Category: Corporate Governance

Crickets, Divorce, Silicon Valley, and the Future of Governance

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One of my favorite comments from an attendee at last year’s Global Board Leaders’ Summit went something like this: “I was expecting to be informed; I wasn’t expecting to be inspired.” For a team that works year-round scouring the globe to discover and deliver to you voices that are shaping the future, that’s about as good as it gets.

KenSummitMainStage

This year’s Global Board Leaders’ Summit is on track to be our biggest ever, and one big feature of the Summit remains the same: a diverse array of thought leaders will share paradigm-shifting insights that will challenge the way you think about leadership, give you new tools to approach your directorship practice, and perhaps inspire you in surprising ways.

Here’s a sampling of some of the most exciting sessions at Summit this year:

  • Michelle Crosby’s start-up Wevorce is not only shaking up Silicon Valley, it’s turning the historic, antagonistic model of divorce on its head. The company’s mission is to “help couples ensure their divorce is less damaging to themselves, their finances, and the people they love.” Crosby was named one of the American Bar Association’s Legal Rebels in 2014, a distinction reserved for “lawyers who are breaking new ground using technology.” “Every institution is subject to change, and the more entrepreneurs who learn to work in the system to create that change, the further we’re going to get,” Crosby said in an interview with USA Today. In an intimate fireside chat, Crosby will discuss innovation, entrepreneurship, disruption, and how the company applies the Wevorce model to talent management inside the company.
  • Howard Ross, one of the most highly rated thought leaders at last year’s Summit, is back again to share insights from his groundbreaking work on unconscious bias, diversity, leadership, and organizational change. The question directors should ask themselves, says Ross, is not “Is there bias?” Rather, directors should ask one another, “What biases do we have that keep us from making choices counter to the values that we say we believe in?” Ross will open the Diversity Symposium on Saturday and will lead an in-depth workshop on Monday focusing on board dynamics.
  • The United Nations estimates that by 2025, two-thirds of the world’s population may face fresh water shortages, a critical concern for business and society. Whitewater rafting guide turned CEO Pat Crowley is betting that the solution to that crisis might literally be in our backyards. Crowley’s passion for the outdoors led him to work as a water resource planner, which drew his curiosity to crickets, of all things. “I heard about insects as a more environmentally friendly form of nutrition. From a water perspective, it was clearly a game-changer,” he said. Crowley founded Chapul, a company that makes cricket-based energy bars, in 2012, “to leap over this psychological hurdle of eating insects in the United States.” With explosive growth— 500 percent annually for the past two years alone—Crowley is on track to break through those barriers. On the summit mainstage on Monday, Crowley will discuss what it means to be part of building a new industry that is challenging societal norms, reshaping the competitive landscape, and may just help save the planet.
  • Phil Gilbert has been working with start-ups for the past 30 years, the most recent of which was acquired by IBM in 2010. Now Gilbert leads IBM’s design team with a focus on an empathy-centered workforce. Bringing a start-up mentality to 100-year-old company can be a challenge and almost immediately Gilbert was forced to confront a disconcerting question: “Is the entire way we’re working an anachronism?” Embracing that hard truth has been nothing short of transformational. Gilbert comes to the Summit mainstage to discuss lessons learned in this transformation. “We’re at an interesting crossroads in business. I think the way business is done and businesses work inside themselves has got to fundamentally change in the twenty-first century,” he said.
  • As managing director of famed Silicon Valley venture capital firm Andreessen Horowitz, Scott Kupor has been part of building brands like Airbnb, Buzzfeed, Facebook, Foursquare, Lyft, Pinterest, and Skype—companies that have become synonymous with disruption. “Things that are fringe today might become mainstream over time,” Kupor explained on Fox News back in June, describing the philosophy that underpins Andreessen Horowitz’s approach to finding the next disruptive trend. In a mainstage fireside chat Tuesday, Kupor will discuss this philosophy in context with everything from M&A activity and shareholder activism, to IPO trends and the next big innovations he sees poised to disrupt the business landscape.
  • When Chelsea Grayson took on the role of general counsel at American Apparel, she faced a daunting task: to help turn around a company that was operating in an increasingly competitive industry and was coming off of a tumultuous series of events, including high-profile sexual harassment allegations, layoffs, bankruptcy, and protests. In February, Grayson told the legal blog Above the Law, “I have been in-house for over a year now, and I have encountered just about every legal issue a general counsel might experience in an entire career.” Next month, Grayson will share her insights on governing complexity, a subject she has become adept at navigating during her tenure at American Apparel.

