By Kira Ciccarelli, lead research specialist, and Edna Frimpong, head of international research, Diligent Institute
Last year, corporate leaders faced intense pressure to take a closer look at the S in ESG. The reasons behind this pressure were largely twofold: the pandemic brought concerns about employee safety, health and wellbeing (both physical and mental) to the forefront, and social unrest in the US following the death of George Floyd caused companies and their leaders to re-evaluate their roles in fostering diversity, equity and inclusion (DE&I). In 2021, we also saw the persistence of a virtual work environment and a host of other factors result in the Great Resignation and talent crisis, ensuring that directors paid even more attention to human capital issues in the boardroom.
As investors, regulators, customers and employees alike made their concerns about these social issues heard, how have companies and their boards responded? How have those responses developed throughout 2021, and where are we headed in 2022 and beyond? This year, Diligent Institute set out to learn more about how the governance of the S in ESG is changing. Here’s what we learned.
How do directors feel about the S in ESG? Diligent Institute’s Corporate Sentiment Tracker gives us unique insight into what topics are on the minds of corporate leaders by scraping more than 56,000 English-language news sources for trending terms being spoken about in the media by corporate leaders.
We also track ESG topics based on the World Economic Forum’s International Business Council ESG metrics, as outlined in its recent white paper, Measuring Stakeholder Capitalism. Over the course of the last year, ‘diversity and inclusion’ was the second-most frequently discussed ESG topic, behind ‘bio-risk’, which has been in the top spot since the beginning of the pandemic.
As 2020 drew to a close, we also wanted to learn more about how directors were feeling regarding recent diversity mandates. That month, Nasdaq filed a proposal with the SEC that would require listed companies to have at least one woman and one member of an under-represented group on their board – or explain why they do not.
We asked directors whether they supported diversity mandates in our December 2020 Director Confidence Index, a monthly flash poll of US public company directors conducted in partnership with Corporate Board Member (CBM).
The results were quite surprising: nearly half (46 percent) of those polled in December say they are in favor of diversity mandates. Comparatively, in 2019, CBM asked directors whether they approved of California Senate Bill 826, which required gender diversity in the boardroom for all public companies headquartered in the state. Of those surveyed, 66 percent opposed the measure and only 24 percent approved of it.
Women gain ground in the boardroom and in leadership roles In March 2021, we published our annual report on gender diversity, titled Gender and Leadership in the Boardroom: Progress in a Tumultuous Year. In this report, we wanted to learn more about what happened to women once they joined the board. Did they join committees and become board leaders at the same rate men did?
The results were hopeful: female directors have made progress on board committees in 2021 compared with 2020, rising 3 percentage points from 24 percent to 27 percent, and women’s representation in board committee chair roles rose by the same margin, from 21 percent to 24 percent. Significantly, the percentage of female board members chairing the audit committee of their board has increased by 7 percentage points.
In the EU, the data suggests that the average percentage of women on board-level committees overall was 30 percent in 2021, up from 29 percent in 2020. The percentage of women on remuneration and nomination committees has decreased only slightly, from 29 percent in 2020 to 28 percent in 2021.
Female representation on audit committees, however, has increased by 3 percentage points, from 30 percent in 2020 to 33 percent in 2021. The percentage of women chairing the committee has also increased significantly from 27 percent to 32 percent over the same period.
In North America, women account for 24 percent of committee members. The average percentage of women chairing committees has also climbed from 18 percent in 2020 to 21 percent in 2021. The percentage of women on remuneration and nomination committees has increased from 21 percent to 25 percent from 2020 to 2021, which deviates positively from the European trend.
The average percentage of women holding chair positions on the remuneration and nomination committees has climbed, too, from 19 percent in 2020 to 23 percent in 2021. Female representation on audit committees has also increased by 3 percentage points, from 22 percent in 2020 to 25 percent in 2021.
Furthermore, the percentage of women holding audit chair positions has increased significantly from 17 percent to 20 percent over the same period.
