Category: Corporate Governance

Living in a Material World

Published by

Veena Ramani

It is clearer than ever before that sustainability practices can affect corporate value. That was the main thread of a panel that I led at the National Association of Corporate Directors’ 2016 Global Board Leaders’ Summit in Washington, D.C. My co-panelists Christianna Wood, director at H&R Block, and Seth Goldman, founder of Honest Tea, and I discussed the potential risks and opportunities that environmental and social issues pose to companies.

Sustainability is a broad term, and not every environmental or social issue belongs on the board agenda. But when an environmental or social issue has the potential to affect corporate revenue and earnings in the short and long term, sustainability absolutely should be on the table.

At the end of the day, it all comes down to materiality, and this is where corporate directors have a critical role to play.

Materiality is about determining a company’s priorities. As fiduciaries responsible for overseeing a company so that it not only survives but also thrives in the long term, directors have a responsibility to assess whether a company is making the right choices.

But the much harder question is: When does an environmental or social issue rise to the level of being material?

Here are some steps directors can take to drive discussions about whether sustainability issues are material to the companies that they oversee.

1.) Understand how sustainability is being integrated into your company’s efforts as a way to identify material issues.

There are a few ways to do this. Directors could point management towards the Sustainability Accounting Standards Board’s Company Implementation Guide, which provides a great starting point for companies to assess whether certain sustainability factors could be considered material for the purposes of the company’s financial filings. Directors could also integrate themselves more meaningfully into corporate efforts aimed at identifying material sustainability issues. They could provide perspectives on the connections between sustainability factors, corporate strategy, risk, and revenue.

2.) Include key issues being raised by critical stakeholders in the materiality exercise. 

While a broader range of stakeholders is raising a variety of issues these days, the financial community is a particularly critical constituency to direct attention towards. As we discussed in our panel, the U.S. investor community is starting to make the connections between sustainability and the financial value of companies in their portfolios. During the 2016 proxy season, close to 400 shareholder resolutions on climate change and other sustainability issues were filed. Large investors including CalPERS, CalSTRS and State Street Global Advisors are asking their portfolio companies to put directors with climate expertise on their boards.

In addition to tracking broad sustainability trends that investors are paying attention to, prudent directors could consider opportunities to engage directly with key shareholders to get a sense of issues specific to the company and the industry. Directors could also track and engage with the broader activist and advocacy community as a risk management exercise.

3.) Weigh in on the time frame over which issues are considered to be material.

Since the board in particular is responsible for long-term corporate performance, directors play an important role in examining whether their company’s materiality process focuses on considering issues over the long or short term.

Overall, momentum is building to adopt a more long-term view to encourage companies and boards to think more broadly about sustainability and materiality. The recently released Commonsense Corporate Governance Principles, which are backed by major U.S. companies including JPMorgan Chase & Co., Berkshire Hathaway, and Blackrock, support the move to long-term thinking. And more companies including Unilever, Coca Cola, and National Grid are moving away from the practice of issuing quarterly guidance specifically to encourage investors and other stakeholders to adopt long-term thinking.

4.) Disclose details on what you consider to be your company’s material priorities.

Noting that determinations of materiality depend on whom the company considers to be its most significant stakeholders, governance experts are starting to call on corporate boards to release a statement noting critical audiences that the company is oriented towards and issues that the corporation is prioritizing. Companies like the Dutch insurance company Aegon have started to issue such statements.

The process of helping to identify the right issues is just a first step in a director’s responsibility on materiality. Directors have an important role to play in ensuring that material issues, when identified are integrated into board deliberations on strategy, risk, revenue and accountability systems. However, getting to the right issues lays an important foundation for the company and its key stakeholders to build on.

Veena Ramani is a senior director at the sustainability nonprofit Ceres. She runs the organization’s program on corporate governance. She recently authored the report View From the Top: How Corporate Boards Engage on Sustainability Performance.

Help Your Company to Face Its Future Confidently

Published by
Jim DeLoach

Jim DeLoach

The uncertainty of looking to the future presses boards to consider how confident their senior executives and supporting teams are in executing strategy. How can the board help the companies they oversee to face the future with a greater sense of confidence?

Confidence is neither a cliché nor an assertion of mere optimism. Rather, it is a quality that drives leaders and their companies forward. The Oxford English Dictionary defines confidence as “the state of feeling certain about the truth of something” and “a feeling of self-assurance arising from one’s appreciation of one’s own abilities or qualities.” This definition focuses on the board and management’s appreciation of the collective capabilities of the enterprise, including the ability to carry out a company’s vision. It raises three fundamental questions:

  • Do we know where we’re going directionally and why? Are our people committed to achieving a common vision that is clearly articulated, meaningful, and aspirational?
  • Are we prepared for the journey? Does our staff have the capabilities to execute our strategy? Do we have a great team, a strong roadmap, and the required processes, systems and alliances, and sufficient resources to sustain our journey?
  • Do we possess the ability, will, and discipline to cope with change along the way, no matter what happens? Does our board have the mental toughness to stay on course? Is our management team agile and adaptive enough to recognize market opportunities and emerging risks, and capitalize on, endure, or overcome them by making timely adjustments to strategy and capabilities?