These are just a few snapshots of the incredible line-up of thought leaders who will join us in September. Want to learn more? View the full list of speakers and sessions at www.NACDonline.org/summit.

 

COSO ERM Revised: What It Means for Your Board

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Jim DeLoach

Jim DeLoach

Recently, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) released its updated enterprise risk management (ERM) framework for public exposure and comment. Why is it important for directors to heed and apply these updates to their work? What follows is a summary of five important insights for directors to implement in the boardroom from the revised framework.

1. Identifying risks to the execution of the strategy is not enough. Many organizations focus on identifying risks that might affect the execution of the chosen strategy. The process of identifying these risks is an inherently good exercise. However, COSO asserts that “risks to the strategy” are only one dimension of strategic risk. There are two additional dimensions to applying ERM in strategy setting that can significantly affect an enterprise’s risk profile.

  • The “possibility of strategy not aligning” with an organization’s mission, vision, and core values, which define what the organization is trying to achieve and how it intends to conduct business. Directors should ensure that the company doesn’t put into play a misaligned strategy that increases the possibility that the organization may run askew of its mission and vision, even if that strategy is successfully executed.
  • The “implications from the strategy.” COSO states: “When management develops a strategy and works through alternatives with the board, they make decisions on the tradeoffs inherent in the strategy. Each alternative strategy has its own risk profile—these are the implications from the strategy.” When overseeing the strategy-setting process, directors need to consider how the strategy works in tandem with the organization’s risk appetite, and how it will drive behavior across the organization in setting objectives, allocating resources, and making key decisions.

In summary, the updated COSO framework asserts that all three dimensions need to be considered as part of the strategy-setting process. Failure to address all three could result in unintended consequences that lead to missed opportunities or loss of enterprise value.

2. Recognizing and acting on market opportunities and emerging risks on a timely basis is a differentiating skill. COSO asserts that an organization can be viable in the long term only if it is able to anticipate and respond to change—not only to survive, but also to evolve. Enterprise resilience, or the ability to function as an early mover, is an indispensable characteristic in an uncertain business environment. Therefore, corporate strategies must accommodate uncertainty while staying true to the organization’s mission. Organizations need to exhibit traits that drive an effective response to change, including agile decision-making, the ability to respond in a cohesive manner, the adaptive capacity to reorganize, and high levels of trust and collaboration among stakeholders.

3. Strengthening risk governance and culture sets the right tone. Effective risk governance sets the tone for the organization and reinforces the importance of, and establishes oversight responsibilities for, ERM. In this context, culture pertains to ethical values and responsible business behaviors, particularly those reflected in decision-making. COSO asserts that several principles drive the risk governance and culture needed to lay a strong foundation for effective ERM:

  • fostering effective board risk oversight;
  • recognizing the risk profile introduced by the operating model;
  • encouraging risk awareness;
  • demonstrating commitment to integrity and ethics;
  • establishing accountability for ERM; and
  • attracting, developing, and retaining talented individuals.

Whether an organization considers itself risk averse, risk neutral, or risk aggressive, COSO suggests that it should encourage a risk-aware culture. A culture in alignment with COSO’s revised principles is characterized by strong leadership, a participative management style, accountability for actions and results, embedding risk in decision-making processes, and open and positive risk dialogues.

4. Advancing the risk appetite dialogue adds value to the strategy-setting process. The institution’s risk appetite statement is considered during the strategy-setting process, communicated by management, embraced by the board, and integrated across the organization. Risk appetite is shaped by the enterprise’s mission, vision, and core values, and considers its risk profile, risk capacity, risk capability, and maturity, culture, and business context.