Gender diversity, director age and overboarding In September 2021, we followed up our March report with an update focusing on director age and overboarding by gender. One of the most interesting findings is that the average age of board members is rising, moving from 58.9 years in 2020 to 59.6 years in 2021, with the financial sector having the highest average director age at close to 63 years.
The report also reinforces our earlier findings that women directors are, on average, younger than their male counterparts: the average age of a female director is 59.33 years old and the average age of a male director is 62.91 years old.
Although we still have a long way to go to achieving gender parity on boards, we have discovered that notable indices such as the S&P 500 and the FTSE 350 currently have no all-male boards, an impressive accomplishment and a hopeful sign for the future.
Director skillsets: Reflecting a changing world In January 2021, we published a report titled What Directors Think in conjunction with CBM. This annual survey of more than 400 directors asks respondents about the most pressing issues for the coming year. In 2021, for the first time in the survey’s 18-year run, skillset and background diversity outrank CEO experience as the most important attribute in board member selection. We decided to do some research to find out whether this sentiment was translating into action.
In June 2021, we published a report titled Beyond the C-Suite: Trends in Director Skillsets, to find out whether the skillset background of new board members was becoming more diverse. We looked at all director appointments dating back to the beginning of 2019 in the US, the UK and Australia to see whether newly appointed directors were beginning to come from less traditional backgrounds (as opposed to your typical former CEO, COO or CFO).
We discovered a small but definite momentum shift away from hiring directors with this more traditional background: director appointments from these backgrounds decreased from 59.4 percent to 56 percent. Meanwhile, appointments from more non-traditional director backgrounds such as human resources, ESG, marketing, legal and technology increased from 13 percent to 18.9 percent over the same time period.
Interestingly, appointed directors with these non-traditional backgrounds were twice as likely to be female as their traditional counterparts. In spaces such as ESG and HR, director appointees were overwhelmingly female, and even in the technology space, director appointees were more than 50 percent female. This is another hopeful sign: hiring for one aspect of diversity like skillset can also mean you add more gender diversity to your boardroom.
Looking forward: What’s to come in 2022? As we enter the last few weeks of 2021, it’s clear progress has been made. Companies and their boards have increasingly focused on the S in ESG. Albeit slowly, boardrooms are becoming more diverse in terms of gender and skillset backgrounds. Directors are coming around to the idea of diversity mandates, and they’re speaking up about social issues, particularly DE&I, that are in the news.
In January 2022, we will publish our annual edition of What Directors Think in partnership with CBM, and our survey results will show some more positive developments when looking at the S in ESG. We asked respondents which issue areas would be the most prominent on their board agenda in 2022. Talent/workforce takes second place, beating every other issue area listed except for M&A. Last year, human capital came only 10th on our list, and DE&I came eighth.
It’s also clear, however, that there is a lot of room for improvement and growth. In the same survey, respondents also list talent and culture as the second-most and third-most difficult issues to oversee, lagging behind only cyber-security.
In the comments section, many directors express frustration with the focus on ESG, and insist they should ‘focus on strategy instead’. When we asked about the most important criteria for the selection of their next board member, C-suite experience was back in first place.
The survey results around DE&I initiatives also paint a mixed picture. While 45 percent of respondents say they had already met their diversity goals, no respondents indicate that their timeframe to meet their diversity goals span more than five years, indicating that the push for DE&I is not being thought of in the long term.
Meanwhile, 32 percent say they’re on track to meet their diversity goals despite only 23 percent saying they have a timeframe in place, which begs the question: how do you know if you’re on track to meet your goals if you have no timeline?
In 2022, it’s important that business leaders continue their focus on the S in ESG. These initiatives should be considered as integral to company strategy and a valuable opportunity for long-term value creation. As pressures around attracting and maintaining talent, DE&I, culture and a host of other social issues continue to mount, boards need the right tools, processes and information to lead effectively.
