Diligent Institute Charts a Bold, New Course of Governance Research & Education for Corporate Leaders

In 2020, we heard our director audience loud and clear: the risks and issues that directors had to manage were existential in nature and evolving rapidly, making good governance incredibly difficult to achieve, if not outright impossible. From a global pandemic, to generational weather events, to global protests of racial and ethnic inequality, to political unrest, to supply chain disruptions, the issues directors were tackling were momentous and often interconnected.

As we entered 2021, many of these issues came to a head, and Diligent Institute sought to make sense of it all and provide useful and timely thought leadership for corporate leaders. Through our research reports and commentaries, we considered questions such as:

• What are the major trends occupying the minds of corporate leaders, and how are they feeling about the issues?
• How are directors tackling the oversight of ESG and climate change – both in terms of mitigating risks and embracing new opportunities?
• What progress is being made on boardroom diversity during a pandemic that disproportionately impacted women and racial minorities?
• What are the trends in executive compensation, and how do policies align with ESG priorities?

Most importantly, as the Diligent Institute’s purview is global, how do the answers to the questions above vary around the world?

The Journey to a Global View

Since its founding in late 2018, Diligent Institute has strived to take a global view of the governance issues that are top-of-mind for corporate directors. However, with a US-based research team and a preponderance of Diligent customers based in the US, our ability to extend our reach beyond the Americas was limited. This year, we wanted to change that. An important first step was expanding Diligent Institute’s research team to include Edna Twumwaa Frimpong as Head of International Research. Based in Amsterdam, and with deep experience in quantitative governance research in the EMEA region, Edna brought a fresh and international perspective to the Institute’s work.

The Institute is collaborating in new ways with governance research partners outside the US, with the goal of expanding both the scope and reach of our research. For example, our work with the Institute of Directors (IoD) in Ireland resulted in a co-branded report focused on how the boards of Irish companies are tackling ESG issues. Similarly, Diligent Institute produced two regional reports focused on executive compensation practices in Australia and in the Belux region (in partnership with PwC Belgium). Additionally, new relationships forged in 2021 will bear fruit in 2022: our work with Reward Value, a nonprofit organization based in the Netherlands, examines the link between corporate purpose and executive compensation; and our collaboration with Human Resources Governance Leaders Co., Ltd. (HRGL), led to new insights on the gender diversity of corporate boards in Japan.

Establishing and Examining Trends

One of the greatest challenges to conducting corporate governance research is the speed with which major issues dominate the news cycle and occupy the thoughts of corporate leaders. Quality research takes time to develop and publish – and at times, that pace feels frustratingly slow. We identified a “gap” between the amount of time it takes to publish our findings, and the speed with which corporate leaders needed insights on the key issues of the moment.

To try to address this gap, in June 2021, Diligent Institute launched the Corporate Sentiment Tracker, a first-of-its-kind AI-powered tool that tracks in real time the issues being discussed by corporate leaders, and measures their “sentiment” (positivity or negativity) about the issues. The Tracker scrapes data from more than 56,000 sources of English-language news and provides a view into the minds of corporate leaders, including an analysis of corporate sentiment on ESG-related topics.

In combination with the Tracker, we expanded our Director Confidence Index, conducted in partnership with Corporate Board Member, to a monthly report charting how US corporate directors feel about the direction of the economy, and gain a “pulse check” on key issues and trends. Collectively, these tools allow us to track and tell the story of how directors are navigating this time of uncertainty and complexity. As these tools continue to gather data, we will be able to analyze comparisons and trends in corporate leaders’ sentiments, confidence in the economy and future business conditions, and changes to business strategy. They also help us determine the most important governance topics in need of further research, such as strategies for handling growth, inflation, war, ESG, climate change, political unrest, talent and supply chains.

Setting our Sights on 2022

As we move forward, we’re striving to build on our progress toward being a world-class source of quality governance research and education. With new partnerships, new technology and new programs on the horizon, 2022 will be an exciting year for Diligent Institute.

Announced at the end of 2021, the Diligent Institute team developed and launched the Diligent Climate Leadership Certification, an interactive eLearning certification program for corporate directors and C-suite executives. Informed and vetted by industry experts such as Glass Lewis, international law firm Kirkland & Ellis, and 40 expert speakers, the program prepares corporate leaders to confidently embrace the oversight of climate risk and strategy. This program will soon be followed by other educational offerings designed to help directors and executives meet the expanding challenges of leadership.

To help us meet our mission, the Diligent Institute continues to grow. We are delighted to welcome Emily Williams, Senior Program Manager, to coordinate and align our research and programming efforts with Diligent’s overall mission and goals, amplifying our work across a broader audience and ensuring our participants the best experience possible. We are beyond excited to see where we can take the Institute next. Thank you, as always, for your continued support of our work.

