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Nominating/Governance Committee in the Spotlight: Three Priorities for 2022

January 2022

At a glance

  • Company stakeholders expect boards to oversee company-specific ESG risks and strategies. The challenge is determining how, if at all, to divvy up ESG oversight responsibilities.
  • Boards are adding more directors from underrepresented communities, but change to overall board composition is slow because of low board turnover.
  • Nominating and governance committees can take several actions to ensure the board is composed of directors with different but relevant skills, experiences and backgrounds.

Expectations of nominating and governance committee chairs and committee members further increased in 2021, with stakeholder interest intensifying in issues ranging from oversight of environmental, social and governance (ESG) issues to board composition and diversity. Through our extensive work with nominating and governance committees of private and public companies of all sizes, we have identified three key focus areas for the committee in 2022:

Company stakeholders — including employees, customers and shareholders — expect boards to oversee company-specific ESG risks and strategies. Today few boards have standalone ESG/sustainability committees, and instead general oversight of ESG-related issues is most frequently delegated to the nominating and governance committee.

Because ESG risks and opportunities vary widely based on sector, industry and company culture, one size does not fit all when it comes to best practices and structures for board oversight of ESG. The challenge facing nominating and governance committees is determining how, if at all, to divvy up ESG oversight responsibilities between the full board, the audit committee, the compensation committee, the nominating and governance committee, and any other committee(s).

As a result, nominating and governance committees should:

  • Add a discussion of ESG oversight to the committee’s agenda if the topic hasn’t been discussed in the boardroom or assigned to another committee.
  • Ensure the nominating and governance committee and full board understand the company’s key ESG risks and strategies.
  • Determine how to best allocate ESG oversight responsibilities between the full board and board committees. Questions for consideration include:
    1. How are ESG considerations embedded into boardroom strategy discussions?
    2. What is the role of the full board vs. committees in ESG oversight?
    3. Which committee(s) should own the various relevant key ESG issues?
    4. What are the roles of the full board and committees in approving ESG-related goals?
    5. What is the appropriate cadence for ESG-related discussions?
  • Formalize board and committee ESG oversight responsibilities in committee charters and board corporate governance policies.
  • Make certain the company is fully communicating its ESG story, using frameworks expected by the marketplace and addressing the disclosure needs of key stakeholders.
  • Understand marketplace perceptions of the company’s ESG practices, benchmarking company ratings from key rating agencies against company peers.

Board diversity may fall under the ESG umbrella, but our view is the topic deserves a separate headline in light of the growing spotlight on the issue. Feeding stakeholder interest in the issue are the relatively low numbers of women and directors from historically underrepresented racial, ethnic and LGBTQ+ communities in U.S. boardrooms.

Boards are prioritizing diversity when recruiting new directors. Of the 2021 incoming classes of directors, nearly three-quarters (72%) of new S&P 500 directors and nearly two-thirds (62%) of new S&P MidCap 400 directors are women and Black/African American, Hispanic/Latino, Asian, American Indian/Native Alaskan or multiracial men.

However, due to continued low boardroom turnover, 2021’s addition of directors from historically underrepresented groups has had little impact on the overall diversity of U.S. boards. Women now represent 30% of all S&P 500 directors and 28% of S&P MidCap 400 directors. And just 21% of all S&P 500 directors and 18% of a sample of S&P MidCap 400 companies are from racial/ethnic/LGBTQ+ communities.

To continue progress on boardroom diversity, nominating and governance committees should:

  • Adopt a goal of continuous improvement when it comes to diversity.
  • Consider adopting a formal policy, such as the "Rooney Rule," to commit to including women and candidates from historically underrepresented communities (racial/ethnic, LGBTQ+) on all lists of candidates considered for the board. In the 2021 proxy season, just 19% of S&P MidCap 400 boards and 39% of S&P 500 boards disclosed the adoption of some form of the “Rooney Rule.”
  • Consider temporarily expanding the board to add women and candidates from historically underrepresented communities. For example, 78 S&P 500 boards expanded to add one or more women directors, and 88 boards increased their size to add racial/ethnic diversity during the 2021 proxy season.
  • Commit to transparency on boardroom diversity metrics. In the 2021 proxy season 60% of S&P 500 and S&P MidCap 400 boards disclosed their ethnic/racial composition, with 28% of S&P 500 and 29% of S&P MidCap 400 boards providing director-specific detail.

Board composition, a core responsibility of the nominating and governance committee, continues to be a high-profile issue.

Nominating and governance committee chairs and members should expect to face “no” votes from major investors if the composition of the board fails to meet expectations on a variety of board composition metrics, such as director tenure and diversity of gender, race and ethnicity.

But changing the composition of a board is slow work. Consistent with prior years, just over half (55%) of S&P 500 boards added at least one new independent director in the 2021 proxy year. One quarter had no change to board composition, neither adding nor losing directors.

Nominating and governance committees know that a strong board, composed of directors with different but relevant skills, experiences and backgrounds, is a strategic asset. And they understand that while consistency in the boardroom is valuable, so are new perspectives. However, it can be uncomfortable to ask a colleague to leave the board in order to make room for a new director.

To ease the sometimes-difficult conversations surrounding board refreshment, nominating and governance committees should:

  • Set a solid foundation for board refreshment by carefully assessing the skills and perspectives currently in the boardroom against boardroom needs most relevant to the company’s forward-looking strategies and risks. An effective annual board assessment is a critical tool for identifying gaps and overcapacity and other board composition vulnerabilities.
  • Establish a boardroom culture that understands and appreciates the value of board refreshment. The committee should ensure that each director understands that his/her board appointment is not a guaranteed decades-plus role, and that re-nomination is based solely on boardroom needs and director performance. This tenet should be explained at the initial appointment of any new director and reinforced every year when considering the re-appointment of existing directors.
  • Re-examine reliance on mandatory retirement policies and instead consider the adoption of a culture of continuous evolution, with new directors and fresh perspectives added at least every other year.
  • Promptly and courageously address director underperformance by articulating expectations for improvement, seeking the director’s resignation or determining to not re-nominate the director.

Conclusion

The spotlight continues to intensify on the work of nominating and governance committees. In 2022 strategic nominating and governance committees will expand their work on ESG issues and proactively examine the board thoroughly, making changes, as appropriate, to enhance its composition and address potential vulnerabilities.