Posts Tagged ‘Corporate Governance’

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.

The Value of Your Voice

April 22nd, 2014 | By

Here at NACD our annual governance surveys—publicprivate, and nonprofit—underlie nearly every aspect of the organization’s activity. From our Blue Ribbon Commission reports, to peer exchanges and our annual Board Leadership Conference, data collected from the thousands of respondents informs discussions, forums, topics, and future events. Beyond the boardroom, the trends, statistics, and perspectives captured in these surveys provide those in the C-suite, investors, and stakeholders with crucial information on the current state of corporate governance in the United States.

In the regulatory sphere, we use survey data to inform our comment letters and in-person testimony on behalf of boardrooms to regulators and lawmakers. Most recently, survey responses from NACD’s membership strengthened a December 2013 comment letter to the Securities and Exchange Commission on pay ratio disclosure.

NACD also uses the three annual governance surveys to create industry-specific one-page benchmark reports. Whether you use one of these or commission an NACD Custom Benchmarking Report, data broken down by industry, size, or both serves as an excellent starting point for boardroom discussions.

NACD is dedicated to providing directors with timely and pertinent content, but we need your input. As a thank you for participating in these surveys, NACD will send each participant a free electronic copy of the final report for each survey he or she takes. This is the sole opportunity for non-NACD members to receive a copy; once this window closes only NACD members and participants will be able to view the final report.

This investment of your time is critical to NACD’s ability to work for you. We thank you in advance for your participation.