Governance Perspectives: Courage, Curiosity, and Aligned Compensation

By Lindsay Patrick
Published May 30, 2023 | 2 min read

The integration of ESG criteria into executive compensation has grown in prominence over the last year. RBC Capital Markets recently convened a panel discussion on best practices in board governance and drew perspectives from a group of leading board directors, executive management, and institutional investors.

Here are our key takeaways from the discussion:


The Importance of Diversity of Thought and the Courage to Constructively Challenge

The ability to navigate complexity was highlighted by speakers as an important skill for board directors, particularly in the context of being forward-thinking, attuned to the evolving global risk environment, and able to anticipate how macro developments may translate into emerging risks or opportunities for a specific business. Having the courage to speak up and constructively challenge assumptions was also underscored as an essential trait of effective board directors. One speaker noted that some of the greatest corporate risks that they had witnessed in their career came about because of blind spots caused by groupthink. These blind spots, the speaker reflected, could have been avoided with greater diversity, observing that “diversity of thought comes from diversity of representation.”

“The courage to speak up and constructively challenge assumptions is of critical importance in a rapidly changing external environment. The discussion today reinforced how essential this trait is for effective board leadership and for the creation of long-term stakeholder value.”

- Michael Fortier, Vice Chairman, RBC Capital Markets


Always Learning, Staying Curious, and Owning Your Development

Speakers agreed that sector-relevant expertise was of the greatest importance for board directors and noted the benefits of seeking out advice from a roster of external thought leaders on the sustainability issues that are most material to the company in question. The importance of staying curious and educating oneself was another theme that came up throughout the discussion; in a time of rapid change, staying accountable for one’s own continuous learning is essential. Taking a “portfolio” approach to board commitments, with exposure to different sustainability considerations across a variety of industries, was also highlighted as beneficial.

“It is very clear that ESG-related considerations are at the top of the agenda for boards and investors alike. Our panel showcased a diversity of best practices in board governance, with the value of critical thinking, continuous learning, and robust data and metrics emerging as especially important.”

- Anne-Marie Monette, Director, Institutional Equity and ESG Sales, RBC Capital Markets


Aligning Compensation: Linking Executive Remuneration to ESG Targets

One speaker described proxy reports as the “mirror to the soul of a company” – if stakeholders are curious about a company’s values and culture, then the proxy report and executive compensation structure can provide invaluable insight into the motivations of senior management. The importance of establishing quantifiable, easy-to-understand ESG targets in order to align incentives across the entire value chain was also underscored by several speakers. Linking executive compensation to ESG targets was highlighted as an essential tool for accountability; one speaker noted that his team had voted against “say on pay” proposals where companies claimed to have sustainability as core to their corporate strategy but failed to integrate ESG metrics in executive compensation.


Closing Thoughts

In a time of significant change in the external environment, the value of an effective board – marked by a thoughtful composition of sector-relevant expertise, a culture in which constructive challenge is valued, and a shared focus on continued learning and development – is especially evident. The role of aligned incentives in the advancement of an organization’s ESG strategy, specifically the linking of executive compensation to ESG targets as a mechanism to strengthen accountability, continues to grow as an important area of focus for many organizations. As our speakers noted, these themes will continue to develop and shape the future of effective board governance in the years ahead, and we look forward to sharing our perspectives as key trends evolve.

Lindsay Patrick

Lindsay Patrick
Head, Strategic Initiatives and ESG

GovernanceSustainabilitySustainable Finance