Defining the Audit Committee’s Role in ESG Oversight

Whether they are institutional investors viewing environmental, social, and governance (ESG) through a long-term value creation lens or socially responsible investors interested in specific areas of impact, the investor voice is getting louder.

PwC’s Governance Insights Center is often asked about the best way for a board of directors to exercise its oversight responsibilities related to ESG. We think it’s a mix between full-board involvement and that of various committees, especially the audit committee.

The Full Board: Integrating ESG into Board Oversight Responsibilities

The full board naturally wants to understand the organization’s ESG strategy, including related opportunities and risk mitigation needs. Directors also want to ensure the ESG strategy is grounded in the company’s purpose and strongly links to the company’s overall business strategy.

In our roles at PwC, we’re privileged to regularly meet with boards of directors and management teams at some of the world’s largest public companies. From those discussions, we know that some boards already have committees, such as safety or environmental committees, that have been and will continue to focus on ESG oversight. We are also hearing about some boards who are opting to start new committees entirely focused on ESG oversight. That may make sense for boards that need to take a step back and invest time in aligning the company’s broader purpose, messaging, and activities with the overall business strategy, and from there in ensuring that ESG strategies are properly aligned. A special committee might be best suited to address these alignments, though it would likely only be needed for a limited period of time.

Meanwhile, most ESG risks and opportunities relate to broader company topics that are already being addressed in standing committees. And oversight of the execution of the ESG strategy is likely to fall to the committees in pieces. For example, the nominating and governance committee may want to dig into the shareholder engagement element of the ESG strategy, while the compensation committee might focus on related pay incentives.

But as the business maxim goes, if you can’t measure it, you can’t manage it. As ESG issues gain in prominence and investors ask more questions, finance teams are getting more involved. And many of the finance teams that we’re speaking to have shared with us that as they wade further into ESG reporting it becomes apparent that more rigor is needed for disclosures to be accurate and investor-grade.

The Audit Committee’s Role

In addition to the audit committee’s traditional responsibilities, most public companies already delegate significant risk oversight to the audit committee. Over the years, that risk oversight has continued to expand to include areas such as cyber risk, data privacy, and other reputational risks. Despite the audit committee’s full plate, PwC believes ESG is an area that warrants the committee’s attention, as well.

The following list details several important points of intersection between the audit committee’s built-in expertise and ESG, making the committee a natural candidate to take on ESG reporting quality.

Disclosures. Determining where the company will be disclosing its ESG messaging—such as in corporate responsibility reports, proxy statements, the company website, US Securities and Exchange Commission (SEC) annual and quarterly reports, or earnings calls—is an important decision to make. For most companies, corporate responsibility reports house the broadest array of disclosures. There’s now also regulatory attention and a policy-making focus around material human capital disclosures (see this fall’s new human capital disclosure rules from the SEC), which are especially relevant in providing insight into how management is responding to risks from COVID-19 and opportunities for shifting how and where work is done. As ESG disclosures evolve, we expect to see more make their way into SEC filings, such as Form 10-Ks or proxy statements. Companies also need to think about the use of standards and frameworks. Reporting a metric that is aligned to a standard or framework can provide additional integrity to the disclosure.

Policies, procedures, and internal controls. ESG data is generated by a wide group of departments within a company. Environmental or recycling data might come from operational teams and talent-related data might come from human capital teams. Companies will need to focus on the policies and procedures that feed the development of ESG metrics as well as the internal controls that ensure the metrics are accurate and consistently prepared. Metrics should focus on the current state of, and the milestones toward, achieving an organization’s long-term goals, both of which should be regularly shared with the full board.

Independent assurance. As companies expand ESG reporting, the information should be rigorous enough to support accountability. Undefined or misaligned information may lead to reputational and credibility challenges. The audit committee may want to consider whether some level of review of these disclosures is needed to provide confidence and trust in the quality and transparency of information reported, whether by internal audit or outside assurance.

