If there is a single common denominator to many of the stories in this issue of NACD Directorship it is reason. And in matters pertaining to business disruptors, maintaining calm, cool objectivity is no easy task. Any discussion of this subject oftentimes elicits an emotional response. Disruption is typically considered a negative force, prompting apprehension and, sometimes, outright fear.
Take shareholder activism, which is a potentially disruptive force in any boardroom. Statistics tell part of how this story is playing out: The number of activist campaigns has increased 60 percent since 2010, according to Factiva, and activist funds control northward of $130 billion in assets, per Hedge Fund Research. Not so long ago, passive index investors like Vanguard depended largely on the proxy advisers to inform their voting, but that too has changed.
Corporate attorney Martin Lipton recently described a “new governance paradigm” by which major investors like BlackRock and Vanguard take their activism in-house, making our interview with McNabb ever more timely. “It is not likely that activism and short-termism will totally disappear,” Lipton wrote in a client memo in June and reiterated in a speech at the World Economic Forum in August, “but I’m comfortable that the influence of major investors will be more favorable to shareholders generally and to the nation’s economy and society, than the self-seeking personal greed of hedge fund activists.”
Today, Vanguard owns at least 1 percent of every publicly traded company in the Fortune 1000. What it desires is nothing less than long-term success for those companies. And, what could be more reasonable than that?
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.
Over the past decade, I’ve found that few factors have influenced the evolution of the board’s role more than new technology. From drones to 3-D printing to the latest cybersecurity tools, the transformative force of technological innovation is reshaping the competitive landscape and redefining best practices for corporate boards.
As I often discuss with our members, this shift presents both opportunity and risk, leaving many of us wondering how to best forecast—or “futurecast”—potential disruptors and achieve desired outcomes.
A great place to learn more about state-of-the-art technologies and how they’ll affect you is the 2015 Global Board Leaders’ Summit from September 26–29 in Washington, DC, where directors, innovators, and leading governance experts will gather under one roof to discuss this shifting corporate terrain and how to effectively navigate it.
For the first time ever, NACD’s largest annual gathering will feature “Innovation Nation”—a hands-on, interactive exhibit displaying the most buzz worthy cutting-edge technologies. Think drones, 3-D printing, Google Goggles, and more.
In addition to “Innovation Nation,” our summit agenda is packed with change-the-world-and-business-as-we-know-it sessions. Here’s just a sampling:
The big ideas and technologies of tomorrow are already changing the way we live and do business, but how we work together to transform those ideas and advances into high-value assets that will create a successful, sustainable future is what’s important.
And that’s our goal at this year’s annual summit. I hope you can join us.