Private Company Boards Focus on New Areas of Oversight, ESG Stagnates

Most private company directors believe that artificial intelligence (AI) will impact their businesses. However, less than one-tenth believe that their management teams are proficient with AI.

Comparatively, many private company directors believe that environmental, social, and governance (ESG) programs create long-term value within their organizations. Yet, according to the 2023 NACD Private Company Board Practices and Oversight Survey report released in late August, 38 percent say that their boards are not effective at integrating ESG into company strategy.

The report offers responses from 218 private company board members who answered the annual NACD survey between Apr. 3 and May 3, 2023. Below are some of the key takeaways from the report.

Burgeoning Areas of Oversight Grab Board Attention

Like their public company peers, private company boards are working to advance their oversight of significant new areas of focus for today’s companies. This includes AI and human capital.

While the latter has always been a key element of business, the COVID-19 pandemic, the Great Resignation, and the trend of “quiet quitting” pushed talent management to the board level. Now, private company boards are attempting to catch up to their public company peers when it comes to formalizing human capital oversight. For example, while only 28 percent of private company respondents say that their boards have assessed human capital-specific experience and expertise to identify board gaps, 52 percent of public company peers say the same. In addition, only 23 percent of private company respondents say that they have reviewed existing charters to ensure adequate oversight of human capital and 26 percent of private company respondents say that they have evaluated the effectiveness of their companies’ human resources leadership.

Boards are also keeping their eyes on the foreign and novel topic of AI. In fact, 93 percent of private company directors say that the increased adoption of AI tools will impact their businesses. At the same time, only 23 percent of respondents say that the topic of AI features regularly in board conversations. Additionally, less than 7 percent say that their management teams are very or extremely proficient with AI issues while 23 percent say that their management teams are not proficient at all. As AI technology, risks, and opportunities evolve, and as the effects of AI on the workforce begin to be felt and understood, private company boards will need to devote more attention to the topic and to consider whether they have the appropriate level of AI and human capital expertise within the management team and the boardroom. This will then determine whether they can find this expertise externally.

ESG Efforts Stall

Even in the face of public pushback against ESG initiatives and investing over the past year, 55 percent of private company board respondents continue to believe that ESG programs create long-term value at their companies. However, only 30 percent of respondents say that ESG issues have increased in priority. Meanwhile, 27 percent of respondents say that a lack of a clear definition and scope of what ESG means for their companies is the most challenging issue in providing oversight of ESG matters.

Regarding environmental issues specifically, 37 percent of private company respondents say that climate change is not a concern for their companies and only 22 percent say that the frequency of climate change-related discussions has increased over the past two years. This should prompt private company boards to revisit or rethink their climate strategies as some companies may soon be impacted by the Scope 3 emissions disclosure requirements in the U.S. Securities and Exchange Commission’s upcoming climate disclosure rule. More generally, private companies are not immune to the impacts of climate change. In fact, 30 percent of private company respondents say that unprecedented weather patterns will adversely impact their companies and supply chains in the next 5 to 10 years. Utilizing better integration of ESG into corporate strategies can only improve private company boards’ risk oversight and preparedness.

Board Culture Strengths and Weaknesses Come to Light

Whether a public company or a private company, a strong and intentional board culture is imperative to board agility and effectiveness. More so than public company boards, however, private company board culture appears to be affected by a lack of diversity. While 18 percent of public company respondents say that diverse perspectives are a significant barrier to sustaining an effective board culture, 27 percent of private company respondents say the same. Among the private companies served by responding board members, investor-owned organization boards have some of the lowest levels of diversity with 19 percent of these board seats held by women and 16 percent held by racially or ethnically diverse directors.

In addition, 52 percent of private company respondents say that a lack of board time spent together outside of formal meetings is among the most significant barriers to sustaining an effective board culture as are a lack of board turnover (21%) and problematic individual directors (21%). Private company boards may find it helpful to strengthen board culture by selecting the right board chair or lead independent director, as 59 percent of respondents say this is one of the factors that strengthened their culture the most. Developing a healthy board-management relationship (59%); ensuring diversity of thought, expertise, and experience (58%); and ensuring an environment conducive to candid conversations (55%) also strengthened the board culture of respondents.