To be useful, risk appetite must be driven down from the board and executives into the organization. To that end, COSO defines the “acceptable variation in performance” (sometimes referred to as risk tolerance) as the range of acceptable outcomes related to achieving a specific business objective. While risk appetite is broad, acceptable variation in performance is tactical and operational. Acceptable variation in performance relates risk appetite to specific business objectives and provides measures that can identify when risks to the achievement of those objectives emerge. Operating within acceptable parameters of variation in performance provides management with greater confidence that the entity remains within its risk appetite; in turn, this provides a higher degree of comfort that the entity will achieve its business objectives in a manner consistent with its mission, vision, and core values.

5. Monitoring what really matters is essential to effective ERM. The organization monitors risk management performance and how well the components of ERM function over time, in view of any substantial changes in the external or internal environment. If not considered on a timely basis, change can either create significant performance gaps vis-à-vis competitors or can invalidate the critical assumptions underlying the strategy. Monitoring of substantial changes is built into business processes in the ordinary course of running the business and conducted on a real-time basis. As ERM is integrated across the organization, the embedding of continuous evaluations can systematically assist leadership with identifying process improvements.

Following are some suggested questions that boards may consider, based on the risks inherent in the entity’s operations:

  • Is the board satisfied that the organization is adaptive to change, and that management is considering the effects of volatility, complexity, and uncertainty in the marketplace when evaluating alternative strategies and executing the current strategy?
  • Should management consider the principles supporting effective implementation of ERM, as set forth by COSO, to ascertain whether improvements are needed to the enterprise’s risk management capabilities?

 

Jim DeLoach is managing director with Protiviti, a global consulting firm. 

Turning ‘Commonsense’ Governance Into Common Practice

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Friso van der Oord

Friso van der Oord

The most powerful names in U.S. business have published guidance on Commonsense Principles of Corporate Governance (Commonsense Principles) to provide a framework to improve corporate governance and make it more long-term–oriented. Warren Buffett of Berkshire Hathaway, Laurence D. Fink of BlackRock, Jamie Dimon of JPMorgan Chase & Co., and others have outlined principles covering nine broad categories of governance issues that, while nonbinding, will likely spark an important dialogue in boardrooms. Eight of the categories have direct and far-reaching implications for boards, while the final group of principles relates to the role asset managers play in the governance arena. What makes this announcement unique is the unified position these leaders have taken behind one set of commonsense principles.

At the National Association of Corporate Directors (NACD), an organization that is advancing exemplary leadership among our community of 17,000 director members, our position is clear: We agree with many of the principles outlined and we can help boards implement effective governance practices. In fact, the Commonsense Principles reinforce the Key Agreed Principles to Strengthen Corporate Governance for U.S. Publicly Traded Companies that we introduced a few years ago.

While recognizing that the principles are not a one-size-fits-all solution, and that practices will likely differ based on size, industry, and specific company, we’ve included a practical list of next steps below that boards can take to implement the principles.

The Case for Improved Governance

Key drivers behind the 50+ nonbinding principles are the decline in the number of publicly traded firms, with many highly performing private companies delaying initial public offerings (IPOs), essentially reducing available investment opportunities; the current lack of trust between shareholders, boards, and management teams; concerns about the dominance of short-termism in the management of companies; and the complexity of current corporate governance rules.

The Commonsense Principles identify several areas for improvement:

  • Board agendas should include a focus on major strategic issues (including material mergers and acquisitions and major capital commitments) and long-term strategy, ensuring thorough consideration of operational and financial plans, quantitative and qualitative key performance indicators, and assessment of organic and inorganic growth, among other issues. A company should not feel obligated to provide earnings guidance, the business leaders suggest, and should determine whether providing earnings guidance for the company’s shareholders does more harm than good. Companies should frame their required quarterly reporting in the broader context of their articulated strategy and provide an outlook, as appropriate, for trends and metrics that reflect progress (or lack of progress) on long-term goals.
  • Every board needs a strong leader who is independent of management, the principles emphasize. The board’s independent directors usually are in the best position to evaluate whether the roles of chair and CEO should be separate or combined, and if the board decides on a combined role, it is essential that the board have a strong lead independent director with clearly defined authorities and responsibilities.
  • Diverse boards make better decisions, so every board should have members with complementary and diverse skills, backgrounds, and experiences. It’s also important to balance the wisdom and judgment that accompany experience and tenure with the need for the fresh thinking and perspectives that new board members can bring.
  • In financial reporting, the use of Generally Accepted Accounting Principles (GAAP) should not be obscured by the use of non-GAAP metrics.

