Archive for the ‘Leadership’ Category

The Environmental and Competitive Disruptors That Lie Ahead

July 23rd, 2014 | By

More than 100 directors gathered at The Ritz-Carlton, Denver on July 15 to learn about competitive and environmental forces that can disrupt business as usual.

The half-day symposium was the second of three NACD Directorship 2020® events this year. The forums are addressing seven disruptive forces (competition, demographics, economics, environment, geopolitics, innovation, and technology)—the major trends and transitions expected to drive significant change for companies and industries in the near future—and the implications for the boardroom.

Environmental Disruptors

Linda J. Fisher, vice president of safety, health, and environment and chief sustainability officer at DuPont, called attention to five key sustainability trends: population growth, water supply, climate change, resource scarcity, and circular economies.

Population growth. The earth’s population is expected to reach nine billion by 2050. Population growth will lead to increased demand for food and other goods, while supply may be limited. This could lead to price hikes, increased regulation, and shortages.

Water supply. Water will become limited somewhere within businesses’ value chains, potentially affecting—among other things—transportation of goods. In December 2012 and January 2013, low levels in Mississippi waterways resulted in more than $6 billion in commodity losses when barges carrying goods were unable to pass through the river, according to waterways groups.

Climate change. The Intergovernmental Panel on Climate Change reported last year that they are 95 percent sure that human activity is primarily responsible for global warming.

Resource scarcity. Focus also should be placed on resource efficiency concentrating mostly on improving building performance and food waste reduction.

Circular economies. Also gaining traction is the trend of circular economies in which products are designed so they can be used, deconstructed, and have the remaining materials captured for reuse or recycle.

And while companies are accustomed to the government regulating environmental issues, concerned consumers now are playing a regulatory role. These consumers increasingly are business savvy, understanding the degree to which companies rely on their reputations and brands. Activist consumers can call negative attention to a company’s brand until they see the change for which they have advocated.

These increased demands mean that companies should stay abreast of environmental and sustainability issues. There must be a balance found between sustainable market growth, environmental stewardship, and social responsibility.

Competitive Disruptors

Adam Hartung, managing partner at strategy consultancy Spark Partners, CEO of Soparfilm Energy Corp., board member of 6 Dimensions, and an NACD Fellow, shared his thoughts and concerns about the impact of competitive disruptors and how boards should help set the competitive edge at their companies.

People often think about bankruptcy filings as being the sign of business failure, but Hartung proposed that business failure begins when a company loses its relevancy.

He said the biggest risk to companies’ competitiveness is getting stuck maintaining the status quo. The secret of being successful in today’s marketplace is to overcome the “lock-in” to past successes.

Hartung detailed four steps that boards could take to stay competitive:

  1. Focus on trends and potential future competitors, rather than on companies that have been competitors in the past.
  2. Shift direction away from current solutions and customers’ desires and instead steer more toward marketplace needs and competitors.
  3. Ask how your company can disrupt the marketplace—not just how it can do things better, cheaper, and faster.
  4. Allow for white space innovation, in which creative thinkers (outside the board of directors) can develop business or product ideas that are outside the status quo. White space innovation can lead to ideas that will set the competitive curve in your industry.

How Boards Can Strengthen the Risk Oversight Dialogue With Management

July 10th, 2014 | By

This spring, members of the NACD Advisory Council on Risk Oversight convened in Washington, D.C., to discuss how boards can strengthen their dialogue with management on risk oversight. Participants—including Michael Hofmann, the former chief risk officer of Koch Industries and current director of Calpine—shared experiences, lessons learned, and effective approaches for embedding risk in board-level strategy dialogue. From that discussion—detailed in the meeting’s Summary of Proceedings—delegates focused on these steps directors can take. They include:

  • Establish a clear definition of what “risk” means at the company: For management and the board to work together, they need to establish a shared definition of what risk means to the company.
  • Monitor the company-wide risk culture: Directors should ensure that the company has a culture that supports the discussion of risk throughout the entire organization and is seen as part of the company’s fabric.
  • Avoid the trap of false precision: Looking at only the expected return of a new business program or strategic move can restrict dialogue and lead to minimization of the potential downside.
  • Get out of the weeds by taking a deep dive: To help counteract the tendency of boards and management to focus on operational, regulatory, and financial reporting risks, many boards conduct an annual “deep dive” or “off-site” meeting. These meetings are dedicated to thinking about, understanding, and challenging assumptions of strategic moves and risks.

