Some unavoidable debates for the upcoming board season

The full version of this article was originally published in Spanish in the Esade Center for Corporate Governance Newsletter.

As the general shareholders' meeting season concludes, it's foreseeable that certain governance topics concerning our listed companies will resurface strongly next year. From the conversations hosted at the Esade Center for Corporate Governance in recent weeks, we identify the following key topics, among others: 

Diversity 

The debate on diversity and its incomplete treatment at the board level, especially concerning executive teams, is crucial. While much attention has been given to increasing female representation on boards, the structural issue of women's presence in senior management remains largely unaddressed. Boards, particularly the Nomination and Compensation Committee, must prioritize this issue. This area is directly related to overseeing talent management policies and diversity, equity, and inclusion (DEI) initiatives. Boards must take responsibility for ensuring that management teams adequately address this long-term challenge with vision, initiative, and rigorous review of the effectiveness of adopted plans. The upcoming implementation of the European parity directive will undoubtedly increase the urgency in this area. 

Transparency and the CSRD 

The CSRD’s implementation in 2025 will test two fundamental aspects of our companies: the strength of sustainability management (starting with establishing a good dialogue with stakeholders within the double materiality analysis framework and integrating sustainability into strategic design) and the governance of sustainability. During a recent ESG Talk at Esade, a speaker aptly described the directive as a management directive disguised as "reporting." The CNMV’s updated technical guide for audit committees and its recommendations on non-financial information and risk management will further drive this debate. Sustainability has become a transversal axis in business management and board oversight, demanding greater coordination, process clarification, and responsibility delineation. 

The impact of AI and the profile of new directors: generalists or specialists 

The significant disruption caused by new technologies, particularly artificial intelligence, is reigniting the debate on how this aspect is reflected in the competency matrices for board renewal processes. Should we prioritize specialist or generalist profiles? How many specialist profiles can a board accommodate? How does the predominance of specialist profiles affect debate? What alternatives do boards have to incorporating an AI specialist in their next renewal? This debate will undoubtedly occupy significant space in nomination committee discussions and board meetings. 

Independence and the increasing influence of proprietary directors 

The reinforcement of shareholder blocs in various companies during 2023 has led to an increased presence of proprietary directors. All directors must protect the social interest, regardless of their category according to the LSC, but reducing or limiting independence levels directly impacts investors' perception of market competitiveness and attractiveness. The growing presence of proprietary directors necessitates discussing how to maintain independence levels that reassure minority shareholders their interests are not neglected. The debate on board independence will remain relevant because it touches the core of good corporate governance. This tension and the dilemmas it raises should encourage healthy debates in each board to find their "path towards strengthening independence," as it attracts capital, impacts valuation, and draws talent to boards and management teams. 

Succession plans 

Succession plans are a common area for improvement among many boards, as highlighted in our report on "The Strategic Role and New Challenges of the N&R Committees." Are we prepared to replace the CEO? This question is a call to action for all boards that have not structured a plan for this eventuality. The debate in the N&R committee and the board, the keys to a good succession plan, and the process for addressing it are essential. Boards that have not structured this process should tackle it, while those with a defined process should periodically review and update it. It is uncomfortable and complex, but necessary, as CEO turnover is inevitable, and it is the board’s responsibility to lead this process. 

Compensation and ESG 

The decision by two major Ibex companies to require independent directors to maintain a portion of their annual compensation in shares has sparked one of the most interesting and fresh corporate governance debates in Spain in recent years. This trend is likely to compel more boards to include this topic in their agendas, especially when submitting new compensation policies for shareholder approval next year. 

Additionally, some major Ibex35 companies have received over 20% negative votes on their 2024-2026 remuneration policies, leading to expectations from institutional investors and their advisors for responsive measures and greater scrutiny. Executive compensation remains a significant topic, further emphasized by the pressure to integrate ESG metrics and objectives into long-term incentive models and the impacts of the European transparency directive coming into effect in 2026. 

Talent management in strategic debate 

Boards must increasingly incorporate talent management into their strategic debates. Market dynamics, such as demographic aging, the emergence of new professions due to AI and other disruptive technologies, talent scarcity, and competition, require boards to address talent management strategically. This includes monitoring management, assessing risks, and supporting plans to mitigate talent-related impacts on strategic initiatives. 

Geopolitics in board agendas 

Strengthened geopolitical tensions in 2023 and 2024 have increased boards’ appetite for understanding their implications. Topics like the EU's strategic autonomy, supply chain impacts, industrial policy opportunities, and the effects of US and EU protection measures against Chinese imports are critical. The EsadeGeo model proposes three steps for integrating geopolitics into board agendas: analyzing geopolitical trends, maintaining public sector connections for better understanding, and managing risks and opportunities for the business.