The Future of Business Decision Making

Non-financial metrics are a growing part of the future of business decision making, with heightened focus from regulators on transparency and increasing expectations from shareholders as well.

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FEI Daily spoke with Amy Rojik, director and founder of the BDO Center for Corporate Governance, about the results of their latest Board Survey and the top challenge when it comes to 2021 corporate reporting.

FEI Daily: When it comes to ESG issues, how are boards keeping up with evolving regulatory guidance?

Amy Rojik: Our survey found that nearly three-in-four (73%) public company board directors are focused on keeping up with evolving regulatory and reporting guidance for ESG in the near term. In order to stay on top of the latest in this area, boards are finding that they need continual education – not just what is happening domestically, but in tandem with international developments. Earlier this year, the Sustainability Accounting Standards Board (SASB) and International Integrated Reporting Council (IIRC) merged to become the Value Reporting Foundation, driven by an increasing market desire to reduce reporting complexity by the potential creation of a single global set of reporting standards.

In the U.S., all eyes are on the SEC, which has signaled that they are considering rulemaking around climate risk disclosure and learning from other frameworks and standards, including the Task Force on Climate-related Financial Disclosures (TCFD). Additionally, the SEC expressed intentions to provide further guidance with respect to human capital, board diversity and cybersecurity risk governance. But even before that is a very real focus by the SEC on disclosure consistency. When looking at something like climate risk, the regulator is looking for any discrepancies between company shared non-financial information and what is included in financial statements.

To address this, boards may be leveraging internal audit or third parties to assist in ensuring the information the company is already sharing is accurate and consistent. Whether ESG responsibilities lie in the hands of the full board or are allocated to various board committees, in order to ensure compliance there must be significant board oversight into what management is doing and how it is being done.

On an ongoing basis, we are seeing record levels of director engagement through board forums, peer governance education channels and requests for third party and executive management topical discussion sessions at board meetings, boosted by the ease in attending virtually. Additionally, individual channels such as podcasts are a good way for board members to remain educated and engaged.

Continuing education for board members is critical to assist with oversight accountability, compliance and transparency with stakeholders.

FEI Daily: 29% of the respondents said they are including ESG metrics and disclosures within audited financial statements. Does that percentage surprise you?

Rojik: I wouldn’t say that this surprised me—in fact, I expect this number only to increase in the coming years. Many aspects of ESG criteria have significant upside and downside impacts on the performance of a business, and thus can impact financial risk. The SEC already requires these types of risk disclosures within public filings. That said, non-financial metrics are a growing part of the future of business decision making, with heightened focus from regulators on transparency and increasing expectations from shareholders as well. The truth of the matter is, many boards have been taking ESG criteria into consideration when building their company strategy for years, but they just haven’t been telling that piece of their story publicly. The various elements covered within ESG efforts both impact and contribute to long-term stability and growth, and it makes sense to integrate them within financial reporting as a true reflection of the businesses’ risks and opportunities.  Conscious leaders and directors who understand this and are ready to disclose this critical piece of their business will be the ones who will lead their companies to the highest successes. 

FEI Daily: The top challenge when it comes to 2021 corporate reporting is increasing disclosure of qualitative and quantitative ESG efforts. Can you tell me more about this challenge?

Rojik: Yes, 43% of our respondents reported anticipating this challenge. One way to interpret the popularity of this answer is that there is still no single, global set of ESG reporting standards. Currently, companies are leveraging a variety of standards and frameworks to achieve their voluntary ESG reporting goals. While this allows for flexibility, it also results in an influx of subjective decision points to consider, and potentially makes it harder for companies to provide consistent information in demonstrating ESG progress. For companies that have global operations, there are also further challenges in identifying and satisfying compliance needs for applicable international requirements.

For U.S. filers, the SEC activity gives boards reason to believe that we’re getting closer to understanding what may be coming from a regulatory filing requirement perspective —perhaps as soon as late-2021 or early-2022. But without a single set of principles-based standards to guide companies in reporting highly subjective non-financial metrics, significant challenges remain.

Companies are also at very different stages of their ESG efforts. There is a crucial point of maturity for a company to not only determine what ESG factors and activities are both material to their business and meaningful for stakeholders, but to further assess whether the company has the capabilities– resources, systems, data and data integrity – to produce transparent, consistent and accurate information related to their ESG activities.

Boards and management teams are encouraged to activate their ESG journeys, if they haven’t already—to position themselves to be proactive in a rapidly changing landscape.

FEI Daily: Labor shortages are on the minds of many board members. How are they thinking about this challenge and what are their plans for the new year?

Rojik: Labor shortages are encouraging more thoughtful talent recruitment and refreshment strategies. Directors rightfully want to protect and satisfy their best employees as much as they can in order to retain them. In response, the top three ways businesses are attracting and retaining talent are by re-imagining flexibility and remote work, (53%), emphasizing diversity, equity and inclusion as a priority (DEI) (51%), and upskilling their workforce (46%). While the bulk of traditional recruitment and retention efforts continues to center on pay levels and highlighting opportunities for career advancement, compensation packages are composed of more than just salary. In the current evolving environment, culture is king and employee safety, health and satisfaction are true drivers of business risk and opportunity. Companies poised to win the war for talent are those that strike the right mix of salary, bonuses and equity awards, offer competitive benefits, and provide flexible, inclusive and supportive work environments.

FEI Daily: What will a successful board look like in 2022?

Rojik: Directors are looking ahead with their eyes on growth, and those who will be most successful in 2022 are those that align their business’s growth efforts with both shareholder and broader stakeholder expectations.

From an operational success standpoint, a successful board will ensure management is able to forecast their business performance and needs, despite continued market uncertainty. This includes identifying emerging risks and opportunities in a broad sense. Additionally, a key board focus should be on fostering a corporate culture that supports talent, which is many companies’ most valuable asset.  Additionally, regardless of the type of company you serve on, experience combined with diversity in your boardroom and leadership team matter. It’s paramount to have the right people with the right skills, in the right roles to make an organization successful. As the events of the prior 18 months have taught directors, it’s critical to take new pressures in stride as they govern during times of change.