Corporate Governance Outlook 2023: Executive Summary

The 16th edition of Equilar's LinkedIn CHRO Navigator features the executive summary of our Corporate Governance Outlook 2023 report. The full report features commentary from Ron Schneider , the Director of Corporate Governance Services at Donnelley Financial Solutions (DFIN) . To read the commentary and access the full report, request access by clicking here.

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Going into 2023, companies are preparing for a year that is sure to present new changes to how they approach the corporate governance environment. The long-term economic impacts of the pandemic and other current events—such as the War in Ukraine and a looming recession— continue to leave a mark on Corporate America, forcing companies to face several difficult decisions to keep operations flowing. Despite the challenges faced by companies, investors and other key stakeholders will continue to closely monitor how executives and boards address the most critical governance issues in 2023.

Most notably, the conversation around executive pay and performance alignment is expected to grow louder. On August 25, 2022, the United States Securities and Exchange Commission (SEC) officially adopted Pay Versus Performance rules, following several rounds of comments and proposals. The new rules require public companies to disclose information reflecting the relationship between compensation actually paid to a company’s named executive officers (NEOs) and the company’s financial performance. As a result, the 2023 proxy season will serve as the inaugural year for these disclosures.

The ongoing discussions around environmental, social and governance (ESG) topics, as well as human capital management (HCM) issues, will further play out over the course of the next year. While topics related to diversity, equity and inclusion (DEI), the return-to-office transition, corporate culture, and employee health and safety will remain top of mind for many companies, much of the focus may shift to climate change in 2023. On March 21, 2022, the SEC proposed new rule changes that would require companies to provide detailed disclosures around climate-related risks that may have a material impact on their business, results of operations or financial condition. As part of the disclosure requirements, companies must identify any board members or board committees responsible for the oversight of climate-related risks.

The aforementioned topics are just a short list of governance issues companies must take into account heading into the new year. Other issues, such as shareholder engagement, CEO succession planning and more, will undoubtedly remain critical areas of focus. With these observations in mind, Corporate Governance Outlook 2023 analyzes key trends in corporate governance over the last five years. DFIN offers independent commentary on how to effectively address these issues with investors and other stakeholders.

Pay Versus Performance Set to Take the Spotlight in 2023

With 2023 serving as the first year for the new Pay Versus Performance requirements, there is a level of uncertainty that looms over companies. This, coupled with the amount of work that will go into the disclosure process, will pose challenges to companies. Nevertheless, the concept of pay for performance has long been advocated by investors, particularly given the influence they have on pay packages. Since the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, companies have regularly disclosed graphs displaying the relationship between executive pay and performance in their proxy statements. However, the prevalence of these disclosures has diminished over the last five years. In 2021, just 9% of Equilar 100 companies disclosed a graph that displayed the relationship between their NEOs' pay and financial performance. While this is up one percentage point from 2020, the figure is down overall by more than 50% since 2017 when 18.2% of companies disclosed a pay for performance graph.

There is no question that the SEC’s new Pay Versus Performance disclosure requirement will indeed accelerate the use of these graphs and brighten the spotlight on pay for performance. The question is whether or not the rules will have any impact on Say on Pay results in the coming years. In 2022, just 2.4% of Equilar 500 companies received a failing Say on Pay vote in 2022, down from 3% in the previous year.

While it may be too soon to draw any speculative conclusions, it’s in the best interest of companies to begin preparing how to tell their pay story. “Investors who have expressed concerns about executive compensation in prior years or whose policies have a sharper focus on executive compensation are going to take a much greater interest,” said Joe Yaffe, Partner and West Coast Chair, Executive Compensation and Benefits at Skadden, during an Equilar webinar. “It's going to vary from company to company. I think a lot of the extent to which companies provide more or less fulsome disclosure is frankly going to depend on the overall story of their executive compensation program relative to their performance.”

A Sustained Focus on DEI in 2023

The global focus around ESG has expanded rapidly over the last several years, with companies seeking to effectively identify the risks and opportunities associated with these topics. Perhaps to no surprise, nearly 97% of?Equilar 100 companies discussed their ESG policies to some extent in 2022—up from just 18.9% of companies in 2018. Nevertheless, the last two years, particularly in light of social justice movements stemming from 2020, have shed light on the DEI portion of ESG.?With respect to corporate governance, the conversation specifically starts at the top of an organization in the boardroom.?

In 2022, 99% of Equilar 100 companies included a board composition disclosure on gender, the same percentage as companies that did so for ethnicity/race. Similarly, 92.8% of companies included a board or director assessment for gender, with the same percentage including one for ethnicity/race. Furthermore, among the 1,918 new Russell 3000 board members through Q3 2022, 39.7% were women—a figure that has hovered around 40% for the last several quarters.

It has become apparent that leadership teams across Corporate America are making a concerted effort to conduct discourse around board diversity, particularly as pressure mounts from several directions, including new Nasdaq board diversity listing rules that went into effect in 2022. Additionally, beginning in 2023, Glass Lewis will recommend against the chair of the nominating committee of a board that is not at least 30% gender diverse, with the exception of substantial disclosure of a commitment to increase board diversity in the near future. Regardless,?DEI issues—board diversity, in particular—will be a key area to monitor?in 2023.?

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