Five Guiding Points for Directors in the Digital Age of Corporate Governance

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In an effort to stay relevant in today’s rapidly evolving digital landscape, directors of leading public and private companies from across the country recently attended the National Association of Corporate Directors’ Spring Forum in New York City.

This year’s topic, “Directors in the Digital Age,” included an agenda full of applicable topics, along with experienced directors and corporate governance experts there to help dedicated director attendees remain ahead of the curve.

One of the most interesting sessions during this year’s forum was the keynote conducted by Ed Ludwig, BD’s (Becton, Dickinson and Company) soon-to-retire chairman of the board. With more than 30 years of service at BD, Ed has personally experienced what it takes to lead in the boardroom and has personally advanced exemplary board leadership.

As Ed noted during his keynote, and as other attendees at the forum addressed, “the digital age—in which business transactions and information often move at the speed of light—has served to dramatically accelerate and amplify our successes and failures at leadership.” More than ever before, the digital age is impacting the boardroom in ways that directors must be prepared to address.

Although it is crucial to engage through digital mediums, there are fundamental guidelines corporate directors should follow in order to achieve sustainable long-term shareholder value creation, as well as to avoid shareholder value destruction. Here are a few of Ed’s tips:

1.      Choose the right CEO

Companies and circumstances call for different types of leadership and skills. There are, however, acknowledged universal skills that all CEOs should possess and values they should live by. This includes an unwavering ambition to serve the organization and society, combined with personal humility and acknowledgment on the part of leaders that at least some of their successes can be attributed to good, old-fashioned luck. In addition, leaders should be able to forge a strategic identity for the firm, build a shared commitment on the part of the organization and create a community of diversity.

2.      CEO Succession: Know What’s Needed Next

It’s never too soon to begin thinking about CEO succession, even with a newly appointed CEO. Every board of directors should ensure that its CEO succession plan includes a pool of potential next leaders with diverse experiences that will enable them to jump into action, if called upon, as the chief executive.

3.      Ensure There is an Effective Executive Leadership Team and System of Engagement for the CEO

It is equally important for an effective CEO to have the right leadership team working with him or her. These individuals must be genuinely exceptional in their own fields of expertise and also possess the ambitious leadership traits described for the CEO. Leaders of any organization must surround themselves with outstanding individuals that they trust completely to “speak truth to power.”

4.      Test Company Strategy to Make Sure It is Focused on Long-Term Shared Value Creation and Not Just Short-Term Operational Results 

Most agree that among the most important roles for directors is to ensure that the firm is pursuing the right strategy. Single dimensional, short-term shareholder value creation is no longer sufficient for companies. Global companies in the digital age must aspire to a higher purpose. Board members should ensure that the companies they oversee have realistic strategies aimed at long-term value creation.

 5.      Collaborate in Peer Forums, Commit to Continuous Learning and Remain in the Know 

Participating in peer exchange forums and professional educational programs are among the most important ways that directors can share and refresh their expertise and voices to focus on long-term shared value creation. In today’s new paradigm of capitalism, corporate director leadership will eventually reward both shareholders and other stakeholders in society. Peer exchanges and director education programs such as the NACD Spring Forum are among the best ways to share leading practices and to teach and learn from fellow participants.

While directors do not want checklists, mandates and unnecessary regulations to oversee their enterprises and drive effective board governance, the digital age demands that directors and their boards be nimble, innovative, ethical and value-producing entities on behalf of global stakeholders. So stay in the know and engage in director-led peer education. It is the best way to ensure our future growth and prosperity.

Ed’s perspectives are important for all directors to keep in mind, from those who are newly appointed to their first board positions to those who have been seasoned with years of experience. The accelerated pace of a global marketplace fueled by an increasingly reactive media environment requires a higher level of responsibility. As part of NACD’s mission to build better boards and further exemplary leadership, we will remain on the forefront of helping directors identify, interpret and gain insights and intelligence about current and emerging issues worthy of boardroom dialogue.

NACD Spearheads Alternative Solution to Mandatory Audit Firm Rotation

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Next week, the Public Company Accounting Oversight Board (PCAOB) will hold its second public hearing on a proposed rule that would mandate audit firm rotation for all publicly traded companies. One concept the PCAOB has floated is a requirement that public companies rotate audit firms at least every 10 years.

The concept has been floated as a way to address flagging investor confidence in the ability of public audit firms to maintain strict independence.  However, the proposal could have an unintended adverse and far-reaching impact on public companies, not only for directors but also for executives, investors and shareholders.

NACD members across the nation are raising concerns about this concept.  In response, NACD is leading an initiative to engage the corporate governance community and propose an alternative solution—one that allows directors to retain their governance authority while also addressing what the PCAOB perceives to be a lack of investor confidence in the processes by which companies ensure auditor independence.