Action Steps for Directors

You and your board/company may consider taking certain steps:

  • Review the principles in detail and benchmark your current governance approach against them.
  • Determine if identified differences are areas ripe for further discussion and possible change.
  • Engage your largest investors to get their take on the principles and how they plan to use them when assessing corporate governance effectiveness.

NACD Alignment With Commonsense Principles

Below I’ve highlighted just a few examples of how NACD aligns with the most significant principles. I have included links to NACD reports that can help boards make the Commonsense Principles common practice.

Focus on Long-Term Value Creation

The principles advocate for the creation of long-term shareholder value. Our guidance to members over the past several years has skewed unabashedly toward boards prioritizing long-term value creation. In fact, our 2015 Report of the NACD Blue Ribbon Commission on the Board and Long-Term Value Creation emphasizes the need for directors to align short-term goals—and executive compensation—with long-term strategy. The report provides tools and practical recommendations including, among others, the following:

  • Boards should consider recommending a move away from quarterly earnings guidance in favor of broader guidance parameters tied to long-term performance and strategic objectives.
  • The board’s CEO selection and evaluation processes should include an assessment of the extent to which he or she can be an effective advocate for the firm’s long-term strategy.
  • The nominating and governance committee should approach board composition and succession planning with long-term needs in mind, based on the director skills that will be most relevant to the company’s strategy in three, five, or more years.

Role of the Lead Director

The role of the lead independent director emerged as another key area where board effectiveness can improve. We at NACD believe that the lead independent director should spearhead efforts to intensify the board’s efficacy by identifying and addressing weaknesses in process and individual director performance. An effective lead independent director should be able to provide criticism that is both respectful and objective, and be able to ensure every director’s voice is heard. To put it simply, the lead independent director should bring out the very best in the board. Our NACD Blue Ribbon Commission Report on the Effective Lead Director provides practical guidance on how to do that.

Board Composition and Diversity

Public-company boards should have a diverse and complimentary mix of backgrounds, experiences, and skills, according to the Commonsense Principles. While this is an area in which we’ve not seen much movement—aside from a slight increase in gender diversity, with 79 percent of NACD survey respondents reporting they have at least one woman director on their board compared with 77 percent in 2014—our Report of the NACD Blue Ribbon Commission on the Diverse Board: Moving From Interest to Action provides very practical advice and tools, including a board-level discussion guide on diversity, that can help boards make diverse board composition a priority. Additional information can be found in NACD’s Board Diversity Resource Center.

Non-GAAP Financial Metrics

The use of non-GAAP metrics in financial reporting has been widely scrutinized by regulators. Mary Jo White, chair of the U.S. Securities and Exchange Commission, stated last December that non-GAAP metrics deserve “close attention, both to make sure that our current rules are being followed and to ask whether they are sufficiently robust in light of current market practices.” NACD’s Audit Committee Chair Advisory Council, a prestigious group of Fortune 500 committee chairs, met a few months ago to discuss the use of non-GAAP metrics. The council made an important recommendation:

From a governance perspective, audit committees should ensure that there are adequate controls in place to help mitigate the risk of management bias in measuring and reporting non-GAAP measures, and that these controls are frequently assessed.

For more information, please review the brief NACD Audit Committee Chair Advisory Council: Audit Committee Oversight of Non-GAAP Financial Measures.

Further Guidance

Our resources and messaging have always been—and will continue to be—shaped by directors who actively contribute to better board-governance practice. As the largest gathering of directors in the United States, NACD’s 2016 Global Board Leaders’ Summit will convene some of the best minds in governance to continue the dialogue on how boards can adopt leading practices. We believe in and strongly support good corporate governance and will continue to provide resources to help directors effectively oversee U.S. businesses. For more information on the governance principles NACD has established, please review our Key Agreed Principles to Strengthen Corporate Governance for U.S. Publicly Traded Companies.