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PwC Study Finds Corporate Directors Pursue Change and Accelerate Progress, but Challenges Persist
Significant changes in corporate governance are impacting boardroom dynamics, compelling directors to spend more time on board work and prompting them to reconsider their oversight approach, according to the 2012 Annual Corporate Director Survey issued by PwC US. Directors acknowledge that challenges remain and expect to increase their focus on critical areas including board composition, risk management and IT oversight.
“Corporate directors are in the spotlight as never before,” said Mary Ann Cloyd, Leader for PwC’s Center for Board Governance. “PwC’s Annual Corporate Director Survey shows an attitude shift among directors grappling with change -- indicating their progress to-date -- and reveals ways to enhance performance and adjust to the altered landscape.”
In the summer of 2012, 860 public company directors responded to the survey. Of those, 70% serve on the boards of companies with more than $1 billion in annual revenue. PwC structured this year’s survey to provide actionable feedback directors can use as benchmarks to help evaluate their performance in core areas that are “top of mind” to today’s boards.
“Our survey provides the candid views of some of the most influential and well-respected directors, reflecting the practices and boardroom perspectives of today’s world-class public companies,” said Cloyd. “At a time of unprecedented regulatory change and shareholder scrutiny, the survey offers valuable insights that will help directors effectively meet the challenges of their critical roles and achieve quality governance.”
Key survey findings include:
Board Composition and Behavior
Questioning board performance. Nearly one-third of directors believe someone on their board should be replaced. Diminished performance because of aging and lack of expertise were cited as the two primary reasons.
Finding new directors. When seeking new board members, 91% of directors say they take suggestions from other directors, with 11% considering investor input for candidates. A quarter consider racial and gender diversity as “very important.”
Reconsidering board leadership. About half of boards that have a combined CEO and Chair position are already discussing splitting the role at their next CEO succession.
Self-evaluations prompt changes. Two-thirds of directors (66%) made changes during the last 12 months as a result of their full-board or committee self-evaluations.
Continuing director education. Over half of directors (52%) believe some form of annual board education should be required. Of those with this belief, over 40% had less than four hours of outside training last year, and 21% did none at all.
IT Oversight
Technology matters. Over half of directors (56%) believe IT is “very important” or “critical” to their companies. Only 5% consider it a “back-office support function.” Directors at companies where IT is considered “very important” or “critical” meet with the CIO more frequently than those where IT is considered less important.
Building IT into the overall framework. Almost 60% of directors want to spend more time on IT in the coming year, an increase from 36% in 2011. More than a third (36%) believes their company needs improvement anticipating competitive advantages from emerging technologies.
IT experience helpful but not essential. Less than one-third of directors believe it is “very important” to seek new directors with IT experience.
Executive Compensation
Voices that influence compensation. Directors rate the following groups as “very influential” or “influential” when it comes to their boards’ decisions about executive compensation: 86% cite compensation consultants, followed closely by the CEO (79%), and then institutional investors (54%).
Responding to say-on-pay. In the second year of say-on-pay, 64% of companies took some action to address voting results: 41% modified compensation disclosures, 29% made compensation more performance-based and 23% worked more closely with proxy advisory firms. Two percent of directors indicated that their companies decreased executive compensation.
The influence of proxy advisory firms. Over 60% of directors estimate that proxy advisory firms have more than a 20% influence on proxy voting at their company. Almost half of directors rate quality of the firms’ work as “fair” or “poor.”
Strategy Oversight
More time wanted on strategy. Strategic planning topped the board’s “wish list,” with over 75% of directors saying they want to devote more time to it, up from 60% of directors who wanted to do so last year.
Getting the right information. Two-thirds are satisfied with the customer satisfaction research management provides, while nearly 72% are satisfied with information about employee values and satisfaction. However, a number of boards do not receive any information about either customers or employee satisfaction (20% and 16%, respectively); and 21% are dissatisfied with competitive intelligence.
Risk Management
Allocation of risk responsibilities. More than one-third (37%) of respondents say their boards have no clear allocation of specific responsibilities for overseeing major risks among the board and its committees, while 57% are not comfortable with their understanding of the company’s social media response plan in the event of a crisis.
Responding to the new whistleblower rules. Most directors acknowledged that their companies took action to address the new whistleblower rules: two-thirds placed more emphasis on employee awareness around ethics and compliance policies; 42% enhanced follow-up policy on compliance-related complaints; and 42% increased reporting of such issues to the board.
Boards satisfy their risk appetite. A majority (97%) report they are at least “moderately comfortable” with the board’s understanding of the company’s risk appetite and 91% of directors are at least “moderately comfortable” with their understanding of emerging risks (e.g. the European debt crisis, natural disasters).
Looking Forward
Considering topics of ongoing regulatory and shareholder interest, directors say they are most concerned with and spending the most time on two: mandatory audit firm rotation and proxy access. The SEC estimates that almost 6,000 companies will be affected by the conflict minerals provision of the Dodd-Frank Act, but 85% of directors do not expect to spend much time discussing conflict minerals and 75% report “not much” or no concern with the issue.
PwC’s Center for Board Governance is a leading resource to enable directors to more effectively meet the challenges of their critical role. By promoting leading governance practices the Center promotes excellence in the boardroom and is dedicated to better enabling boards and audit committees to perform their important roles. To provide timely updates to board members, the Center publishes the Annual Corporate Director Survey , quarterly To the Point, monthly BoardroomDirect, and offers forums for directors to discuss current issues.