Category: NACD

What Changing Director Demographics Tell Us about Board Work

The forces that are shaping business are changing as much as they are intensifying, and with that comes evolving needs for board oversight. Given the extreme turbulence of 2020, NACD partnered with Main Data Group to empirically describe the size, shape, and structure of Russell 3000 boards. MyLogIQ also provided additional data to supplement our work. The research, which is collected in the forthcoming NACD publication Inside the Public-Company Boardroom, looks at the dimensions of market capitalization and three-plus year market trends to assess how boards are changing. Board turnover in particular illuminates shifts in board demographics, in terms of gender diversity, skill sets, and overall size.

Boards and Committees Are Getting Larger

According to Main Data Group, the average board size has grown steadily between 2017 and 2020. In 2017, the average board size consisted of 9.88 members, and today that figure stands at 10.13; in the Russell 3000, this means the addition of more than 1,000 board seats. Small- and mid-cap companies have largely driven this trend, whereas large- and mega-cap companies have seen, on average, a slight decrease in board size: 12.29 members down to 12.12.

COVID-19: SEC Filings Are a Communication Platform

On March 25, the US Securities and Exchange Commission (SEC) issued another round of relief for public companies with regard to financial filings in light of the Coronavirus Disease 2019 (COVID-19) outbreak. The Commission provided public companies with a 45-day extension to file reports originally due between March 1 and July 1, 2020. This new order is an extension of the SEC’s earlier March relief order. As companies prepare their 10-Q and 10-K filings, boards need to ensure that their companies’ filings not only accurately identify and reflect the impact of the pandemic on their businesses, but also effectively communicate with investors.

A recent NACD poll on board responses to the COVID-19 crisis found that only 34 percent of boards at the time the survey was conducted in mid-March had reviewed their company’s external communications strategy, but this number is bound to grow as the crisis continues. As the SEC states in its recent order, “we encourage public companies to provide current and forward-looking information to their investors,” adding an important reminder about safe-harbor rules for such statements.

In speaking about future developments, companies can deprioritize issues and engagement not related to COVID-19, which is the topic most important to investors in this moment. As stated by one major investor group, such engagement “should be postponed where not related to COVID-19 to allow management and boards the ability to focus on crisis management.”

COVID-19 Pulse Survey Reveals Boards Have Confidence in Management

NACD this week polled nearly 200 members to better understand how directors and their boards are responding to the coronavirus disease 2019 (COVID-19) pandemic. While the economic, social, and political impacts remain in flux—evidenced in one dimension by the S&P 500 declines and gains of nearly 10 percent last week—corporate boards are in a unique position to help management respond effectively to the short- and long-term implications of the crisis.

Director responses to the pulse survey reflect the early actions boards are taking to combat the crisis, and their responses may have shifted in the time since. NACD’s Resource Center: Responding to the COVID-19 Crisis can help directors govern more effectively through these uncertain times. And NACD’s March 2020 poll reveals how boards have been doing so in real-time over the last week.

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Many anticipate a short-term business impact.

As of March 16, about a third of S&P 500 companies had disclosed COVID-19 in their risk factors (30%) and earnings calls (33%), according to MyLogIQ, a public company disclosure information aggregator. Numbers are similar for the Russell 3000, where risk-factor mentions jumped from 29 percent to 39 percent between March 12 and 16, per MyLogIQ. In the NACD poll, most directors saw the largest likely disruption in the demand for their products (28%) followed by employee productivity (19%), and impacts to their supply chain (16%) and the capital markets (14%).

ESG Risks Trickle Into Financial Filings

Investors in 2019 have increasingly turned their attention to environmental, social, and governance (ESG) topics, and are demanding more information on how companies are thinking about the potential long-term risk and opportunities related to specific environmental and social factors. As companies prepare for the 2020 proxy season and engage with shareholders, directors should understand the current state of ESG risk reporting in public filings.

Standards setters such as the Sustainability Accounting Standards Board and the Taskforce on Climate-Related Financial Disclosures provide frameworks to disclose ESG risks that could have a financial impact. Despite, or perhaps due to, the myriad standards and suggested disclosure frameworks, companies struggle to identify the most relevant risks to disclose, and where in their reporting to disclose them. In 2019, 66 percent of companies in the Russell 3000 Index discussed ESG risk but approaches varied widely.

To help directors and their management teams understand the current landscape of ESG risk disclosure, NACD mined MyLogIQ – Multidimensional Public Company Intelligence’s data to identify trends in 10-K filings, specifically in the risk-factors section and in management’s discussion and analysis of financial condition and results of operations (MD&A). While companies may describe risks anywhere in their 10-K filings, they must list all major ones in the risk-factors section. Previously, risks were listed in the MD&A, a practice that continues in some companies.