The Institute Team
Dottie, Edna, Emily, and Kira

Research Summary

The following is a short summary of the key findings from Diligent Institute’s 2021 research.

Director Confidence Index

In 2021, we completed our first full year of the Director Confidence Index, which began in October 2020 as a quarterly pulse survey of U.S. public company directors conducted in partnership with Corporate Board Member. At the start of the year, we moved to a monthly cadence.

Each month, we asked our director respondents about their confidence in current and future business predictions, as well as for the conditions or other reasons driving their ratings. In addition to these static questions we tracked over time, we also asked directors a small set of questions that changed each month based on current events and topics of interest.

How Did Director Confidence Change Throughout 2021?

Over the course of the year, director confidence in future business conditions rose steadily from the survey’s inception at the end of 2020 to a peak in April of 2021, a few months after initial approvals of the COVID-19 vaccine and right around the time vaccines became widely available to the adult population. However, as new variants took hold, first Delta in the summer and later Omicron in November and December, combined with directors’ less than hopeful views on rising inflation, confidence eventually declined to its lowest level recorded in September and continued decreasing through November/December reporting period.

“The sequence of events taking place over the past two years has made strategic planning very challenging,” said Melanie Nolen, Head of Research at Chief Executive Group, the parent company of Corporate Board Member, and a partner in this research. “Today’s environment is rife with risks, many of which didn’t exist just a few years ago, so it’s no surprise that considering the stewardship role of the board, we’ve been seeing an increasing proportion of directors shift to a more bearish or cautionary outlook for the short term.

Facing New Issues: Talent, Cyber, ESG, DEI, and More…

In 2021, we were able to capture a snapshot of evolving director sentiment on several key issues. In January, we learned that more directors were tying ESG and DEI goals to executive compensation: 25% of our respondents either were already doing this or were planning on doing so in the next 12-24 months for ESG metrics, and this number was 40% for DEI goals.

In March, we learned that directors increasingly focused on cybersecurity and digital transformation when it came to their risk oversight agenda. That month, directors were asked to share the most pressing risk issues facing their board in the current environment. Cybersecurity and digital transformation were first and third on that list. Meanwhile, more than a third (36 percent) of directors surveyed said their board would benefit from having better information, processes or reporting to oversee cyber risk.

We also saw directors’ attention to attracting and maintaining talent evolve throughout the course of the year as the Great Resignation developed. In May, 71% of directors said they were experiencing a “skilled talent” shortage, 55% indicated that a talent shortage was occurring at some of their locations and departments with an additional 16% indicating that the shortage was occurring across the entire organization. By November, talent had taken the top spot when we asked what the most important strategy drivers for 2022 would be.

Launching the Corporate Sentiment Tracker

The following section is guest-authored by special contributor Andrew Duchon, Ph.D., Senior Director of Data Science, Diligent Governance Analytics and Insights technology and creator of the Corporate Sentiment Tracker.

In June of 2021, the Diligent Institute launched the Corporate Sentiment Tracker. The Tracker leverages Diligent Governance Analytics and Insights technology for classifying and organizing corporate news. From over 56,000 online sources, the Tracker isolates English-language opinion pieces by executives from 7,500 public companies, grouping articles into stories daily so one can see what the “biggest” (most re-syndicated or talked about) stories are each day. Since we are limited to opinion pieces, we can also talk about the sentiment of these stories being positive, negative, or neutral. Terms are extracted from the headlines to determine what is being talked about most, as well as what ESG topic is most discussed (based on the World Economic Forum’s framework).

The Tracker enables numerous data classifications through these opinion stories. One type of data reported on is the top term each week. In other words, what is top of mind for executives that week? In addition, we look at the sentiment of the stories and relevance of the term to create a “health score” for the term. In 2021, only 8 distinct terms were number one: pandemic, recovery, growth, future, inflation, India, omicron and outlook.

On only two occasions was one of those terms predominantly negative: future the weeks of February 8th-14th and October 4th-10th. The week of February 8th-14th, the biggest negative story was “Zillow’s CEO is warning that the future of work could create a ‘two-class system’ where those who come into the office are viewed as better employees.” The week of October 4-10, the biggest negative story was “Constellation Brands CEO says slower growth of hard seltzer will ‘probably’ continue in future.”

While inflation would come to be a pressing topic towards the end of 2021 and into 2022, executives were first worrying about it significantly back in May 2021, with the biggest story being “Energizer CEO expects inflation to keep going and going, disputing what most at the Fed believe.” This has turned out to be a very prescient opinion.