As a board determines where ESG oversight will be assigned, it may want to consider the following questions:

Will the full board take on the responsibility of broader categories of ESG oversight? Or is there a specific committee with the capacity, interest, and skills to take the lead on overseeing the company’s overall ESG efforts?
Have we considered how ESG oversight responsibilities should be operationalized and embedded in the current committee structure? Have committee charters and proxy statements been updated to transparently disclose to shareholders and other stakeholders the board’s allocation of ESG oversight responsibility?

Wesley “Wes” Bricker is a vice chair at PwC and the firm’s assurance leader. Paula Loop is a partner with PwC and leads its Governance Insights Center, which strives to strengthen the connection between directors, executive teams, and investors by helping them navigate the evolving governance landscape.

NACD: Tools and resources to help guide you in unpredictable times.

Greater Focus on DE&I Accelerates NACD Programming

As Virtual NACD Summit 2020 came to a close last week, it was abundantly clear that the board’s role in overseeing diversity, equity, and inclusion (DE&I) will only continue to grow. A mainstage panel on social justice and “Expert Insights” programs on the social aspect of environmental, social, and governance (ESG) issues and DE&I itself made it clear that directors, investors, and stakeholders all have a keen interest in seeing real progress on the DE&I front.

Indeed, the topics of diversity, equity, and inclusion were not only the focus of NACD Summit sessions, but also the impetus behind a new two-year education program called NACD Accelerate. The program aims to help build the board talent pipeline, in effect creating a highly diverse new generation of board-ready directors out of high-potential and mid-career executives.

“Diversity and the broad mix of perspectives and experiences that come with it are essential for the robust, insightful discussions that drive good corporate governance,” said Peter R. Gleason, CEO of NACD, in a statement announcing the launch of NACD Accelerate. “Yet, even with recent gains, diversity is nowhere near where it needs to be in this age of modern governance. NACD believes that we must build a deeper bench of directors now and ensure that all directors are better prepared to lead companies through challenges and uncertainty.”

And this year presented challenges and uncertainty like no other, not merely because of the COVID-19 pandemic but also because of social unrest over racial injustice in the United States. Along this vein, NACD Summit’s mainstage panel titled The Intersection of the Arcs: Social Justice Movements and Corporate Oversight emphasized the importance of understanding historical context and the need for directors to consider stakeholder concerns as a business imperative. The discussion was moderated by Tina Tchen, president and CEO of nonprofit advocacy group Time’s Up, and the panel comprised Denison University Black studies associate professor Lauren Araiza; Dr. Tony Coles, cochair of the Black Economic Alliance; and Sarah Kate Ellis, president and CEO of GLAAD.

During the panel, some 80 percent of Summit attendees responded to a polling question, acknowledging that recent social movements elevated conversations on how to address systemic racism in their boardrooms. One panelist advised directors to be true stewards of the companies they serve and challenged them to take a deeper look into their organizations’ current practices. A framework for considering diversity—”people, purchasing, and philanthropy,” developed by the Black Corporate Directors Conference—was cited as a good starting point for those boards who are early in their journeys toward creating more inclusive corporate cultures. And it was noted that operational changes, such as examining and setting goals around supplier diversity and aligning diversity objectives with executive compensation, can help make management more accountable. The gist of the panel? Resulting pressures from and implications of social justice movements need to be recognized by boards as more than reputational risks—they affect the company’s talent pipeline, productivity, ability to innovate, and, ultimately, the bottom line. 

While it has been greatly accepted in recent years that having diverse teams leads to better business results, this was underscored in the “Expert Insights” panel on DE&I, moderated by Anna Catalano, director at Kraton Corp., which comprised speakers Terri Cooper, chief inclusion officer at Deloitte; Stephanie Creary, assistant professor of management at The Wharton School, University of Pennsylvania; and Denice Torres, CEO of The Ignited Company. This panel discussion focused on how recruiting for and otherwise uplifting diversity is only the first step in a much longer journey. Boards must ensure that the companies they serve foster an inclusive and equitable culture to allow for those diverse voices to be heard and respected. As one panelist stated, “Diversity is being invited to the party, equity is playing music, and inclusion is being asked to dance.”

The board should ask itself, What is the partnership between the three terms? What is the corporation’s story if it is diverse but not inclusive? Organizations need all three elements to capitalize on the advantages of having a diverse workforce.

