How committees are evolving to meet changing oversight needs

Corporate boards continue to evolve in response to changes in the business environment. 

Stand-alone corporate responsibility and sustainability committees are also on the rise. The percentage of S&P 500 company boards with a separate sustainability committee jumped to 11% in 2022, up from 7% in 2019. These committees are primarily focused on environmental, social and governance (ESG) risks and opportunities and what may broadly be described as corporate citizenship or stakeholder value matters. The most common sectors adding such committees are materials, energy and consumer staples.

While finance, executive and compliance committees remain the three most prevalent extra-regulatory committees, the percentage of S&P 500 company boards with those committees has ticked down in recent years. 

Another approach boards are taking to strengthen oversight is to broaden the purview of the three core committees — audit, compensation, and nominating and governance — to address oversight of talent and culture (including diversity, equity and inclusion (DEI)), environmental and social matters, and cybersecurity and digital trust.

Audit committees expand oversight of cybersecurity and other nonfinancial risks

The audit committee has emerged as the primary committee overseeing cybersecurity. The percentage of S&P 500 companies citing cybersecurity in their descriptions of the audit committee’s responsibilities in the proxy statement has nearly tripled since 2019, jumping from 25% then to 73% in 2022. This percentage may be poised to change even further in the near future. Under Securities and Exchange Commission (SEC) proposed rulemaking on cybersecurity, companies would need to disclose whether the entire board, specific members or a board committee is responsible for cybersecurity oversight.

Beyond cyber, more audit committees are overseeing other nonfinancial risks. Notably, the environment, ESG, sustainability and climate are topics now appearing in the descriptions of audit committee oversight responsibilities for 13% of S&P 500 companies.

Compensation committees embrace oversight of talent matters

Compensation committees are facing an exponential shift in their scope, reflecting a major committee change. Once focused primarily on compensation matters related to the CEO, C-suite, and equity incentive plans and succession planning, many compensation committees have expanded their oversight role. While some of the descriptions of human capital management oversight are high level, others specify that such matters include diversity, equity and inclusion; talent recruitment, development and retention; workplace environment and culture; health and wellness; pay equity; and employee engagement and external surveys.

While only 3% of S&P 500 companies included “human capital” in their compensation committee descriptions in the proxy statement in 2019, a third do so now. Even more, 41%, include diversity or DEI among the committee’s areas of oversight, 15% claim oversight of company culture, and 7% say they oversee employee engagement. These changes are significant and reflect the board’s oversight and focus on the broader talent agenda. 

Compensation committees are also changing their names to reflect this expanding oversight role, such as by expanding their titles to include “human capital” (from zero in 2019 to 7% in 2022), “talent” (from 1% in 2019 to 7% in 2022) or “human resources” (from 8% in 2019 to 10% in 2022).

This explicit inclusion of human capital in the work of compensation committees helps signal to stakeholders the importance of the issue to the board, and this is an area of increasing stakeholder focus. Workforce (and board) diversity as well as other strategic workforce issues were among the top three stewardship priorities investors shared with us for 2022.

Nominating and governance committees broaden to incorporate ESG

Nominating and governance committees continue to hold the lead role in overseeing corporate environmental and social matters. A majority (56%) of S&P 500 companies cited environmental oversight in their description of the nominating and governance committee’s responsibilities in the proxy statement in 2022, up from 19% in 2019, and 41% cited ESG as an area of responsibility, up from just 7% in 2019. Other ESG-related terms included among nominating and governance committee responsibility descriptions are sustainability, climate, social responsibility and political (with company political activities coming under closer scrutiny in relation to their ESG commitments and stated values). Some specific responsibilities commonly cited include overseeing environmental and social responsibility strategies, policies, procedures, initiatives, goals, performance, and disclosures.

This clarity around the governance of ESG is something investors tell us they want to see. In our most recent investor outreach, a third of investors said that committee charters or other governing documents should disclose how ESG matters are included in the work of the board, specific committees and subcommittees. This is also a subject of focus for regulators. The SEC’s proposed rulemaking on climate would require companies to identify any board members or committees responsible for the oversight of climate-related risks and the processes by which that oversight is conducted.

While nominating and governance committees are providing primary oversight of ESG, we are also observing many companies adopt a more integrated governance model whereby other committees are overseeing the aspects of ESG most relevant to their purview. For example, more companies are disclosing that their audit committees are overseeing disclosure processes and controls for sustainability reporting and that their compensation committees are overseeing DEI. 

Going forward

Boards are more effective when they can delegate authority to well-run and well-functioning committees that have clarity on their roles and responsibilities. Committees play a critical role in allowing boards to meet evolving oversight responsibilities relating to strategy, risk, talent, culture, compliance, technology, cybersecurity and climate change. There is no one-size-fits-all best practice for board committee structures or division of oversight responsibilities. Boards need to regularly evaluate what works best for them to meet changing priorities and needs.