The most positive week was at the end of February with growth at a score of 6.45. Interestingly, February, 2021 was also the highest value recently on both the CEO Confidence scale and the Director Confidence Index, according to data from Chief Executive Group/Corporate Board Member and the Institute. The biggest positive story that week was “After a banner year in 2020, Papa John’s CEO looks to build on company’s growth.” Vaccines were beginning to be produced and administered in mass and hopes were high that the pandemic would be over soon.

That turned out not to be the case, and we saw that executives stayed mostly positive through the Delta variant wave over the summer. However, hope of a rosy future diminished in the fall with negative talk about inflation beginning to dominate in October. Except for one very positive growth week in early November, most executives were dour for the rest of the year, with COVID-19 variants emerging. This also corresponds with the time that most stock exchanges started to decline. This trend continues to the present day, with oil, Ukraine and yes, still inflation, dominating executives’ thoughts. The Corporate Sentiment Tracker, while being an excellent tool for understanding what executives are talking about today, is also effective for highlighting long-term trends, and even trends in terms. We continue to explore these patterns and look forward to sharing future results.

Navigating a Pivotal Year - What Directors Think

To kick off our in-depth reporting for the year, we partnered with Corporate Board Member to publish the 18th annual edition of What Directors Think. The survey was conducted from August-October 2020 and asked US public company directors about the greatest challenges facing their boardrooms for the year to come. Unsurprisingly, pandemic fallout dominated directors responses. COVID-19 and its impact on the economy topped corporate directors’ list of concerns for 2021. As companies continued to operate in a remote environment, cyber risk also featured prominently as a top agenda item as companies continued operating in a remote-work environment. Relatedly, the majority of directors also indicated that new technologies and culture were the most challenging things to oversee in their roles, trends we would see play out over the course of the year.

Additionally, half of the directors said that the events of 2020 made them realize the need to focus on diversity, equity and inclusion in the boardroom, a trend we would also study in our research in 2021.

Diversity, Equity and Inclusion: Progress and Priorities in 2021

Female Directors Gain Slight Ground in the Boardroom and in Leadership

Each year at the Diligent Institute, we track levels of female representation in the boardroom and in board leadership. In a year where we saw the pandemic disproportionately impact women in the workforce, we wanted to see whether the long-running issue of female representation in the boardroom had also stalled. In 2021, we saw progress: the percentage of board seats held by women in our global sample increased by five percentage points, from 22% in 2020 to 27% in 2021.

Women also gained ground on committees and in board leadership. In board leadership, women made up 8% ofboard leaders, up from 7% in 2020. On committees, female representation in committees rose three percentage points, from 24% to 27% and women’s representation as board committee chair also increased 3 percentage points, from 21% to 24% in the same time span.

However, there’s a lot of progress to be made. Despite these incremental improvements, male directors still hold 3x as many board positions as women do on average and are 4.67x as likely to be board leaders as female directors. While 14% of male directors are also board leaders, this number is only 3% for female directors.

Boards Prioritize Diverse Skillsets

At the end of 2020, we were hearing that directors wanted to bring more diverse perspectives into the boardroom. As the corporate world focused on gender and racial/ethnic diversity, particularly in the United States, we also wanted to see whether boards were also appointing more directors with diverse skillset backgrounds.

In July 2021, we published the report Beyond the C-Suite: Trends in Director Skill Sets to see how the desire to bring new perspectives into the board room was impacting director appointments. In the report, directors with “traditional backgrounds” have held the role of CEO, CFO or COO. Directors with “nontraditional backgrounds” have never held those roles, but have other backgrounds in technology, marketing, sales, legal, human resources (HR) or environment, social or governance (ESG). We looked at director appointments in three key regions: the United States, the United Kingdom and Australia.

Since the beginning of 2019, the share of newly appointed directors who come from a traditional CEO/CFO/COO background has declined, dropping from 59.4% to 56.0%. Over the same time period and in the same regions, the share of newly appointed directors who come from nontraditional backgrounds increased from 13.0% to 18.9%.

The results are even more interesting when analyzed by gender. While newly appointed directors from CEO/ CFO/COO backgrounds are twice as likely to be men, newly appointed directors with nontraditional backgrounds were at parity with their male counterparts. Meanwhile, women represented the majority of new appointments in technology and marketing and the vast majority of new appointments in HR and ESG.

The Intersection Between Skillset and Gender Diversity

Looking at the findings from both reports, it seems that pressure on companies to increase the gender diversity of their boards has contributed to an increase in diversity of director skillsets. Since so few women have held roles as CEOs, CFOs or COOs of major listed companies, as companies recruit and appoint more women to their boards, those women are likely to come from nontraditional skillset backgrounds.

Though the data only looks at gender, it would hold that this trend exists for racial/ethnic minority board members as well. This is one area of further exploration for the Institute in 2022.