Finally, the session on “Understanding the Board’s Role in the ‘S’ of ESG” provided context for the discussion of diversity and inclusion by looking at the many social issues that have arisen in 2020. Between the pandemic and the renewed vigor of social justice movements, the social aspect of ESG issues has, due to recent events, risen to the top of boardroom agendas. For instance, after the mass move to remote work spurred by the declaration of the pandemic in March, stakeholder performance and health-and-safety considerations became front and center for both board and management teams.

The convergence of these issues led to one key takeaway from the panel for director attendees: Do not be merely performative. Instead, dig down when you see troubling patterns in data related to, for example, employee retention, pay equality, and who is being promoted—all areas that can reveal whether a company is, in fact, making progress. Stakeholders and investors alike will be asking related questions and boards must be prepared to address them with transparency and authenticity. The “S” of ESG can no longer be ignored in the boardroom.

NACD: Tools and resources to help guide you in unpredictable times.

Regulatory and Cybersecurity Responsibilities Intersect for Boards

Cybersecurity is a recurring and critical board agenda item for good reason. Related reputational, regulatory, and business impact risks—all of which are likely to have economic consequences, potentially resulting in regulatory fines, lawsuits, and decreasing stock prices—are just a few key concerns for companies and their leaders. The failure of an organization and its board to fulfill their cybersecurity responsibilities can even create existential risk.

Given the global business environment, the interconnectedness of today’s technology, and corresponding cyber threats, it is vital that boards keep current on news cycle headlines, trending cyber risks, and global regulatory cybersecurity requirements, expectations, and best practices.  

Regulatory Responsibilities

Director responsibilities with regard to cybersecurity oversight stem from a general obligation or fiduciary duty of care to oversee risk and, in many cases, are more specifically prescribed by regulatory requirements, strong recommendations, and expectations. Below are examples of such global regulatory responsibilities required by regulatory or law-making bodies in the respective countries in which companies do business.

The boards of certain organizations are required to approve information security or cybersecurity policies in a variety of jurisdictions around the world, including for financial services companies in the United States, Bermuda, Israel, Malaysia, and India. The board is also required to be the point of escalation for material cybersecurity risk, data breaches, or incident responses in those same jurisdictions.
In the United Kingdom, a director has a duty to exercise reasonable care, skill, and diligence in the conduct of their role, including for cybersecurity.
In Denmark, board members at insurance companies are required to complete a basic course on cybersecurity no later than 12 months after joining a board.
In Singapore, the board is expected to be regularly apprised of salient cyber-risk developments so as to equip itself with the requisite knowledge to competently exercise its oversight function.
In Australia, the board is responsible for ensuring that the entity it serves maintains its information security practices and for maintaining information security in a manner commensurate with the size and extent of threats to its information assets.

The Perils of Responsibilities Unfulfilled

A failure of the board to properly understand and effectively mitigate cyber risks that results in a cyber incident or damage to the company (reputational or otherwise) may amount to a breach of director duties, exposing directors to personal liability in certain jurisdictions such as the United Arab Emirates, Argentina, Malaysia, and Israel.

Under Europe’s General Data Protection Regulation (GDPR), companies have an obligation to reasonably safeguard data whether in electronic or paper form. Violations of this requirement due to a cyber incident or other factors can result in fines of up to 20 million euros or four percent of a company’s total worldwide annual turnover from the preceding financial year. The GDPR imposes fines for noncompliance only on legal entities, not individual managers. However, based on German procedural laws implementing GDPR locally, the fine is imposed on responsible individuals, which can include a corporate director, rather than the legal entity.

In France and Singapore, criminal sanctions of up to five and two years of imprisonment, respectively, may be applied against an individual responsible, including a corporate director.

Board Best Practices

The board plays an important role in helping the company it serves balance and oversee security risk appetite, risk mitigation strategy, and strategic business objectives. 

