While the Internet initially was a communication tool between the U.S. Department of Defense and multiple academic organizations, it has become the backbone of a global economy and government operations, the Hon. Tom Ridge told a rapt audience of more than 200 directors at the NACD Strategy & Risk Forum in San Diego. The first secretary of the U.S. Department of Homeland Security, Ridge currently serves as president and CEO of the strategic consulting firm Ridge Global and is a director for the Hershey Co. Ridge delivered the opening keynote to directors convened for the two-day forum co-hosted by the National Association of Corporate Directors (NACD) and its sponsors.
“We’ve come a long way from a simple communication tool,” Ridge said. “What’s really remarkable is the tool is designed to be an open platform.… It wasn’t designed to be secure. It wasn’t designed to be global. The ubiquity of the Internet is its strength, and the ubiquity of the Internet is its weakness. For every promise of connectivity, there’s a potential vulnerability.”
A report released last year by McKinsey & Co. and the World Economic Forum found that more than half of all respondents surveyed—and 70 percent of executives from financial institutions—view cybersecurity as a strategic risk to their companies. The report was based on interviews with more than 200 chief information officers, chief information security officers, law enforcement officials, and other practitioners in the United States and around the world.
“In this world, you’ve got to manage the risk before it manages you,” Ridge advised the audience.
Support for the forum was provided by BDO USA, the Center for Audit Quality, Dechert, Dentons, Diligent, Heidrick & Struggles, KPMG’s Audit Committee Institute, Latham & Watkins, Pearl Meyer & Partners, Rapid7, and Vinson & Elkins.
The Chattering Class
Risks to reputation are nuanced and numerous. Jonathan Blum, senior vice president and chief public affairs and global nutrition officer for Yum! Brands Inc., which operates 41,000 KFC, Pizza Hut, and Taco Bell restaurants worldwide, has seen firsthand the damage that can be done to a company’s reputation. He recounted an incident that hit the brand’s reputation and bottom line, and ultimately spurred substantial changes in the company’s supply chain.
In December 2012, a state-owned television network in China reported that some local poultry suppliers were putting unlawful amounts of antibiotics in chicken. One of the many suppliers investigated happened to be one of KFC’s suppliers, albeit one of the restaurant chain’s smallest. “But, because we’re the largest brand in China, not just the largest restaurant, we obviously bore the brunt of the publicity,” Blum said.
The most damaging aspect of the negative attention, according to Blum, was not the investigative report that aired on television, but rather the chatter on social media in the wake of the report. The fallout was a tarnished reputation, a sharp downturn in sales, and some decisive action.
“Consumer trust plummeted. Belief in our brand plummeted. Our sales plummeted. We saw a huge drop in our stock,” Blum said. “Now, this was at the end of 2012, so the impact on our financial results that year was negligible. Up until 2013, we had had a 10-year run of at least 10 percent [earnings per share] growth year over year, which is pretty unusual. In 2013, given the ditch we were in in China, our earnings per share dropped 9 percent. We lost $270 million in profit as a result of this incident, and it took about a year to rebound.” In the aftermath of the negative publicity, Yum! Brands learned that its stakeholders wanted answers to three questions:
What was being done about it?
How would the company would prevent it from happening again?
Yum! Brands apologized to the public, fired about 1,000 small poultry suppliers, and worked with the Chinese government to upgrade the quality of the poultry supply.
“Over time, that rebuilt consumer trust,” Blum said.
The company also took a significant step toward managing its reputation on social media. “As a result of this incident, around the globe, 24/7, we monitor what consumers are saying about us and we immediately respond,” Blum said.
The differences between nonprofit and corporate governance are few and far between when the nonprofit in question has a budget of almost $700 million and operations in more than 120 different countries. But when you are a nonprofit of this size, what should the board’s expectations of management be—and vice versa? Carolyn Miles, president and CEO of Save the Children, and Dona Young, who is a director on the Save the Children board, spoke with NACD Senior Advisor Jeffrey M. Cunningham about how directors can navigate the perils and opportunities of operating around the globe while fostering a top-notch organizational culture.
One of the problems of working in the nonprofit space is controversial topics—for example, immigration, an issue that came to a head with the recent influx of children crossing the U.S. border. For Miles, Save the Children didn’t adopt the attitude of choosing sides, but rather, they chose children. With that mindset, the organization was able to push beyond the immigration debate and focus on the issue of taking care of kids and ensuring their basic human rights. It’s a position that drew criticism but doing otherwise would have been a disservice to the company’s mission.
