The Evolving Role of Corporate Boards: Why BOD Compensation Matters More Than Ever

As a professional in the corporate world, I've noticed a growing topic of discussion among my colleagues and friends: is serving on a board of directors worth the risk? With increasing demands, responsibilities, and personal risks, some individuals are now questioning the value of pursuing a board career track. I've even witnessed a few experienced professionals choosing to step back from board roles, concerned about the potential implications for their reputations and the mounting pressures that come with these positions.

In fact, it's becoming increasingly difficult for companies to attract top-tier candidates for board positions due to the risk-reward dynamic. Many talented professionals are now weighing the potential benefits of serving on a board, such as increased professional visibility and opportunities for career growth, against the potential downsides, including reputational risks, increased time commitments, and the need to navigate complex and evolving challenges. As the stakes grow higher, organizations must rethink their approach to board compensation and governance to ensure that they can continue to attract and retain the best and brightest talent for their boards of directors.

The popular belief that board members enjoy high pay for minimal effort is a thing of the past. Demands on corporate boards are more intense than ever, and filling board seats has never been more challenging. Data from the Korn Ferry survey, along with other sources, highlights the increasing responsibilities and dedication required of board members in today's business world.

The Duty of Oversight: A Growing Commitment

The Korn Ferry survey reveals that 70% of directors believe that improving board oversight of strategy development and execution is a top priority for 2023. This increased focus on oversight is driven by factors such as shortened strategic planning cycles, activist investor scrutiny, pressure to deliver short-term results, and the difficulties of navigating disruption. A majority (56%) of respondents expect deeper and more frequent board engagement on strategy in the coming years. Climate governance, on the other hand, is considered a lower priority. Only 28% of respondents saw it as important or very important for their boards. Despite increasing awareness of climate risks, boards tend to focus on a three-to-five-year planning horizon for long-term strategies.

The fallout of so many companies lately highlights the growing reputational risks faced by board members, emphasizing the importance of effective oversight and decision-making. In the wake of consumer complaints, labor disputes, and investigations into the company's operations, board members have been subject to increased scrutiny and criticism. Their perceived failure to identify and address these issues in a timely manner has not only damaged the reputation of the company but also raised questions about the competence and integrity of individual board members. This situation demonstrates the potential personal and professional ramifications for directors who do not actively engage in risk management and uphold their fiduciary duties. As a result, it is crucial for board members to prioritize transparency, ethical conduct, and strong governance practices to protect both their own reputations and those of the organizations they serve.

Emerging Risk Readiness: Time for a Reality Check

The growing risks faced by Boards of Directors (BOD) today are significantly greater than they were two decades ago. With the increasing focus on Environmental, Social, and Governance (ESG) factors, boards must now address climate change, social responsibility, and ethical governance in their decision-making processes. In addition to ESG, they also need to navigate the complexities of digital transformation, cybersecurity threats, and heightened geopolitical risks. The constantly evolving regulatory landscape and the rise of activist investors demanding transparency and accountability further intensify the challenges faced by the BOD. As a result, the stakes have never been higher for board members, who must not only meet these diverse challenges head-on but also ensure that they maintain the trust and confidence of shareholders, employees, and the wider community.

While most respondents (74%) believe their boards are well-composed to support shifting business needs, they express less confidence in addressing specific emerging risks. A significant 41% feel their board lacks the expertise to oversee climate issues, with around one-third seeking improvement in cybersecurity (34%) and geopolitical risk (31%) oversight. To bridge this expertise gap, director education is crucial. Yet, nearly half (49%) of respondents felt that their board did not allocate enough time to the director of education in the past year.

Lead Directors: The Compensation Dilemma

As boards expand their roles and committees, the position of a lead director becomes increasingly complex and time-consuming. Attracting qualified individuals for these roles may necessitate higher compensation. However, the topic of BOD compensation seems to be taboo, but it needs to be addressed. Korn Ferry's Dennis Carey and Joe Griesedieck interviewed numerous board leaders who advised against paying lead directors more in cash.

Instead, they propose a performance-based equity component tied to the lead director's increased engagement.

Rethinking Compensation: A Shift in Perspective

The current compensation structure for lead directors and committee heads primarily involves cash, with little transparency regarding assessment or determination. Griesedieck suggests that the compensation committee, in collaboration with the full board, determine the number of equity grants and the criteria for awarding them. Equity grants could compensate lead directors for the extra workload while being more acceptable to other directors and shareholders.

Embracing the New Era of Board Responsibilities

Corporate boards face greater demands, increased dedication, and higher risks than in the past. As a result, they must adapt by prioritizing oversight, addressing emerging risk readiness, and rethinking compensation for lead directors. By acknowledging and embracing these changes, we can foster stronger, more effective boards capable of navigating today's business landscape and creating value for shareholders. Let's dispel outdated perceptions and champion the importance of board compensation in cultivating a more dynamic and resilient corporate world, breaking the taboo surrounding this critical issue.