The Summary of Proceedings also investigates ways in which directors can and do incorporate these practices into their boards’ activities. NACD members can click here to access the full list of takeaways.

How Boards Can Proactively Oversee Strategy and Risk

May 15th, 2014 | By

The 2013-2014 NACD Public Company Governance Survey found that strategic planning and oversight ranked as the number one issue for directors. While risk oversight came in at number 3, Paula Cholmondeley—who serves on the boards of Terex and Dentsply International Inc.—finds it curious that risk doesn’t follow strategy as the number 2 priority because these issues are part and parcel of each other.

During a May 6 panel discussion at the C-Suite to Board Seat program at the Four Seasons Hotel in Washington, D.C., Cholmondeley and fellow panelist Greg Pratt offered their perspectives on the board’s role in overseeing strategy and risk. Cholmondeley emphasized that strategic thinking is where directors add the most value to a company. Furthermore, boardroom discussions surrounding strategy should be viewed on an ongoing basis—not as a single event. Chairman of Carpenter Technology Group and director of Tredegar Corp., Pratt went on to  compare strategy to a GPS system:  A tool that tells you where you are, where you want to go, and the possible ways to reach that destination. According to Pratt, directors have a responsibility to use strategic discussions and planning to decide which route is best for the business.

THREE KEY TAKEAWAYS FOR OVERSEEING STRATEGY

1. Educate yourself—and others. This is especially important for directors serving on boards in industries in which they do not have prior experience. Reading industry publications, attending relevant conferences, and getting exposure to as many sources of industry information possible can help directors enrich board discussions. Similarly, directors should ensure that the strategic goals are well-known throughout the company. This could include requesting that the CEO meet with staff so that goals are communicated to the lower levels of the company.

2. Set reasonable benchmarks. Directors should consider the critical assumptions underpinning the strategic plan. For example, how much progress is the company expected to make in the course of a month? Evaluate whether those benchmarks are reasonable for your company by consulting regional or national industry sources as well as third-party sources.

3. Monitor the course and evolve the strategy. The board should consistently review corporate performance with respect to the strategy, and alter course when necessary. Boardroom culture should support open discussions with the c-suite—and management should feel free to report to the board areas where the strategy may or may not be working. As a company reacts to different economic environments, the board needs to be able to evaluate which initiatives worked, which initiative work over a period of time because they are key to your business.

THREE KEY TAKEAWAYS FOR MANAGING RISK

As stated in the 2009 Report on the NACD Blue Ribbon Commission on Risk Governance: Balancing Risk and Reward, “Every business model, business strategy, and business decision involves risk.” Risk may bring doubt, but it is the board’s role to work with management to find a balance between the costs and benefits of a strategic plan.

1. Get the committees involved. While ultimate responsibility for governing risk lies at the board level, the board can look to committees for support. In publically-traded companies, the audit committee has traditionally assumed the responsibility of risk oversight.  A growing trend, however, is to delegate specific risks to various standing committees. The board can also create new committees that manage the emerging facets of risk, such as keeping the board abreast of new sources of competition.

2. Work with management to assess risk. Open communication between management and the board is critical, especially because the C-suite is likely to be the first to see that a strategy is not working. Directors should learn how risk discussions take place within the various departments and business lines, and establish multiple avenues through which directors can work with management.

3. Be aware of the risks around the corner. The board should constantly review potential non-traditional sources of competition, for example, Amazon’s move to enter the dental distribution market.  Likewise, a company should work to make itself obsolete—best itself at its own game before the competition—and then create a strategy that will again put the company on the cutting edge of its industry.

NACD will continue to discuss these issues throughout 2014. Our Directorship 2020 events explore the disruptive forces that create new challenges in the boardroom and our forthcoming 2014 Blue Ribbon Commission Report will address the board’s role in recalibrating strategy. The topic will also be discussed at the next C-Suite to Board Seat in Beverly Hills, CA.