To avoid the perils of unfulfilled director responsibilities in relation to cybersecurity oversight, the board should consider the following tips:

Formally approve on an annual basis and in documented minutes the company’s information security program, including policy.
Try to recruit a cyber expert to the board in line with the US Securities and Exchange Commission’s suggestions from its guidance around cybersecurity disclosures.
Require regular (ideally quarterly at a minimum) reporting from management on cybersecurity and information security material risks and events, and how the leadership team is implementing the strategy for management of those risks and the treatment of those events.
Designate a board committee that will be responsible for regular oversight of cybersecurity activities (unless it is determined that cybersecurity will remain a full-board issue).
Stay current on the regulatory security landscape and your company’s compliance status and strategic approach with at least an annual briefing from internal legal counsel.
Understand what the company’s cyber insurance covers (e.g. does it include fines and penalties?).
Periodically practice the company’s documented incident response plan.
Understand the company’s plans for expanding or contracting business operations in geographic regions that are considered nation-state adversaries or otherwise present cybersecurity legal or operational high-risk challenges.
Ask about the company’s current and planned cybersecurity resources in an effort to ensure that the company is adequately staffed from numbers and expertise perspectives.
Require periodic updates from the company’s internal audit group on cybersecurity audit material findings and cyber program effectiveness.

Lucy Fato is executive vice president, general counsel, and global head of communications and government affairs of AIG and Nubiaa Shabaka is chief cybersecurity and privacy legal officer and associate general counsel of AIG.

NACD: Tools and resources to help guide you in unpredictable times.

A Methodical and Scientific Approach to Professional Development Coaching

Career Partners International has partnered with LeaderAmp to design PowerAmp Coaching.  PowerAmp Coaching is the world’s first professional development coaching program delivered by trained coaches augmented by rigorously created Artificial Intelligence.  This combination of professional coaching paired with technology gives organizations the power to provide coaching at a previously unthought of scale and significantly enhanced ROI.

While other programs may offer individual content and some form of guided development, none can match this level of scientific rigor and targeted development.  Many forms of coaching can provide participants with an experience that “feels” positive.  PowerAmp Coaching takes this to the next level by increasing engagement, measuring improvement, and providing transparent progress tracking to the client organization driving continued advances across the workforce.

One of the many unique elements of PowerAmp Coaching is the Time Trial.  Designed to identify those with the highest potential for coaching success, the Time Trial not only ensures the best application of development investments, it also uncovers hidden talent and organizational enrichment priorities.  Through brief assessments and AI guided prompts, participants will take part in self-guided development, demonstrating commitment to a coaching engagement.  By focusing efforts on those who are most prepared for and receptive to coaching, organizations can ensure that funds invested in development are being optimally allocated and motivated individuals are being appropriately engaged.

After successfully completing the Time Trial, the unique journey into modern development begins.  Participants are assigned a trusted CPI coach and complete computer adaptive self and 360-assessments to establish a baseline.  These proprietary and scientifically validated assessments, developed by LeaderAmp, measure each participant in 18 unique dimensions.  By focusing on the dimensions that each participant or organization has deemed most critical, coaches are able to ensure targeted development and progress.  Throughout the process Artificial Intelligence works in tandem with the coaches to track the emotional experience of participants, ensuring assignments are neither too challenging nor too simple, keeping participants in a growth mindset.

With over 50 Member Firms and 300 locations around the globe, CPI is uniquely positioned to deliver coaching to national, multi-national, and international organizations with a proven and uniform approach.  CPI’s experienced and credentialed coaches amplified by LeaderAmp’s scientifically developed content create greater levels of scalability, bringing access to quality coaching to all levels within the organization.  With artificial intelligence and modern engagement techniques, PowerAmp Coaching democratizes the professional development field and creates stronger leaders and employees.  Whether supporting high-level individual contributors, guiding new leaders, identifying diverse pools of talent, expediting change management, or solving for other complex issues, PowerAmp Coaching provides innovation and intimacy driving sustainable results.  
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Targeted Professional Development and Coaching Excels Teams to Success

Unprecedented, chaotic, new-normal, turbulent, challenging, these are just some of the descriptors of today’s business environment.  Clearly, 2020 has brought new levels of complexity to the working world. Organizations are asking more and more of their employees, leaders, and managers; many of whom will rise to the occasion, but so many may not be equipped to do so.  In conjunction with LeaderAmp, Career Partners International is pleased to introduce PowerAmp Coaching, an industry first professional development and coaching solution designed to deliver measurable results, with a scalable model, and a greatly enhanced ROI.

