Archive for the ‘Risk Management’ Category

Four Things Boards Should Know About Global Markets

October 29th, 2015 | By

Companies continue to face significant global economic uncertainty. Although U.S. economic prospects have improved in recent years, structural weaknesses in other regions pose significant challenges for multinational companies. To ensure their organizations thrive in this volatile environment, boards and senior executive teams must pay close attention to regional trends and international politics and how these affect the growing interdependence of markets worldwide. During a presentation at the 2015 NACD Global Board Leaders’ Summit, Kaushik Basu, chief economist and senior vice president of the World Bank Group, identified four major market conditions that will influence the growth prospects for many businesses.

Emerging Markets speaker Kaushik Basu

  1. The shape of the post-crisis recovery continues to change. In recent years economists have been hard-pressed to forecast how global markets will behave. After the 2008 financial crisis in the United States, economists initially anticipated a V-shaped recovery, in which the market hits bottom and then recovers. As it became clear that the recession would continue, they altered their predictions, asserting that the recovery would be U-shaped instead. When the European debt crisis occurred, economists then foretold a W-shaped recovery. The lesson seems to be that economic cycles have become less predictable and no longer adhere to historical patterns. In response to this increased uncertainty, directors and management teams must now expand their strategic planning process to incorporate a range of possible economic scenarios.
  2. The economic fortunes of emerging economies are not uniform. Brazil, India, and China are often touted as emerging centers of economic power; however, . In the past year only India and China saw growth in their gross domestic products, while Brazil—which has endured corruption scandals, tax increases, and spending cuts—has experienced virtually no economic growth. When discussing potential investments in these foreign markets, boards should require management to provide forward-looking country assessments in order to responsibly evaluate the potential risk and rewards.
  3. Economies are porous. Directors need to be aware that local economies are inextricably intertwined, and that deteriorating economic conditions in one country can therefore spread quickly to other nations. For example, the ramifications of slowing growth in China are significant because so many countries are increasingly dependent on continued Chinese investments and consumption. Africa, Latin America, and Germany are likely to suffer most as major exporters to China. Conversely, India’s economic growth has recently accelerated, due in part to structural tax reforms that have created a more welcoming investment climate, resulting in a rapid surge of foreign direct investment in 2014.
  4. Increasingly disparate monetary policies among the developed nations will have global economic ramifications. Directors will be expected to understand the consequences of divergent policies—especially those of developed countries—for the world’s biggest economic blocks. For example, the Federal Reserve is debating a possible rise in interest rates after seven consecutive years of record-low borrowing costs. While a rate hike would ostensibly strengthen the U.S. dollar by encouraging investments in this country, it could also raise the prices on U.S. exports and undercut the economic viability of U.S. products in foreign markets. In the Eurozone, the European Central Bank (ECB) has in recent years maintained loose fiscal policies, increasing the supply of money flowing through international markets in hopes of facilitating economic recovery. A U.S. interest-rate hike would result in a weaker euro, which in turn could lead to a boost for Eurozone economies because buying trends would begin to favor domestic products. On the other hand, tighter U.S. fiscal policies could readily be undone by the European Central Bank injecting even more liquidity into the markets to keep euro values low and maintain the viability of Europe’s export market. Emerging markets, too, might experience a negative impact from these proposed policy changes. Because they have been borrowing money in U.S. dollars at near-zero rates, these countries will almost certainly see an increase in debt and decreased economic growth if U.S. interest rates rise.

A Former White House CIO Discusses Data Hygiene and Cybersecurity Strategies

October 15th, 2015 | By

Consumers in the digital marketplace rarely think twice about allowing companies access to their personal information, and the companies that are amassing this data are enjoying the unprecedented business opportunities that such access entails. This exchange of information does, however, come with substantial liability risks; that information can easily fall into the wrong hands. This feature of the e-commerce landscape is causing both consumers and companies to ask: Is privacy dead in the Information Age? To explore this question, NACD Directorship Editor in Chief Judy Warner sat down with former White House Chief Information Officer and founder of consulting company Fortalice Theresa Payton during a Monday evening session at the 2015 NACD Global Board Leaders’ Summit.

Theresa Payton at 2015 Global Board Leaders' Summit

In short, privacy isn’t dead, but our concept of privacy is undergoing a transformation. Payton said that as business leaders and consumers, we need to have serious conversations about what the new—and correct—lines of privacy are. “We own some responsibilities as business leaders and government officials,” she said. “Data is hackable and breaches are inevitable. Don’t aid and abet hackers.”

