Current and future competence and composition
The board’s governance structure and processes around ESG issues
The board’s skills in relation to ESG issues
According to our research, most companies are facing investor queries about how their boards are set up to address ESG matters. Overall, 55 percent of respondents say that in the past 12 months investors have asked questions about the board’s governance structure and processes around ESG issues. Among those at mega-caps, more than three quarters (77 percent) report investor inquiries, compared with 69 percent of those at mid-caps, 63 percent of those at large caps and less than half (40 percent) of those at small caps.
Board members’ experience and expertise – or lack thereof – in dealing with ESG issues has also become a topic of discussion among directors, governance professionals, investors and other stakeholders, increasingly featuring in proxy statements. Our research suggests investors are focusing more on this, at least at the very largest organizations, although companies of all sizes are having to face it – or may have to do so soon.
Overall, 37 percent of respondents say that in the past 12 months investors have asked about the board’s skills in relation to ESG issues, while almost the same proportion (38 percent) say investors have not. It should be noted, however, that a quarter of respondents don’t know whether those questions have been asked.
Almost two thirds (65 percent) of respondents at mega-cap companies say investors have asked about the board’s skills. This compares with just under half (47 percent) of those at mid-caps, just over a third (34 percent) at large caps and almost a quarter (24 percent) at small caps.
Respondents in Europe (42 percent) more frequently than those in North America (34 percent) say investors have asked about the board’s ESG skills.
Globally, respondents have a broadly positive view of their board’s abilities in the ESG field. Asked to rate their board’s competence in being able to oversee ESG issues that are relevant to the company, they give an average score of 6.9 out of 10, on a scale where one is ‘not at all competent’ and 10 is ‘extremely competent’.
Respondents at mega-cap companies give the highest average rating of their board’s competence (8.3), followed by those at large and mid-cap companies (both 6.9) and those at small caps (6.7). Respondents in North America give a higher average competence rating (7.0) to their boards than their peers in Europe (6.6).
If a board perceives itself to lack certain ESG skills, one obvious remedy is to bring in a new director with those missing abilities. Globally, more than four in 10 respondents (43 percent) say their board already takes into account ESG skills when recruiting directors. Around a quarter (26 percent) do not know whether this takes place.
As our research finds in other areas, there is a distinct gap between mega-cap companies and smaller firms in terms of board recruitment. Almost six in 10 respondents at mega-caps (58 percent) say their board takes ESG skills into account, compared with less than half (46 percent) of mid-caps, 41 percent of large caps and 38 percent of small caps.
There is much uncertainty as to whether board practices will shift in this area. Just 20 percent of respondents say their board intends to start including ESG skills in its consideration of new directors over the next year, with 37 percent saying there are no such plans. But 43 percent don’t know whether this change will happen.
As in other areas, there is broad alignment between North America and Europe with 43 percent and 44 percent of respondents, respectively, saying their board currently takes ESG skills into account.
Our research finds that a sizable majority of boards rely on two key sources for most of their ESG information: the company’s sustainability team (37 percent of all respondents) and the corporate secretary/governance team (34 percent). A handful say their board receives most of its information on ESG issues from the finance team (4 percent), directors’ own research (4 percent) or outside advisers (6 percent).
Larger companies are more likely to have the resources to support a specific sustainability function and this is reflected in the study’s findings. Fifty percent of respondents at mega-caps say their board gets the bulk of its ESG information from a sustainability team, compared with 41 percent of those at large caps, 46 percent at mid-cap firms and 24 percent at small caps.
Conversely, the number of respondents citing the corporate secretary/governance team as a primary source of ESG information falls from 43 percent at small-cap companies to 27 percent at mega-caps.
Among respondents in North America, more than four in 10 (46 percent) say the corporate secretary/governance team is the board’s main source of ESG information, with 30 percent citing the sustainability team as the main source.
By contrast, in Europe half of respondents point to the sustainability team and just 15 percent to the corporate secretary/governance team.
Our research finds that, on average, directors at the smallest and largest companies talk to shareholders about ESG matters more frequently than those at issuers of other sizes. Respondents were asked how frequently members of their board take part in engagement with investors when ESG issues are discussed, on a scale of one to five where one is ‘never’ and five is ‘always’. The average score is 3.3 for respondents at mega-cap companies and 2.5 for those at small caps. The lowest score (1.9) is among those at mid-caps.
These scores translate, for example, to more than four in 10 respondents (42 percent) at mega-cap companies saying board members frequently take part in engagement when ESG matters are on the agenda. Globally, just 7 percent of respondents say board members are always involved in these discussions and almost a third (32 percent) say they are never involved.
On average, respondents in Europe report more frequent involvement by board members (2.6) than do those in North America (2.2).
