The National Association of Corporate Directors (NACD), a prominent association of corporate directors of USA has conducted a survey on the governance of public companies in 2019-20. Although, the survey is focused on public companies of US, the lessons could be a good reference point for Indian companies as well. The learning from the report is expected to help Indian boards and directors in assessing their priorities; evaluate the effectiveness of the oversight practices and the governance approach practiced.

The survey has been divided into three parts and the key findings are briefly discussed as follows:

I. Board Demographics

• Board Independence – It has been found that on board independence, there is not much change in the last 3 years i.e. from 2017 to 2019 as only 16% of the directors surveyed believe that board independence is 90% or more in their companies. However, majority among them (56%) viewed that board independence is between 75% and 90%. But, only about 12% of the respondents considered board independence between 50% and 75% in their organizations.


• Board Leadership Structure – In almost 33% of the surveyed cases, board leadership vests with the present CEO of the company. However, in 39% of the organizations, Independent Directors also chaired the board. The percentage of non-independent, non-executive directors; Executive Director and Former CEO to chair the board has been found to be non significant.


• Gender Diversity – The survey revealed that more women professionals have joined corporate boards between 2017 and 2019, though the progress has found to be slow. The percentage of women joining the board of companies has increased from 15% to 19%. Furthermore, depicting an encouraging sign in gender diversity, percentage of women as new public company directors has increased from 26% in 2018 to 34% in 2019.


• Prevalence of Board Committees – Besides the traditional standing committees of board such as the Audit Committee, Compensation Committee and Nominating/Governance Committee, the other committees, for e.g. Finance and Risk Committee also has gradually received prominence among the participating companies.


• Director on boarding – While recruiting new directors, the Board have continued giving priority to candidates with a desired skill set relating to executive leadership (62%) and finance (40%).


• Tenure of Directors – The study also reveals that almost 50% of the directors occupy their board seat for about 10-15 years. And, 1/3rd among them are there in the company board for more than 15 years.


 

II. Board Practices

• Trends – A common perception emerges from the survey, that the boards are confronted with increasingly divergent trends such as business model disruptions; a slowing global economy; increased competition for talent and changing cyber security threats.


• Director’s skill improvement – Most of the directors believe that they have to improve the core oversight areas like strategy execution, strategy development and cyber security. At the same time, 2/3rd among them believes that they are already spending enough board time on these activities and devoting more time will not yield any further result. So, the report suggests maximizing return on time that the board spends together and with management. That includes optimizing board meeting management, taking a strategic approach to time allocation, and revisiting board structure.


 

III. Board Oversight Activities

1. Strategy – In this section, the main challenge for the board has been realized to replace obsolete and dated strategies. In this respect, 68% of the directors surveyed believe that company strategy should change in the next five years. Further, 83% of directors state that boards are now proactively doing the process of strategy development. And, 88% of companies are conducting strategy review sessions at least once on their board agenda over the last year. Also, 74% of the directors believe that quality of information from the management has enhanced as compared to two years ago.


2. Enterprise Risk – The main concerns expressed by the respondents were that although risk information is presented to the board, in almost 50% of the cases they are not sufficient for the Board to draw the right conclusions. Board mostly hears about risks from the CEO or the CFO. And, only 51% of boards hear about risks from the head of internal audit who can give an independent view about the efficient management of risk in the organization.

   Also, 77% of companies are scheduling enterprise risk management at least once on their board agenda over the last year. Further, 60% of the directors believe that quality of information from their management is higher compared to two years ago.



3. Cyber Security – About 3 in 5 directors believe that business objectives should be preferred over cyber security. Further, only 28% of them prioritize cyber-security. However, directors are now more confident about their organization’s ability to counter cyber risk because of enhanced management reporting and greater transparency.

   Also, 66% of companies are scheduling cyber risks at least once on their board agenda over the last year. Further, 75% of the directors believe that quality of information from their management is higher compared to two years ago.



4. Human Capital – Although 3/4th of the directors surveyed believe that their board understands the company’s talent needs to provide effective oversight, yet, 1/3rd of the respondents were unsure of their organization’s ability to develop an effective workforce for the future.

   Also, 67% of companies are scheduling human capital at least once on their board agenda over the last year. Further, 55% of the directors believe that quality of information from their management is higher compared to two years ago.



5. Compliances – A vast majority (89%) of the respondent directors indicated that their companies have a good ethics and compliance culture. Further, 82% of them reported that they can freely raise issues regarding any alleged misconduct.

   Also, 80% of companies are scheduling compliance at least once on their board agenda over the last year. Further, 52% of the directors believe that quality of information from their management is higher compared to two years ago.



6. ESG – Boards are now beginning to take Environmental, Social and Governance (ESG) skills seriously as 79% of the directors stated that their board is focused on some aspect of ESG. Further, directors ranked human capital management (65%) and diversity (54%) as the top ESG concerns for their organization. Since, the investors’ focus is now primarily on ESG, 49% boards are endeavoring to improve their report structure and 61% openly discussed about most material ESG matters when they meet with investors. Further, 92% of the Boards have environmental and social experts.

   Also, 47% companies are scheduling ESG at least once on their board agenda over the last year. Further, 41% of the directors believe that quality of information from their management is higher compared to two years ago.

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