It turns out that companies are inadvertently aiding and abetting hackers. First, some organizations fall victim to their own, outdated view of building cyber defenses: Set up as big a firewall as you can around the company’s data assets; install anti-malware and antivirus software—done. This is a losing defensive strategy; it fails to take into account the mechanics of how and why these major breaches continue to happen.

According to Payton, companies with poor data hygiene are the most susceptible to cyberattacks. When companies kept analog files, they would shred records when storage space was exhausted or when data reached a certain age. In a digital environment, storage space is cheap and seemingly limitless, meaning that data could—and probably will—live on servers for years. As time goes on and a company reorganizes, data is forgotten, creating prime points of entry for hackers. Adopting a data-“shredding” strategy is imperative.

In addition, the tools needed to hack into a system have become both affordable and readily available. Now anyone can be a hacker—and those who have chosen this path grow more adept at their craft every day. Taken altogether, this is a recipe for potential disaster.

Payton outlined best practices for maintaining optimal data hygiene:

  • Don’t keep all of your data in one place. For data you need to retain, “segment it to save it.” In other words, divide that information among multiple digital locations so that if one location is compromised, a hacker hasn’t gained access to the entirety of the data the company holds.
  • Create rules around when you no longer need data and set a schedule for “shredding” it.
  • “Shred” any data that you don’t need. Keep only data related to the attributes of consumer behaviors and get rid of the specifics (e.g., names and social security numbers). Doing so will reduce your risk of being held accountable when a breach happens.

Furthermore, she stressed that directors should be sure to ask certain questions as they work with management to hone the company’s cybersecurity strategies:

  • Have we identified our top critical assets—those that if held for ransom, lost, or divulged, would destroy us as a company?
  • Who has access to those assets? How do we grant access?
  • Have we drilled for a cyber breach disaster?
  • Do we have a liability plan that will cover the board should critical assets be breached?

Environmental and Innovative Disruption: What Directors Need to Know

August 31st, 2015 | By

On July 17, NACD hosted a Directorship 2020® forum in Seattle that focused on how disruptive forces are changing the way companies do business. Through keynote addresses, expert panels, and small group discussions, the program provided an in-depth look at environmental and innovative disruptive forces and how boards can oversee management of the risks and opportunities such forces create. This event was held in partnership with Broadridge Financial Solutions, KPMG’s Audit Committee Institute (ACI), Marsh & McClennan Cos., and PwC.

In his keynote address, Hewlett-Packard Co. (HP) Global Director of Sustainability and Social Innovation Nathan Hurst examined the nexus of environmental issues and innovative technology. Motivated in part by concerns about the anticipated effects of climate change, consumers are more alert than ever to the impacts that businesses and their products are having on the environment. As our increasingly data-driven society shifts to digital media, the new technologies being used to store, manage, and process this data are producing a larger environmental footprint than one might expect. Hurst estimates that if cloud computing were a country, it would rank as the fifth largest country in the world in terms of energy use.

According to Hurst, companies must understand their environmental footprint in order to leverage the opportunities provided by “big data” and other technological tools for managing corporate sustainability. HP, for example, examined its operations, supply chain, and product portfolio to gauge its end-to-end carbon footprint. This assessment involved an organization-wide effort that required expertise and feedback from senior management, information technology departments, and operations departments, which was then used to determine the company’s baseline performance, set sustainability goals, and collaborate with organizational units on initiatives to reach those goals. For Hewlett-Packard, the relationship with supply chain managers was especially important, as the company sought to develop products whose production consumes fewer resources—such as power or water—and generates less waste—such as greenhouse gas emissions. In addition, Hewlett-Packard signed a power purchase agreement with SunEdison, the world’s largest renewable development company, to provide wind-generated electricity to its 1.5 million square-foot data center in Texas. Hewlett-Packard originally set a deadline of 2020 for reducing its greenhouse gas emissions by 20 percent of 2010 levels; however, the SunEdison agreement will enable HP to realize that goal by the end of the 2015 fiscal year.

Hurst succinctly summarized HP’s rationale for its sustainability and social innovation initiatives:  the benefits of these initiatives for the company’s reputation and employee engagement, combined with new opportunities for profitable growth, collectively have the potential to produce major gains for HP.