Executives have long experienced the benefit of professional coaches.  Great coaches have the ability to provide insightful, meaningful, and actionable advice and guidance.  They address specific opportunities for improvement in an individual, rather than the more general recommendations offered through training or study.  Historically, coaching has been limited to the upper echelon of organizations due to its complexity and costs.  PowerAmp Coaching’s unique application of Artificial Intelligence within the coaching solution allows for increased transparency and endless scalability.  Organizations can provide coaching to whole teams of participants ranging from hi-potential individual contributors, to new managers, to experienced leaders, and more.  Each participant will benefit from a consistent process augmented by technology with measurable results while receiving personalized coaching resulting in measured improvements.

Group training sessions and online courses are valuable in delivering large numbers of participants the same guidance and messaging.  Coaching is unique in that it targets an individual’s areas of improvement and, when implemented at scale, leads to lasting improvement across the organization.  PowerAmp Coaching is designed to eliminate the risk from coaching by first identifying those with the most potential to gain from the program, then by maintaining constant communications with participants to ensure they are practicing between sessions.  Amplified by LeaderAmp, PowerAmp Coaching utilizes Artificial Intelligence to prompt actions and to quickly interpret engagement levels.  With this capability and high levels of engagement coaching becomes more expeditious and effective.

PowerAmp Coaching creates the biggest impact when applied to organizations’ most difficult problems.  With state-of-the-art assessments, scientifically designed to be accurate and precise, organizations measure participants’ starting points across 18 dimensions.   Participants can then focus on the skills that are most in need of development.  The effects of the coaching engagement are then measured to determine real progress made from start to completion.  PowerAmp Coaching makes professional development and coaching accessible to all levels of an organization with the transparency and targeted growth that proves the ROI of each coaching relationship.
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Career Partners International Launches PowerAmp™ Coaching – Industry Leading Professional Development Solution

Career Partners International (CPI) is pleased to announce the launch of PowerAmp Coaching, the world’s first professional development coaching program delivered by trained professional coaches amplified by scientifically created artificial intelligence.  This combination gives organizations the power to provide the benefits of coaching to otherwise unreachable populations all while minimizing risk and ensuring a solid return on investment.

CPI has launched this program in conjunction with LeaderAmp, founded by Dr. Matt Barney, Organizational Psychologist.  In Dr. Barney’s previous work as the head of learning and development in major organizations around the globe he identified three key obstacles to successful coaching engagements.  First was the inability to view and measure progress in real time.  Second was the difficulty in predetermining which participants would succeed in coaching.  Third was the limitation of delivering coaching to those only at the highest levels of major corporations.

PowerAmp Coaching combines the expertise of proven coaches with the tracking and guidance of custom-built and validated artificial intelligence.  This unique solution starts by identifying those in the organization who will most benefit from coaching then quickly identifies areas for improvement based on proprietary, peer-reviewed, and validated assessments.  With these highly accurate and precise tools, organizations and coaches can see which participants are on track and which need more support.   By partnering with AI and utilizing consolidated project management tools, coaches provide greater levels of support to more participants, opening the possibility of coaching to more employees than ever before.

“In my nearly 30 years in Human Resources and Learning & Development, I have not seen a coaching program so rooted in sound science.  Coupling CPI’s excellent coaching capabilities with LeaderAmp’s scientific approach and participant guidance bring previously unheard-of possibilities to the world of Professional Development,” states Bill Kellner, CEO of Career Partners International.

With over 50 Member Firms and 300 locations around the globe CPI is uniquely positioned to deliver coaching to national, multi-national, and international organizations with a proven and uniform approach.  PowerAmp Coaching combines this coaching presence with scientifically sound and proven technology to deliver measurable results to employees at all levels and in all corners of the world.  PowerAmp Coaching solves what have historically been the most difficult employee development problems faced by virtually all organizations.
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