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E-MailMaria Castañón Moats is Leader and Paul DeNicola is Principal at the Governance Insights Center, PricewaterhouseCoopers LLP. This post is based on their PwC memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and Will Corporations Deliver Value to All Stakeholders?, both by Lucian A. Bebchuk and Roberto Tallarita; For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock by Leo E. Strine, Jr. (discussed on the Forum here).
2021 threw companies and their boards curveball after curveball. They started the year on a hopeful note sparked by the COVID-19 vaccine rollout, but ended it in the midst of new outbreaks caused by the Omicron variant. Companies saw energy disruptions and high prices, unprecedented weather events, a SPAC boom and bust, record highs in the housing and stock markets, and rising inflation.
When it came to governance, diversity concerns dominated discussions in many boardrooms. Beefed-up board diversity requirements in California, a new NASDAQ listing standard, and strengthening calls from investors made real the need for boards to have gender, racial, and ethnic diversity. 2021 saw the most diverse class of S&P 500 directors ever and signs point to that trend continuing.
The SEC also signaled potentially big changes on the disclosure front. New requirements are likely on the way for environmental, social, and governance (ESG) reporting early in 2022. Not far behind, we expect updates to cybersecurity risk oversight disclosure.
Here are the four trends I’m watching for 2022:
Shareholders and activist investors beat the drum on ESG
After trending downward for years, the number of shareholder proposals submitted in 2021 jumped noticeably. Support was relatively high across many of them, particularly for those related to social and environmental issues. I think we will see even more of these types of shareholder proposals in 2022. And with revised SEC staff guidance on how companies should evaluate whether they must include those proposals in their proxy statement, I think we’ll see many more proposals go to a vote this year. And we are likely to see more pass.
Activist investors also focused on companies’ environmental impact. Companies operating in the energy sector felt the most significant impact as climate-driven investors took over board seats in proxy battles at industry giants and unlikely calls for conglomerate breakups generated major headlines.
I see this trend intensifying this year, in part because of increased ESG-related mandatory disclosure. To grapple with these changes, boards need to have the expertise and reporting to effectively oversee a growing area of risk management.
Human capital concerns take center stage
A confluence of changing workplace policies and talent issues—and what those issues mean for the resulting company culture—require more board time and focus. And as companies weather the Great Resignation, directors highlighted talent management as the No. 1 place they would like to spend more board time in 2021’s Annual Corporate Directors Survey. I see this trend intensifying for 2022.
Ensuring the company has the talent it needs is a basic building block for success. As that goal has become more challenging, boards are getting more involved. Where and how talent is working has also become a board-level issue, as companies’ policies run the full gamut and continue to shift in response to evolving circumstances. Employee retention as well as their health and safety, are board issues today.
Boards are already relying on more data for talent and culture monitoring, culled from employee engagement surveys, exit interviews, customer feedback, and other sources. This need for data will grow, as directors dig further into these areas.
Supply chain disruptions continue for every sector
From holiday toys and software chips, to raw materials including food and lumber, few companies escaped the impacts of supply chain disruptions. Many took action. They invested in the supply chain as a resiliency-growth enabler, diversified suppliers and manufacturing across geographies, gained greater end-to-end supply chain visibility, and used data to be more responsive to demand.
I don’t think we’ve seen the end of this problem. Now is the time for boards to reflect, assess the quality of the company’s response, and learn and prepare for the future. Chief operations officers and others steeped in supply chain management may not typically have slots on the board’s agenda, but time with the executives leading these areas will arm boards with the information they need to assess the scope of the issue and the company’s response. Digging deeper into sourcing, locations, and sticking points in supply chain decision-making are issues for the board in today’s highly interconnected, interdependent global marketplace.
Quickly evolving data privacy regulations demand nimble responses
Trends and risks related to data privacy are changing nearly every day and keeping up with the shifts is getting harder.
A global privacy regulation wave is giving most consumers the ability to access and delete their user data, leading chief information officers to rethink their cloud and technology strategies and architectures and related risks. Meanwhile, rising privacy enforcement in the United States, Europe, and China is prompting general counsels and chief compliance officers to reconfigure their privacy organization’s operating models to adapt to heightened risk. And tightened restrictions by large US tech platforms around the use of cookies, online tracking, and privacy disclosures have chief marketing officers rethinking their consumer privacy experience.
That’s all in addition to the risks inherent in holding sensitive personal information of customers and employees. While that data may be necessary for operating, the cost of a security breach can be diminished trust and potential lawsuits. I believe boards need to devote more time to understand this increasingly complex area and be ready to respond.
On a final note, 2022 is a midterm election year. While it feels as though we can never stay ahead of political change, I’m watching events closely. Developments on US infrastructure spending could reshape the future for some companies, while President Biden’s tax proposals could have major impacts on companies’ employees, job creation capability, and investments in the United States. The history of midterms suggests major legislative developments in 2022 might be unlikely, but a change of control in the House and/or the Senate could be expected come 2023.
One thing that’s certain? Change and rising expectations for boards. While we don’t know what 2022 will bring, agile, well-informed boards remain critical for success.
