Each year I find myself declaring that the profession of directorship has become more challenging than it was in the previous year. I believe we’ve now reached the point where we should recognize this escalation as the status quo, not an annual anomaly. The Securities and Exchange Commission’s director qualification disclosure requirements, the advent of proxy access, and the increasingly public role of shareholder activists have contributed to a business environment in which directors’ qualifications and performance are continually scrutinized.
NACD’s mission is to help directors lead with confidence—and to foster stakeholders’ confidence in their directors’ ability to effectively serve their companies. I’d like to highlight three critical issues that we believe directors—of all company types—should focus on during the year ahead.
1. Director Awareness
The dramatic slowdown in China’s economy, plummeting oil prices, recent terrorist activities, and the rise of the digital economy have put a fine point on the need for directors to be aware of disruptors that may cause a drastic change in sea conditions for their organizations.
No one can be expected to anticipate every potential disruption. (Who could have seen Uber idling around the corner?) But foresight comes down to one deceptively simple practice: asking the right questions. Are board members exploring the possible impacts of a terrorist act on the company’s supply chain, investigating their organization’s vulnerability to a cyber attack, or considering new competitors that can bring products to market faster than ever before and with nominal investment? Throughout 2016 our NACD Directorship 2020 initiative will continue to focus on disruptive forces, putting a spotlight on the issues that may affect your companies in the years to come.
It goes without saying that activist investors have gotten our attention. A record-setting 355 activist campaigns were announced in 2015, including 33 against Fortune 500 companies. Last year was also a record year in terms of activist campaigns resulting in board seats—127 resulted in at least one board seat for the activist or the activist’s appointee. Our own annual survey of public-company directors found that 20 percent of respondents’ boards were approached by an activist investor in the past year. But nearlyhalf of respondents reported that they are unprepared for an activist challenge.
Activists aren’t practicing black magic; they are performing effective due diligence and smart analytics on their holdings. Boards need to think like activists and anticipate the issues these investors may raise. Do your company’s metrics fall outside industry norms? Does your board composition have any perceived weaknesses? Do you engage with management about the assumptions that undergird your company’s strategy? In 2016, NACD will continue to provide resources that can help your boards to anticipate—and respond to—emerging issues.
M&A activity reached record levels in 2015. Given this phenomenon, it’s more critical than ever that boards understand their role in M&A. We believe it boils down to readiness and oversight.
At any given time, directors may need to consider either the sale of their own company or the purchase of another company. The board must carefully weigh all opportunities to buy or sell as part of its routine corporate oversight. Be on the lookout for NACD’s new M&A Board Resource Center, which will be available later this quarter. The center will serve as a one-stop shop to help boards participate effectively in the evaluation of proposed M&A transactions.
NACD Cyber Summit
On a final note, I’d like to call your attention to the 2016 NACD Cyber Summit, which will be held on June 15 in Chicago. With Congress now considering passage of a bill that would require companies to publicly identify the “cybersecurity experts” on their boards, scrutiny of the board’s role in cybersecurity oversight has never been greater. This year’s Cyber Summit will equip directors and management with the tools they need to foster cyber resiliency and confidently oversee cyber-risk management.
If you would like to receive additional resources on the three issues mentioned above or more information about the Cyber Summit, I encourage you to contact your dedicated NACD Concierge. If you have not yet had a chance to meet the concierge assigned to you, give us a call at 202-775-0509, and we’ll connect you.
Thank you for being an NACD member. I wish you a successful year ahead.
According to Confucius, one should “study the past if you want to define the future.” With that in mind, President and CEO Ken Daly led the session to officially kick off NACD’s future-defining initiative with panelists that have a storied history in the world of governance. The panel comprised Raymond Gilmartin, former president and CEO of Merck & Co., lead director at General Mills, and the newest member of NACD’s board of directors, and Myron Steele, Chief Justice, Delaware Supreme Court.
Based on the observation that capitalism is undergoing a profound shift as a result of shareholder activism, technology, and regulatory activity, work to define and shape NACD Directorship 2020 has been underway for several months. Starting this spring, NACD held three events to discuss and hone the direction of research topics in New York City, Chicago, and Los Angeles. Three areas came to the forefront: information flow, performance metrics, and disruptive technologies. For recaps of these sessions, visit nacdonline.org/directorship2020.
Changes in the Boardroom
According to Steele, the most significant changes in the boardroom have been the shift in dynamic of ownership from retail to institutional investors, and the dominance of independence in the boardroom. In the past, the majority of investors were retail, now 60 to 70 percent of stock ownership is in the hands of institutional investors.
As a result of Enron and WorldCom, Sarbanes-Oxley required the board to become more independent than ever before. And yet, as Chief Justice Steele observed, without an empirical study to support this requirement, the legislation missed the mark. Of the 17 directors on Enron’s board, 15 were independent and it “still resulted in a massive failure of corporate governance.”
In his remarks, Chief Justice Steele stressed his belief that regardless of who comprises the shareholders, authority, balanced with accountability, rests with directors. “It is still fundamentally the responsibility of directors to manage the corporation with oversight, loyalty, and care. Also the underlying dynamic has changed, the authority and accountability of directors has not.”
TSR and Short-Termism
Continuing off a theme that began last night with keynote speaker Raj Sisodia, Gilmartin addressed the increasing focus placed on generating short-term quarterly results. Maximizing shareholder value above all else has reinforced practices that can be detrimental to society. Although some practices, such as laying employees off, are sometimes required, they are currently being used with a frequency that destroys long-term value and the future survival of an institution.
But directors have an opportunity to change this. NACD Directorship 2020, according to Gilmartin, “allows an opportunity to challenge the conventional wisdom that has developed over the last few years.”
Innovation and Risk Taking
Both Chief Justice Steele and Gilmartin emphasized the need for innovation and risk-taking in boardroom culture. In addition to using incentive systems that focus on the creation of long-term value, Gilmartin suggested using the company’s ability to innovate as a performance metric.
Chief Justice Steele addressed the increasingly litigious nature of directorship, which as Ken Daly noted has become, “not if you’ll be sued, but when you’ll be sued.” According to Chief Justice Steele, the business judgment rule is alive and thriving. Directors should feel free to take the necessary bold steps to create economic value. “Society is dependent upon a board being empowered to take risks on behalf of shareholders—that is what builds the economy.”
National Association of Corporate Directors (NACD) President and CEO Ken Daly opened the second day of the annual NACD Board Leadership Conference with a status report of where the organization is now and where it is headed.
14,000: Number of NACD members.
75: Percentage of members who are public company directors (about 1,000 are full board members).
93: Percentage of member retention.
3,000: Participants in 2013 NACD education events.
10,000: Number of NACD webinar viewers.
1,000: Number of NACD Fellows.
22: Number of NACD chapters—5,500 people attended chapter events.
28: Pieces of intellectual capital NACD has produced this year.
4: Number of NACD advisory councils, which focused on board committees (audit, compensation, nom/gov, and risk).
NACD Directorship 2020™ is the main vehicle that NACD will use to drive conversation about the future of the boardroom. Directorship in 2020 and beyond will undoubtedly provide new opportunities and thus, will require innovative resources that directors must be prepared to embrace. NACD Directorship 2020 convened three meetings across the country this year that will inform the dialogue going forward, and more events are set for 2014.
Additionally, NACD is planning a meeting on capital markets which will convene institutional investors and directors to begin a dialogue about priorities for the future.