PWC on Corporate Boards: Cyber Threats, #Metoo, Diversity, and What Shareholders Want
PWC’s annual director survey is one of our most trusted resources on corporate governance from the perspective of the boardroom, and this year’s edition has some significant findings on issues like diversity, CEO pay, climate change, cybersecurity, and the gap between what board members think and what they do.
More than 800 U.S. board directors reveal responded to the questions and there were meaningful increases of seven to ten percent in the percentage of directors saying issues like health care availability, human rights and income inequality should be critically considered when forming company strategy. With recent corporate scandals bringing national attention to corporate culture, 87 percent of respondents acknowledge that the tone set by the executive team contributes to problems with company culture. However, 79 percent point to the tone set by middle management as a driver for negative workplace behavior. Board members were better at identifying problems than fixing them. A remarkable 45 percent said that at least one of their fellow directors should not be on the board. And boards have done better in discussing cybersecurity (84 percent) but most have not done much to test their responsiveness (34 percent) or even issue a written policy (47 percent).
We are grateful to Paula Loop, PWC’s Leader of the PwC Governance Insights Center, for taking time to answer our questions about the findings of this year’s survey.
A lot has changed in the world at large and in business since last year due to the revelations of inappropriate and abusive sexual behavior by executives. How do you see that reflected in the boardroom?
A focus on the company’s culture and its importance to the success of an organization has been spotlighted as a result of recent corporate scandals. A few years ago boards relied heavily on the CEO to set the tone at the top and oversee corporate culture. Now directors are telling us that this topic is on the agenda in the boardroom and investors are asking about it too. Boards are still relying on their gut feel but they are also looking for some metrics to help them monitor culture. The most useful metrics are employee engagement survey results, exit interview debriefs and 360-degree feedback results for executives.
Your report emphasizes the importance of “tone at the middle” as well as “tone at the top.” What is the most effective way for board members to assess and improve middle management culture?
Board members usually have opportunities to spend time with members of management outside of the c-suite and they should take advantage of those to assess the culture at that level in the organization. Members of management that present to the board, or to committees of the board, can provide insights: the head of human resources, internal audit, compliance, the corporate controller, supply chain, etc. Also, in many cases, the board has an opportunity to travel to a different locations for the company and visit a manufacturing location or a R&D facility. Those are great opportunities to interact with local management and assess whether the tone at the top is working its way down to the middle management layer.
Boards should also spend some time understanding how the executives focus on the company’s culture. What steps are they taking to shape the culture? What metrics do they use to monitor culture? How do they drive cultural change through the organization?
Nearly half of directors you surveyed thought that shareholders put too much emphasis on board diversity. What was the breakdown between the male and female directors on that question? What other gender differences do you see?
54% of male respondents indicated that shareholders are too preoccupied with board diversity compared to only 20% of female directors. On pages 26 and 27 of our report you can see a comprehensive summary of all the key gender differences we discovered as part of our survey. Specifically, women feel more strongly about company culture matters, talent management oversight including succession planning and diversity efforts, and ESG related topics. Having a diverse group of directors in the room should really expand the discussion on many topics.
A surprising 45 percent of directors think at least one of their fellow board members should be replaced. Why aren’t boards better at replacing ineffective directors? What can they do to improve?
Providing timely feedback to individuals is always seen as a hallmark of individual performance improvement. Unfortunately, not all boards have adopted ways to provide individual performance feedback to their board members. Most boards do conduct board assessments to determine the effectiveness of the board overall (and its committees), yet far fewer are focusing on individual board member performance. I believe that providing timely feedback with specifics about which contributions are really valuable and which areas need improvement would go a long way to improving individual board member performance. In some cases, upskilling directors on certain topics like emerging technologies will also be helpful.
I’m always most focused on the disconnects in your survey between what directors say they should do and what they do. This year, one of the biggest disparities is between the 2/3 who say that compensation plans can send the wrong signals about corporate culture, but only 17% have changed their plans. And they are better at identifying workplace diversity as a priority than they are at making it happen. Does your research give you any insight into why it is so hard for actions to match opinions?
The oversight of culture is a topic that is getting more traction in the boardroom. As that discussion expands I believe that more directors and companies will consider which levers or drivers of culture need to be modified or addressed to ensure that they are getting the right results. Compensation plans are on the list and it might take some time to really take a deep dive and make sure that the incentives are driving the right behaviors. Workplace diversity is another highly complex area. We are certainly seeing a lot more awareness and focus on this topic. The CEO Action for Diversity and Inclusion referenced in the report is a good example of the heightened focus and a way companies can get involved and continue the hard work to drive change.
Your survey shows something of a generation gap, with younger directors more critical of their boards and older directors less interested in bringing on younger candidates. What does this show us and how will it change over the next 10 years?
Yes, younger director are more critical of their peers. Older directors — 76 or older — are least likely to voice concerns about adding younger directors. I think we will continue to see younger directors (age 50 and under) joining boards over the next several years. Those individuals will help provide some of the greater gender, ethnic and skill diversity that boards are looking for. Some of the hottest skills in the boardroom relate to digital or emerging technologies. The population with these skills are typically younger than the age of the average director.
Are more directors engaging with shareholders? How does that work?
We will continue to see executives taking the lead on shareholder engagement with investors but directors will be invited to the discussion when it is appropriate for certain topics. Routine engagements can range from CEO compensation to company strategy. When there is a transaction pending or another unusual event you will likely get more opportunities for director engagement with shareholders. This area has evolved in the last few years and directors are getting much more comfortable with the concept of engaging with shareholders when it makes sense.