In the second keynote address of the afternoon, Mark Silva, founder and CEO of KITE, spoke on innovation partnerships and described them as a gateway to investments, mergers, and acquisitions. Many companies at the forefront of innovation begin as small start-ups. While these businesses may initially be viewed as competitors with larger corporations, pursuing partnerships can be a mutually beneficial arrangement that allows established companies to embrace the latest wave of innovative ideas, provides start-ups with quick access to infrastructure and resources, and empowers both organizations to unlock growth opportunities. For example, the management team behind Sphero, a  toy robot that can be controlled via smartphone or tablet devices, participated in a mentorship program offered by The Walt Disney Co., which subsequently used Sphero’s technology to create a robot featured in its Star Wars franchise. Through this partnership, the Sphero team has realized growth and greater exposure; and by providing a forum in which entrepreneurs can test their ideas, Disney continues to stay abreast of the latest innovations and trends. Other established companies, including Nike and Unilever, have similar brand accelerator programs to rally resources, invest in learning, and develop new capabilities.

Subsequent presentations and panel discussions generated the following key takeaways for board members:

Keep disruptive forces on the agenda. Trends and events that could potentially overturn the company’s business model should be routinely discussed at board meetings so that directors are always aware of and up to date on how management is approaching risks and realizing opportunities. Being proactive and thinking ahead about how to manage disruptors also promotes resiliency when a company faces a crisis. Boardroom discussions should address how the organization can diversify its supply chain so that the success of the business is not dependent on a single link in the chain in order to maintain production. For example, the board might ask management to consider how environmental changes—such as prolonged droughts or severe weather patterns—might lead to new business norms, and to plan how the company will adapt and stay competitive. Panelists agreed that boards need to “ask for the data”: What questions are customers and suppliers posing? What factors are driving their business decisions? What are, or could be, the game-changers in the company’s industry?

Clarify the payoff. Directors should ask management to demonstrate how responses to disruptive trends will impact the company’s bottom line. Nathan Hurst illustrated this point with an example from Wal-Mart, which has worked with several of its suppliers to reduce waste and costs. Noting the high water content of its liquid laundry detergents, the retailer joined forces with Procter & Gamble, Unilever, and Church & Dwight to create “doubleconcentrated” detergent, a product that delivered the same washing power as the old formula in just half the volume. Because of doubleconcentrated’s reduced water content, manufacturers could pack the product in smaller plastic bottles. The new product size allowed more bottles of detergent to be packed onto trucks and store shelves, while its lighter weight resulted in lower transportation costs.

Companies can also consider incorporating sustainability metrics into executive compensation plans. Some companies will not embrace sustainability unless it entails demonstrable cost savings or a failure to address environmental impact will cause the company to lose ground to competitors. But, as the Hewlett-Packard and Wal-Mart initiatives illustrate, focusing on sustainability offers a way to drive more efficient business practices, which in turn allows management to make better-informed and more effective decisions.

Furthermore, sustainability reporting can foster positive relationships with both shareholders and the general public. According to an analysis by Gibson Dunn, shareholder proposals on environmental issues—specifically those concerning climate change and greenhouse gas emissions—are among the most frequently submitted types of proposals. NACD’s Oversight of Corporate Sustainability Activities handbook advises that directors should understand how the company has chosen to define sustainability in the context of its strategy, and the board should be comfortable with management’s decisions about how the company communicates sustainability information within the organization and to shareholders. Reporting not only demonstrates the company’s culture and character; it can also give it a competitive edge.

Examine board composition. Another example raised in the panel discussions was that of Encyclopædia Britannica Inc., which had a board composed of bookbinders who, by virtue of their profession, were disinclined to embrace digital innovation. The advent of Internet-based rivals, such as Wikipedia, quickly made the company’s business model and flagship product obsolete.

The board should analyze the company’s current and future business models to see how well the criteria for director selection correspond to those models. Maintaining a balance between tenured directors, who have invaluable insights into the company, and newer directors can present challenges when that new talent pushes against the status quo, which in turn can lead to culture clash within the board. Since culture, by definition, functions to preserve the status quo, it can make or break innovation. By bringing in outside perspectives and people who will question it, the board can keep the company moving forward.

For information on future events and recaps of past events, including video highlights of keynote speakers, visit the NACD Directorship 2020 microsite. To hear more from keynote speakers at past 2015 NACD Directorship 2020 events, join us at the NACD Global Board Leaders’ Summit, where Mark Silva, founder and CEO of KITE; Paul Taylor, former executive vice president of the Pew Research Center; and Scott Steinberg, CEO of TechSavvy Global, will be speaking on disruptive forces.

Additional Resources on Environmental and Innovative Disruption

Oversight of Corporate Sustainability Activities

Tools for Integrated Reporting

Sustainability Reporting: Demonstrating Commitment and Adding Value