This may be the most challenging—and interesting—time to serve on a US corporate board in the past few decades.

Twenty years ago, boards were predominantly responding to regulation stemming from the Sarbanes-Oxley Act, following the collapse of Enron and WorldCom. After the 2008 financial crisis, they were focused on complying with the Dodd-Frank Act.

Today, boards are responding to market forces that are driving a heightened focus on both “the what”—an array of environmental, social, and governance issues—and “the who”—a shift toward multistakeholder capitalism. At the same time, boards are navigating ESG backlash from multiple quarters.

 The Conference Board recently convened more than 200 executives for a series of roundtables to discuss the changing role of the board in the era of ESG and stakeholder capitalism. Drawing from that research, there are five key areas in which investors should expect more from boards—and be alert to red flags.

First, investors should seek clear evidence the board is making well-informed decisions as to what ESG issues to focus on and how they are balancing the interests of stakeholders. A clear majority of firms—68 percent—say ESG will have a significant and durable impact on the board in the next five years, according to our new research. More than half say the same of stakeholder capitalism. Investors should expect companies to clearly articulate the ESG issues that are not just “material” to a company, but that are strategically important. Boards should also have a decision-making framework that takes stakeholder impact into account.

Investors ought to be wary of companies that try to be all things to all people, or where management seems to be setting the course without strong board involvement.

The second area for heightened expectations is board composition and capabilities. Today, boards need to be an effective strategic partner with management as the company navigates a sustainability-related transformation of industry. More than half of S&P 500 directors, and one-third of the Russell 3000, have some form of ESG experience. More important than specific subject matter expertise, however, is experience in broad areas such as strategic planning, human capital, and adjacent industries that have undergone transformation.

Along with having the appropriate people in the boardroom, investors should expect boards to have a robust and ongoing education program that ensures board fluency in key areas. They should be alert to boards that are suited to a passive oversight role, populated with subject matter experts with narrow experience, or where directors’ experience is overstated or outdated.

Third, meeting the demands of this new era also requires that boards have the right leadership and committees. The board chair or lead independent director should be able to guide the board during a period of transformation. A board leader needs not only to be respected by fellow directors and management, but also to be open to change. 

Nearly 40 percent of the Russell 3000 assigns general ESG responsibilities to the board or a board committee. While committee responsibilities should vary by company, a potential red flag is that 68 percent of those firms have assigned general ESG responsibilities to the nominating and governance committee, and only 11 percent to the full board. Indeed, responsibility for climate is most often assigned to the nominating committee. It may not have the experience to oversee this area or to even to add strategic value to the discussion.

A fourth area for investor focus is how directors engage with investors and other stakeholders to gain fresh insights and supplement information from management. Boards rightfully rely mostly on management to learn how the company is integrating ESG into the company’s business strategy and operations, as well as addressing the expectations and interests of stakeholders.

At the same time, there is no substitute for first-hand exposure. Slightly over half of S&P 500 firms disclose that their directors have direct conversations with shareholders. More boards, especially at smaller firms, could benefit from the practice. Similarly, discussions between board members and employees can motivate both parties. Investors should be alert to boards that seem to operate in a bubble.

Finally, investors should look for boards to evaluate the company’s, senior management’s, and their own performance in ESG as an integral part of their annual review processes. Those reviews should also be aligned: If the transition to renewable energy, for example, is a key strategic focus, then investors should look at how it shows up at the company, management, and board levels.

Yellow, if not red, flags: When the board’s review of management’s ESG performance focuses on just a couple of metrics in executive compensation, or when the board’s annual self-evaluation process does not lead to changes over time. This is a highly dynamic business environment, so investors should expect and welcome an evolution in the board’s governance practices over time.

Even as the bar is being raised for boards, this new era does not fundamentally change the line between the roles of the board and management. Yet it does require boards to actively engage in setting the company’s course during an era of profound business transformation—and to do so in a way that optimizes sustained shareholder value and takes into account the impact on stakeholders, society at large, and the natural environment. For their part, investors should evaluate board composition, capabilities, and governance on a case-by-case basis with an eye toward assessing whether the company’s board has what it takes to serve this vital role.

This article was first published on the Barron’s website.