Definitive, positive responses to these questions from the board will enable confidence across the organization.

Looking back on experiences working with successful companies, seven attributes were identified that organizations must have when facing the uncertainty of future markets.

How to Build the Foundation for Confidence

  1. Confident organizations share commitment to a vision. Commitment to a vision provides a shared “future pull” that is both inspiring and motivating. This perspective fuels enterprise-wide focus and energy to learn, which encourages participation and altruistic camaraderie. An effective vision crafted by the board and executive team leads people at all levels of a company to recognize that the enterprise’s success and their personal success are inextricably linked.
  2. Confident organizations have a heightened awareness of the environment. A confident organization constantly reality tests its market understanding by facilitating effective listening to customers, suppliers, employees, and other stakeholders. Boards should encourage companies to generate sources of new learning, encouraging systemic thinking in distilling and acting on the environment feedback received, with the objective of driving continuous improvement. The confident organization fosters a culture of sharing and supports formal and informal continuous feedback loops to flatten the organization, get closer to the customer, and promote a preparedness mindset.
  3. Confident organizations align their required capabilities. It is a never-ending priority of the board to ensure that the right talent and capabilities are in place to achieve differentiation in the marketplace and execute strategies successfully. Capabilities include an enterprise’s superior know-how, innovative processes, proprietary systems, distinctive brands, collaborative cultures, and a unique set of supplier and customer relationships.

How to Sustain Confidence

Achieving a foundation of confidence is necessary, but alone is not enough without concerted efforts to sustain confidence. Astute directors and executives know that the ability, will, and discipline to cope with change are also needed to sustain their journey. Those winning traits are enabled by the attributes below.

  1. Confident organizations are risk-savvy. The confident organization is secure in the knowledge that it has considered all plausible risk scenarios, knows its breakpoint in the event of extreme scenarios, and has effective response plans in place (including plans to exit the strategy if circumstances warrant). Most importantly, the confident organization should have an effective early-warning capability in place to alert decision-makers of changes in the marketplace that affect the validity of critical strategic assumptions. In a truly confident organization, no idea or person is above challenge and contrarian views are welcomed.
  2. Confident organizations learn aggressively. Confident organizations improve their learning by: creating centers of excellence; embracing cutting-edge technology to drive the vision forward; fostering an open, transparent environment of ongoing knowledge sharing, networking, collaboration, and team learning; perceiving admission of errors as a strength and requiring learning from the missteps; and converting lessons learned into process improvements. Aggressive learning stimulates the collective genius of the entire enterprise.
  3. Confident organizations place a premium on creativity. Innovation should be an integral part of the corporate DNA of the confident company, and should be evidenced by setting accountability for results with innovation-focused metrics at the organizational, process, and individual levels to encourage and reward creativity. Companies committed to innovation have the creative capacity to take advantage of market opportunities and respond to emerging risks. When innovation is a strategic imperative, companies empower and reward their employees to take the appropriate risks to realize new ideas without encumbering them with the fear of repercussions if they aren’t successful.
  4. Confident organizations are resilient. Confident organizations have adaptive processes supported by disciplined decision-making, and are committed to adapt early to continuous and disruptive change. They have the will to stay the course when the going gets tough, and are prepared to act decisively to revise strategic plans in response to changing market realities. They do not allow competitors to gain advantage by building large capital reserves, having great relationships with their lenders, and by cultivating trusting relationships with their customers, vendors and shareholders. The strategies that their boards approve include triggers for contingency plans that directors and management will implement if certain predetermined events occur or conditions arise.

In summary, the speed of change continues to escalate, creating more uncertainty about future developments and outcomes. If there was ever a time for a board to assess an organization’s confidence, we believe it is now. It’s one thing to have a confident CEO, but if the people within the entity lack confidence, the organization itself may not have the creativity and resiliency needed to sustain a winning strategy.

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

Former CEOs Advise on Successful CEO Transitions

Published by

Patrick R. Dailey

The succession work boards oversee is more complex than it once was. Oversight of the internal talent pipeline has grown beyond a narrow focus on CEO successors to include other internal and external talent. This relatively new role for the board or governance committee demands the hands-on ability to assess upper-management aptitude and readiness for the top job.

On September 21, the NACD Atlanta Chapter invited three exemplary former CEOs who serve on public boards to advise Atlanta-area directors on how to navigate this more demanding process. The panel, moderated by NACD President Peter R. Gleason, was comprised of Richard Anderson, previously CEO of Delta Airlines, and member of the Cargill and Medtronic boards; Martha Brooks, former CEO of Alcan, and director of Bombardier and Jabil Circuit; and Frank Blake, former CEO and chair of Home Depot, and currently a director at Delta Airlines.