Audit quality and independence are important issues for directors, and reassuring investor and regulator confidence is a worthy goal.  But in our view, mandatory auditor rotation devalues and undermines the important role boards—and audit committees in particular—play in helping auditors maintain independence, objectivity and skepticism.

In our formal comment letter to the PCAOB, NACD expressed concerns about this proposal on behalf of our members and the entire boardroom community.  We objected to a mandated “one-size-fits-all” solution that would detract from the authority of the audit committee, supplant the board’s governance process and possibly generate unintended risk for the company.

The NACD was not alone in raising questions about the concept. The public comment period triggered a record-breaking volume of comment letters to the PCAOB and vigorous discussion at a roundtable in which NACD participated here in Washington last March.  Several roundtable panelists suggested that NACD was a key source to weigh in on board-level solutions, and the PCAOB noted that it would be receptive to our input.

The NACD Audit Committee Chair Advisory Council is spearheading this initiative, building a coalition comprised of investor representatives (including the Council of Institutional Investors) and the audit profession (including the Center for Audit Quality).   This coalition has a dual mission:

  1. Identify and evaluate with the corporate governance community an alternative solution to mandated regulations on auditor rotation.
  2. Promote this solution within the community and advocate its beneficial effects to the PCAOB and other influencers.

Our goal is to provide our recommendations and rationale to the PCAOB no later than December 2012, in anticipation of the PCAOB finalizing its recommendations in early 2013.

We need your input.  As a first step to formulating an alternative solution to mandatory auditor rotation, we are asking our 12,000 members to offer their own insights on how boards—and audit committees in particular—can apply leading practices to build investor and public trust.

Click here to provide your thoughts through a brief electronic survey. Responses are anonymous and will only be reviewed in aggregate form.

Your participation in this initial survey is a first step in shaping a framework for recommendations that will guide audit committee behavior and actions on matters of auditor independence, objectivity and skepticism.  These recommendations will be shared with the director and investor communities over the course of the coming months.

Ultimately, NACD will deliver these recommendations to the PCAOB by the end of the year, and we will position those concepts as representative of the will and the expertise of the public company directors and boards.

At NACD, we are committed to advancing and promoting best practices of companies to ensure proper board oversight that protects shareholders, investors and employees.

Strategy in the Social Media Age: Not a One-Size-Fits-All Approach

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The first panel discussion of NACD’s Spring Forum, “Strategy in the Social Media Age,” was moderated by Christie Hefner, former chairman and CEO of Playboy Enterprises, and included Virginia Gambale, director of JetBlue and Piper Jaffray, Glenn Brown, director of Branded Content, Twitter, and director of Creative Commons, and Frank Eliason, senior vice president of social media, Citibank, director, Council of Better Business Bureaus, Society of Consumer Affairs Professionals.

Hefner began the panel by noting that many can recall when the Internet transformed every aspect of business, and companies had to start thinking of themselves as media companies to some degree. She explained it was time to start seeing social media in this same light, with companies now needing to think of themselves a technology companies.

One way social media is having an impact today is through reputation. There is a growing trend in reputation management because social media highlights your company’s culture for the world to see, Eliason said. Consumers are talking about products and employees may be explaining what it’s like to work at your company.

Brown suggested thinking about social media as having speaking and listening components. He pointed to Twitter as being a predominantly speaking environment but encouraged directors to think about listening side. He gave an example of listening on the micro-level, saying it could be as simple as a consumer giving feedback on a social media platform that a company can respond to on the spot.

He went on to note that people are talking about your company using social media whether your company uses social media or not. Brown said that it’s essential directors realize this conversation is already happening and that companies needed to ask if they want to host the conversation and what type of host they want to be.

Hefner asked each panelist to offer some guidance on social media and offered several suggestions of her own. She pointed to Starbucks adding a 29-year-old Google executive to its board and suggested boards think about if someone at that level would offer a needed perspective and expertise. Hefner also suggested establishing a multidisciplinary team, which includes a millennial, to set social media guidelines and ensuring that if your company has a digital officer position that it’s a c-suite position.

Gambale said it’s important to have someone on the board with digital expertise who can ask social media questions at a more granular level and to use plain language to have technology discussions. “Technology gets overly mystified,” she said.

Brown suggested companies study how social media is being used around them—whether it’s another company or to examine the unique ways celebrities and media professionals are using social media. They form interesting informal alliances with each other and their peers, he explained. They are not competitors, but they want to be associated with another area, he said. Brown also noted they are often able to gain a new audience.

Eliason urged the audience to find out what’s already being said about their companies.  He suggested searching Twitter and on Google blogs. He also highlighted the important of reputation management and establishing guidelines of how to manage it.