By John Filar Atwood
More than half of corporate directors believe that they are ready to oversee the forthcoming mandatory climate disclosure requirements, but the number that feel that ESG issues are linked to corporate strategy is shrinking, according to PwC. The firm’s annual corporate directors survey, which is based on feedback from more than 600 directors, shows that 51 percent of directors feel prepared for ESG disclosures, up from 25 percent in 2022, but the percentage who think ESG issues are linked to strategy dropped from 64 percent to 54 percent year over year.
The ESG numbers are only one of multiple insights provided by PwC in its 2023 survey. Some of the key areas addressed along with ESG issues include board composition, executive compensation, and board diversity.
In general, the firm found that while it is imperative that the business community embrace the need to change, many boards are resistant to do so. This is especially true when it requires self-reflection about their own composition, PwC said.
Board refreshment. On the issue of board composition, the survey indicates that 45 percent of directors believe that at least one member of their board should be replaced. However, criticism of the performance of their peers has not translated into action as only 11 percent of directors said that their board’s assessment processes resulted in a decision not to renominate a director.
PwC noted that even with increased attention on board refreshment, annual rates of turnover in the S&P 500 were approximately 7 percent in 2023. Mandatory retirement ages are set at 75 or older for most boards, and only 8 percent of S&P 500 companies have adopted term limits for non-executive directors. PwC said that surveyed directors pointed to an ineffective assessment process and board leadership’s unwillingness to initiate difficult discussions about stepping down as two of the stumbling blocks to board refreshment.
ESG issues. Regarding the disconnect between directors and the importance of ESG issues, PwC found that there is a significant divide between male and female directors, with female directors being much more likely to assign importance to ESG matters. Specifically, the survey indicates that 67 percent of female directors believe ESG issues are linked to company strategy versus 51 percent of male directors. Moreover, 61 percent of female directors think that ESG has a financial impact on the company compared to only 35 percent of male directors.
PwC found that directors may be weary of discussing ESG, which is often poorly defined, and that many directors feel that they do not understand key ESG risks. According to the survey, 40 percent of directors said that their board does not understand carbon emissions very well or at all, and 37 percent said their board does not understand climate risk. One-third of directors acknowledged that they do not understand the internal processes that support EG data collection, PwC determined.
Board diversity. In discussions with board members, PwC found that while most directors see the value in board diversity, they feel that the issue has become politicized. Ninety-three percent of directors believe that diversity brings unique perspectives to the boardroom, and 82 percent think that it enhances board performance. However, 55 percent see board diversity efforts as being driven by political correctness, and 30 percent believe it results in the nomination of unqualified candidates.
On the specific issue of gender diversity, PwC again found a divide between male and female directors. According to PwC, 100 percent of female directors said that gender diversity is an important attribute for a board, but only 73 percent of male directors felt that way. The male director responses represent a 17 percent drop from the levels PwC saw in 2016.
Diversity efforts have improved somewhat in recent years, PwC found, as 66 percent of directors said their boards have replaced a retiring director with one who increases board diversity. On the other hand, only 15 percent of directors told PwC that their companies have amended the board succession plan to ensure increased diversity in the future.
Executive compensation. PwC’s survey indicates that sentiment toward levels of executive compensation is improving. While in 2017 70 percent of directors that were surveyed thought that executives were overpaid, only 50 percent felt that way this year. PwC believes that the shift in sentiment reflects companies’ improvement at connecting executive pay to performance, aided by the SEC’s pay-versus-performance disclosure requirements that went into effect with 2023 proxy filings.
PwC said that while ESG goals may be getting attention from investors, directors think that other issues are more important for consideration in drafting executive compensation packages. Sixty-three percent of directors believe that customer satisfaction should be a factor, and 53 percent think that succession planning should be included in executive compensation plans. Only 44 percent said that diversity, equity, and inclusion efforts should be included in pay packages, and 31 percent feel that executive pay should be tied to environmental goals.