Pressure on All Sides: ESG in the Boardroom

ESG Activism on the Rise

In what many believed to be a landmark year for shareholder activism, our annual report on the topic revealed the overall number of investor activist campaigns in our global sample actually declined in 2021 compared to 2020.

However, the number of ESG-related campaigns, and the impact and success of investor activist campaigns, rose year over year. From January to August 2021 13% of activist campaigns were successful, compared to 11% at the same period in 2020.

This proxy season, successful activist campaigns against several “Big Oil” companies often dominated the news cycle. Clearly, shareholders are increasingly viewing issuers’ attention to ESG criteria as a link to their business performance and resilience. The success of this year’s activist campaigns against energy giants served as a harbinger of the mounting pressure on companies to enhance their performance and ESG practices.

In Europe, ESG KPIs Increase in Prominence

As investor focus and shareholder activism intensified around the issue of ESG, the Institute also sought to learn more about how ESG key performance indicators (KPIs) were being incorporated into companies’ executive compensation plans. In 2021, we studied the UK and EU in particular, as the region is a leader in the space, with hopes to replicate this report in other regions in 2022.

We learned that the percentage of companies incorporating ESG metrics in the executive compensation plans in the EU and UK in our sample had increased from 4% in 2008 to 34% in 2020. The sectors with the highest percentage of companies incorporating ESG metrics in executive compensation were the energy and utilities sectors, with 59% and 64% of companies incorporating ESG metrics. The healthcare sector had the lowest levels of representation, with only 22% of companies incorporating ESG metrics.

In response to trends and pressures around ESG, the Diligent Institute, in conjunction with the Institute of Directors (IoD) in Ireland, conducted a survey to learn more about how companies, their directors and leadership are thinking about ESG strategy and leadership using Ireland as a starting point. In future research, we hope to replicate a similar survey in other regions to compare responses.

58% of respondents said ESG issues are dealt with at board level or by a subcommittee of the board. Additionally, 82% of respondents said ESG issues are now discussed at board level at least annually, compared to only 52% of respondents indicating their board had discussed ESG before the pandemic struck in March 2020. Despite the marked increase in ESG-related discussion in the boardroom, respondents indicated only slight confidence in ESG strategy and overall alignment with long-term strategy, rating their confidence a 6 out of 10. This will definitely be an area to watch as we move forward into 2022 and beyond.

“The onset of the COVID-19 pandemic marked a turning point for ESG in Irish boardrooms,” says Maura Quinn, CEO of the Institute of Directors in Ireland, “We were delighted, therefore, to publish in November 2021 the report titled, ESG Strategy, Leadership, and Integration in Irish Companies, in partnership with the Diligent Institute. This was the first time that IoD Ireland, the leading membership body for directors and business leaders in Ireland, has partnered on a survey with the Diligent Institute. The findings of the survey showed encouraging progress in boardrooms in Ireland on ESG. Board members in Ireland have adapted to the changing needs of their stakeholders by prioritizing the issues, such as ESG, that matter most to them. The survey finding that an impressive 97% of the respondents indicated that ESG will feature in boardroom discussions at least once a year was very encouraging and bodes well for the future. We look forward to working with Diligent Institute again in 2022 on this increasingly important and relevant topic.


Executive Compensation: Trends in a COVID-19 Economy

As 2021 drew to a close, we wanted to learn how executive compensation was changing in the midst of the pandemic. As one of the most tangible and measurable forms of action available to the board, we wanted to know whether companies that had announced pay cuts for their executives had followed through on those pay cuts to the extent promised.

In December, we published results looking at the S&P 500 and Russell 3000. We found that of the 647 Russell 3000 companies that initiated COVID-19 pay cuts, only 15% cut pay to the extent they announced. From 2019 to 2020, average CEO total realized compensation actually increased by 20.1% and 26.7% for Russell 3000 and S&P 500 companies, respectively. Additionally, CEO pay levels have risen consistently over five years, while total shareholder return (TSR) has been volatile.

About the Author

Kira Ciccarelli

Kira Ciccarelli

Lead Researcher of Diligent Institute

Kira Ciccarelli is the Lead Researcher at the Diligent Institute. Diligent Institute is the modern governance think tank and research arm of Diligent Corporation, the leading provider in board collaboration software. In her role, Kira works to conduct and provide high-level modern governance research to inform director decision-making and identify best practices. Before joining Diligent, Kira worked in a variety of data-driven research roles, including analyzing global aid funds to the UN Sustainable Development Goals (SDGs) and compiling a meta-analysis of political experimental findings for the Analyst Institute. She holds a BA in Public Policy from the College of William & Mary.