For context, CEO turnover within the world’s largest 2,500 companies has increased in recent years, according to a 2016 study by PwC titled 2015 CEO Success that analyzed CEO turnover data from 2015 in the U.S. and around the globe. Among the study’s findings were the following data:

  • CEO turnover around the globe reached a record rate of 16.6 percent.
  • In North America, the rate of CEO turnover was 14.3 percent.
  • Planned turnover accounted for 10.9 percent of all turnover indicated in the study.
  • Force-outs were reported at 3 percent.
  • CEO turnover triggered by mergers and acquisitions occurred at a rate of 2.8 percent globally and in the U.S.
  • Looking specifically at U.S. turnover data, of all CEO turnovers, 4.4 percent were planned and 2.2 percent of the CEOs were forced out.

The traditional tactic when seeking new CEO talent has been to “go inside” for the most qualified internal candidate, but boards are now deliberately bringing in external CEO candidates. When the same PwC study compared statistics from 2004 to 2015, the percentage of outsiders hired as CEO increased from 14 percent in 2004 to 22 percent in 2015—a 50 percent increase in external hires in 10 years.

Hiring an outsider to serve as CEO was once seen as a last resort—something that typically only happened when a board had to force out the incumbent CEO suddenly, had failed to groom a suitable successor, or both. In recent years, however, more companies have chosen an outsider CEO, and frequently as part of a planned succession.

The stakes are higher. The process is more transparent and invites activist investors, pundits, and media to scrutinize a company’s process and its decision. Often the current CEO is left somewhat in the dark about the progress and the remaining leadership team may just not know status, which leads to uncertainty and process dysfunction.

The distinguished panel offered these nine valuable lessons learned about successfully navigating this board responsibility.

  • Succession must be a CEO-driven process. The panelists urged that a board place the CEO in the middle of the succession process but not as a direct party to the final decision process. They argued that the current CEO brings unique knowledge and passion for the future of the business, and that he or she wants a leadership legacy that includes a smooth and smart transition to a new CEO. The CEO also knows the internal talent pipeline better than any director, which could be an asset to the board. The panel added that with the board’s involvement and perhaps that of external resources, the risk of the “favored son” effect could be mitigated.
  • Succession is a full-board endeavor. Ownership of the process, knowledge of internal candidate development, insight into what could potentially derail the process, external benchmarking, and strategic issues that await the new CEO are matters for the full board to address. Committees can execute on specific tasks but the work, insight, and decision-making process related to CEO succession must be owned by the full board.
    One committee member urged every board member to meet and assess final candidates against a written success and impact profile during lengthy one-on-one interviews. The panel expressed their belief that the successful candidate would develop a sound, unique relationship with each director. Panelists also perceive interviews as the gateway to relationship building and ultimately to the CEO being accepted into the board’s inner circle.
  • The lead director plays an integral role as mentor. The board’s succession method needs a quality control focal point, or someone who will manage group processes among directors so that the “loudest voices” around the boardroom table are not those that necessarily carry the most weight. The panel suggested that the board could task the lead director with this quality-control leadership.
  • Remember that the board’s loyalty belongs to the company—not the current CEO or internal candidates. The board needs and values input from the CEO and there may be internal candidates who are highly regarded. But decisions must be based single-mindedly upon duty-of-care philosophies—the company’s future.
  • Competition among internal candidates must be monitored and managed by the CEO and board. Internal candidates should be explicitly informed or they are likely to figure out whether or not they are a candidate for the CEO role. With that information or suspicion, a competitive “horse race” may begin and performance may peak. There is also the inevitable dysfunction that can occur between the contenders as well as their organizations as they “bid up” their candidacy. CEOs and lead directors may intervene to manage negative behavior, and reinforce that senior-level performance is a collective effort. Compensation schemes for these candidates should be aligned in the spirit that “we all row the boat together.”
  • Get a written exit report from the outgoing CEO. Have the CEO personally develop a lengthy perspective about the future focus of the business and the CEO’s most critical areas of personal attention. Develop an “issues list” of those matters that the new CEO will likely bump into in the market, inside the company, and with regulators. Ensure the list is heavy on issues and light on recommendations. Finally, ask the outgoing CEO to list what strategic items and enabling matters must be done by the incoming CEO.
  • Develop a plan for easing out a reluctant CEO. The chair or lead director must have a “personal legacy” discussion with the CEO, and the CEO will inevitably get the message that it’s time to transition, and yet the panel emphasized that this should be a clear—not a nuanced—discussion. Have a plan for how and when the cord will be cut and communicate that plan clearly.
  • Define how unsuccessful transition candidates will be treated. If these executives can see a good path forward, embrace them. If not, help them leave, and do so quickly.
  • With a C-suite succession event, corporate strategy is likely to change. The board should endeavor to ensure that a sound corporate culture makes it through the transition.

NACD offers research and expert commentary on the executive succession process. Review Success at the Top: CEO Evaluation and Succession, which is part of our Directors Handbook Series, and a succession guide authored by Korn Ferry executives for the September/October edition of NACD Directorship magazine.

Patrick R. Dailey is a partner in BoardQuest, a consultancy specializing in C-Suite and board performance matters, and a member of the NACD Atlanta Chapter advisory board.