It’s clear that corporate boards have a lot on their plate. From climate change to cybercrime, there is no shortage of emerging risks that demand directors’ attention. How can boards best oversee these matters while balancing existing obligations? Could a new committee be the solution?
How you answer that question depends on your own company and board’s unique circumstances. But before making a decision, there are some universal considerations that every board should think over. Creating a committee can signal that directors are taking the issue it will focus on seriously, but it’s not without its costs. Before moving ahead, it’s wise to put all the options on the table.
Most boards of large, mature companies have four or more standing committees. That’s the case for 71% of S&P 500 companies, according to Spencer Stuart. Audit, compensation, and nominating/governance are ubiquitous. Executive, risk (mandatory for some financial services companies), and finance committees are the most common beyond those three.
Recently, we’ve seen an increase in talk about whether boards should add new committees focused on emerging risks. The volume tends to increase with each new (or newly-prominent) issue stakeholders expect the board to address, but at the same time they may lack confidence the board has the expertise to tackle it. In one notable example, Gartner forecasted earlier this year that two in five boards will have a dedicated cybersecurity committee by 2025.
We frequently talk to boards that want to make sure they’re structuring their committees optimally. Lately many of these conversations are driven by questions about forming new committees focused on environmental, social, and governance (ESG) matters.
Questions to ask
Before forming a new committee to handle an area in need of greater oversight, there are some questions boards should ask themselves.
- Do our current committees have the capacity to handle this? Most complex issues have major components that fall under the traditional purview of the mandatory standing committees. Smart allocation of oversight responsibilities can help many boards “divide and conquer” even complex matters. On the other hand, a new issue may be proving too much for an existing committee to handle, distracting it from other duties.
- Could we reimagine one of our existing committees? It could be that a committee your board already has could take a different approach to overseeing an emerging risk or opportunity if it had a broader mandate or a different focus. One example: As boards take on greater oversight of talent and human capital issues beyond the C-suite, they may wish to consider refocusing their nominating and governance committee as a “people committee,” according to an article published by the Harvard Business Review.
- Do we have the bandwidth? Boards should consider whether their directors have the capacity, interest, and skills to take the lead on overseeing the emerging issue—on top of their other responsibilities, of course. Another piece of the puzzle: is the board big enough to fill a new committee’s seats?
- Do we want—or need—to send a message? When key stakeholders are very focused on an issue and looking for action, forming a new committee can help communicate that the board hears those concerns and takes them seriously.
- Can we avoid siloes? If an issue is so significant that a new board committee is on the table, it likely has broad implications for company strategy. Creating a separate committee to oversee it may risk leaving it disconnected from other important board responsibilities.
Putting it into practice
For illustrative purposes, let’s consider these questions in the context of a company that wants to increase its focus on risks related to climate change. Does it need to create a sustainability or corporate responsibility committee to ensure effective ESG oversight?
For many boards, the answer may be no. They may feel that ESG issues, like climate change, will be relevant to each of their existing committees. For example, the nominating and governance committee will be interested in the shareholder engagement element, while the compensation committee will be interested in accountability through compensation. The audit committee will be interested in the disclosure, messaging, and metrics. What’s more, because ESG strategy should align with business strategy and focus on material risks and business drivers, the full board will want to understand the ESG messaging and how those risks are being mitigated.
Others may come to the opposite conclusion. The boards of energy or manufacturing companies, or of large multinational firms, may feel that ESG issues like climate risk are so important that they need special attention. Perhaps oversight for these areas was initially allocated to an existing committee, for example the audit committee—that struggled to give them adequate attention while attending to its other responsibilities. Forming a new committee may telegraph to large institutional shareholders that these matters aren’t being overlooked.
More challenges await
Today, many boards are searching for the right way to oversee emerging and evolving issues like ESG, cyber, and human capital. New challenges will certainly arise in the coming years. Practically speaking, it won’t be feasible to add new board committees to handle every new matter that arises. That’s why it’s important for boards to remain flexible and proceed thoughtfully. New committees can be a powerful tool—if used smartly.
Republished with permission of the author. This article originally appeared on the Harvard Law School Forum on Corporate Governance.
Paul DeNicola is a principal in PwC’s Governance Insights Center, and has worked for over 15 years in corporate governance, boasting a broad range of knowledge in numerous emerging governance issues which helps him in his work guiding directors, executive teams and investors as they navigate the evolving governance landscape.