Both Miles and Young drove home the importance of bringing into the boardroom what’s going on in the field. Young emphasized the need of having a CEO who is continuously communicative with the board. Miles explained a practice she has used of bringing people who are working in the field to attend boardroom meetings and explain their needs to directors. Those lines of communication better inform the board and is a boon to helping the board helping the company accomplish its mission.
Miles also explained how Save the Children’s directors venture out to experience the work that their organization is doing, what she believes is a critical practice. Save the Children’s directors have been to the places that are the toughest—Afghanistan, Liberia, and Iraq. On a recent trip to Liberia, Miles was confronted with about 4,000 cases of Ebola in Liberia, which has created about 2,000 orphans. As a result, Save the Children wanted to consider sending aid, even though the issue at hand was out of the company’s traditional scope.
“We vet the issues together as a board,” Young said. “At the core of our mission, we have to assume risk.” She offered the following process of evaluating resources to ensure that the company can address a certain area of risk.
Identify each component of that risk.
Identify how each component is to be addressed.
Evaluate if the board has the skill sets to attack the issue at hand.
These are tactics that are as relevant for Save the Children as they are for a company such as IBM. Although the traditional scope of Save the Children’s activity did not lie within epidemic disease control, they did, however, know a lot of the pieces of how to assist (e.g., setting up hospital), and the company was able to respond to the Ebola crisis in the ways that it could and in a fashion that was true to its core mission.
Miles also discussed the importance of metrics. From her perspective, it is critical for nonprofits to focus on metrics and not just the “greater good of the cause.” If a company is able to produce palpable results, people who bankroll the organization look to their contributions not as a donation, but as an investment. Young added the importance of the board’s role as a steward of those funds, and the need for discipline and process—if that is not in place, there’s no way company is achieving its goals.
Over the past two decades, I’ve worked with an array of boards in multiple capacities—serving as general counsel, secretary, board advisor and board member.
In my current role as general counsel and head of NACD’s Board Advisory Services, I’ve had the opportunity to counsel and facilitate board evaluations for companies ranging from large family-run businesses to the top of the Fortune 500. Over the years, I’ve concluded: no board evaluation is truly holistic without some form of feedback from senior management.
The management team’s participation in the evaluation process creates a critical 360° view that often brings to light factors that are limiting the board’s ability to operate at peak performance. This approach can naturally raise some very sensitive issues between executives and directors. Yet my belief that anonymous, candid input from the management team is essential to a complete and credible evaluation remains constant.
The insights and information that the c-suite and beyond provide are invaluable. Not only does the input enhance the quality and validity of the evaluation, it typically uncovers information that will directly lead to concrete action steps to improve alignment between the board and senior management.
There are a couple of important dynamics that the evaluation process commonly uncovers:
Talent vs. Engagement
In more cases than not, management teams believe they have strong assets on the board. Yet they often find that some very qualified directors are not as engaged as they could be. The company is not fully benefiting from the wisdom and unique experience these talented advisors bring to the table.
Often, management sees—and reports to my team—that one or two strong personalities on the board dominate meetings, limiting the opportunity for others to contribute.
Tactics vs. Strategy
Many directors tend to drill down into tactical issues, moving away from the real responsibility of the board to provide strategic direction. The board may not realize how serious the issue is until the management team reveals the extent to which that misplaced focus hinders their ability to get things done.
Conversely, boards often find that it’s the management team that spends too much of the meeting focused on operational minutiae, trapping them in “PowerPoint hell.” With limited time for the full board to meet, the agenda should be devoted to the most critical strategic opportunities and risks facing the company. Operational and tactical issues should be reserved for the committees.
Interestingly, we’ve often found that the reason for this is that management tends to drive meeting agendas, which naturally results in a focus on operational issues. In most cases, management would welcome collaboration with the board on defining the agenda to ensure the board’s time is devoted to strategic discussion and risk oversight.
We recognize that giving management a voice in a board evaluation process can be extremely sensitive for both the board and management. To facilitate the most valuable and practicable outcomes from board evaluations, NACD’s approach ensures that feedback is completely anonymous with no risk of attribution. Our approach of weaving the results into strategic education lowers defensive barriers, enabling the “ah-ha moments” that focus the entire process on solutions rather than criticism.
Unless c-suite-boardroom disconnects are brought to light, they can fester and potentially jeopardize the organizational mission. Done right, the management team’s involvement in board evaluation clarifies expectations and fosters a healthier collaborative environment.
My experience has led me to conclude that senior management has a sincere desire to capitalize on the wisdom, leadership and unique business experience of each and every board member. By involving the management team in the evaluation process, boards capitalize on management’s expertise in the same way. Result: the organization’s full intellectual capital is leveraged for the collective benefit.