January 27, 2023 Dispatches from Davos: Takeaways for boards Photo credit: World Economic Forum/Boris Baldinger By Prasanthi Vasanthakumar, Institute of Corporate Directors After two muted pandemic years, the annual gathering of the rich and powerful was back in full swing in the Swiss Alps. An estimated 2,700 leaders from 130 countries – including 52 heads of state and 600 CEOs – descended on Davos to discuss the theme of ‘Co-operation in a Fragmented World’ at the World Economic Forum’s (WEF’s) 53rd Annual Meeting, Jan. 16 to 20, 2023. This year, experts predicted a coming storm of cyber attacks. A global collective of 500 CEOs and their companies launched ESG & Disability Data: A Call for Inclusive Reporting to urge businesses to align around five publicly reported disability inclusion KPIs. And the word ‘Polycrisis’ was born to capture converging global emergencies, from the war in Ukraine and sky-high inflation to rising carbon emissions and social unrest. But directors were under the microscope, too. In one session, “Time for boards to sharpen up,” Mark Carney, United Nations Special Envoy for Climate Action and Finance and corporate director, asked Nicolai Tangen, CEO of Norges Bank Investment Management, what he expects of boards. As chief executive of one of the world's largest sovereign-wealth funds, with more than $1.2 trillion in assets, and a stake in 9,000 companies across 70 countries, Tangen believes boards must get their act together on climate, executive pay and diversity. Wanted: A credible climate plan In the fund’s portfolio, only 17 per cent have a credible net-zero plan, says Tangen. At minimum, he expects companies to have a credible plan with targets and sub-targets. His fund is actively engaged with climate laggards on this issue. “We think it’s a material risk for all of these companies,” says Tangen. “In an uninhabitable world, the value of the sovereign wealth fund is zero.” Tangen attributes the intense backlash against ESG in the U.S. to a more vocal oil and gas lobby emboldened by rising energy prices. He also observes that some investors wrongly view ESG as a luxury to ignore in tough times. “We think [ESG] is dead serious,” says Tangen. “I think you have to go at it all the time.” However, Carney observes that net-zero transition plans are relatively new, as are best practices in this area, which leaves an information void in the market. “There’s a huge value opportunity that’s going to open up,” he says. At the very least, boards must have the right information to determine how well their organizations are positioned to meet net-zero objectives. “That’s to protect your downside before you get to being part of the solution providing people what they want,” says Carney. Out of control: Executive pay In 2021, the average pay for a CEO of an S&P 500 company rose 17 per cent to US$15 million. In many cases, these increases don’t come with long-term value creation. But for Tangen, size matters less than structure. He wants executive pay to link to value creation, be structured to vest over a long period, and be stock-based rather than option-based. His fund is increasingly voting against packages that don’t meet these criteria. It also closely investigates the structure of CEO pay packages that are US$20 million or more. “There’s never been a worse time to show this corporate greed,” says Tangen. “Because we have this [cost of] living crisis, it’s just not the thing to do in this particular period.” Tangen has long advocated for splitting the CEO and board chair role to keep executive pay under control and for healthier governance. “Otherwise, you kind of negotiate with yourself as a CEO,” he says. “That’s generally not a very good outcome.” Outside Davos, many share Tangen’s concerns around executive pay. At home, one critic observed that CEO pay is out of control and called for a wealth tax to level the playing field. Another critic noted that executive pay is justified due to the weight of a CEO’s responsibilities, but called on boards to do a better job of holding chief executives accountable through multi-faceted compensation structures that reward performance and punish failure. With widening income inequality and a looming recession, tough questions on executive compensation are unlikely to go away. Missing: Board diversity Tangen calls for boards to have at least 30 per cent representation of women. “Companies that have diversity at the board level are just making better decisions,” he says. To recruit diverse directors, Tangen urges boards to look at different places in society instead of tapping their usual go-to sources. His fund also votes against overboarded directors, partially to allow room for newer voices, but also to ensure directors aren’t stretched thin and can actively contribute to their boards. These ideas are not unique to Tangen or Davos. TMX Group and the ICD co-sponsored Charting the Future of Canadian Governance: A Principled Approach to Navigating Rising Expectations for Boards of Directors, a report that urges boards to strive for at least 40 per cent of directors who identify as women and 40 per cent who identify as men, leaving room for individuals from the 2SLGBTQ+ community. Additionally, at least 30 per cent of directors should be made up of Indigenous people in Canada, people with disabilities and people from underrepresented racial groups. The report also recommends 12-year term limits, in part to create space for more diversity on the board. As the chorus of calls for board diversity gets louder, it will become increasingly difficult for directors to ignore – especially as investors like Tangen vote against boards with members that all look the same. Photo credit: World Economic Forum/Sikarin Fon Thanachaiary Slow but positive change While Tangen is critical of many boards, he recognizes that progress is happening. In the last 10 years, the proportion of boards in which the CEO doubles as board chair has fallen from roughly 45 per cent to 35 per cent, he says. Six months ago, only 10 per cent of the companies in his fund’s portfolio had a credible climate plan, but today 17 per cent do. And after engaging with some companies his fund voted against, Tangen can see a reduction in executive pay packages. “I think this dialogue works well,” he says. Ultimately, it is this spirit of co-operation and collaboration that Davos 2023 tried to drive home. Indeed, the WEF’s annual gathering is often criticized for its champagne parties, private planes and VIP guest list, just as its relevance is increasingly questioned. However, as a global stage that brings together power players to discuss and debate the issues of our time, it is still a valuable platform. Directors may want to consider how themes from Davos 2023 apply to their organizations. If the world is truly on the brink of a polycrisis, boards must bring as much foresight and insight to their organizations as possible. Share this