other key factors cited by board members include strategic plan review (cited by 91 percent), bench strength and capital use (both at 83 percent), M&A analysis (73 percent) and meeting with company managers onsite (62 percent).
Nearly two-thirds (63 percent) of the directors said they believe their boards are effective at developing and monitoring key performance objectives.
Shareholder Engagement Growing
Board members also said shareholder communication is playing a larger role in their obligations. Prompted by regulatory requirements such as increased disclosure mandates, majority voting in director elections, and say-on-pay provisions, directors say they're dealing with shareholders and activist investors more frequently than in recent years.
In the survey, 20 percent of the directors said their company had received shareholder proxy proposals in the past year. Within that group, 68 percent said the process had been smooth and amicable, and 23 percent said they'd been able to reach agreement with shareholders on the issues being raised.
Even in the absence of formal proposals, many director said they had interacted with shareholders outside of the annual meeting in the past year. Among the most common topics raised were executive compensation (cited by 41 percent of respondents), financial under-performance (33 percent), change of leadership (27 percent) and board nominations (27 percent).
The survey included responses from nearly 500 corporate directors, with more than 70 percent identifying themselves as outside directors.