Category: Corporate Governance

Best Practices for Overseeing Talent and Tone

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A company’s human capital can be a complicated area of oversight for any board, especially when attentions must be turned to the top spot in the C-suite. Here, directors must ensure that the company is attracting and retaining the next generation of leading talent that will realize the company’s future success while setting a tone that promotes integrity throughout the organization.

A daunting task, yes, but one that’s not insurmountable.

The National Association of Corporate Directors (NACD) invited Blair Jones, a managing director at Semler Brossy Consulting Group, and Craig Woodfield, a partner at Grant Thornton and leader of the firm’s audit services practice, to offer their insights on these issues as part of a larger panel discussion at the Leading Minds of Governance–Southwest event.

Highlights from their conversation with NACD Directorship Publisher Christopher Y. Clark follow.


What is the compensation committee’s role in succession planning and talent development?

Blair-Jones

Blair Jones

Blair Jones: While responsibility for succession planning ultimately rests with the full board, there are a number of things the compensation committee can do from a process perspective to support this objective.

First, the committee can look at leadership competencies and the overall leadership development process. The succession plan needs to be supported by a pipeline of talent throughout the organization. And the committee needs to know how that pipeline is developed—be it on-the-job mentoring, developmental role assignments, action learning programs, individual coaching, or relationships with business schools. Consider bringing in a leader who has been involved in these leadership development programs to speak about their experiences.

Second, the compensation committee can spend time with high potential candidates at board dinners and through individual meetings. When the committee is determining end-of-year pay decisions, the CEO typically reviews people. Having met some of these individuals, it’s easier to participate in a discussion of what’s being done to take them to the next level. The committee can also make sure that the pay decisions actually fit the directions coming out of the succession planning process.

Compensation committees should also consider following results from employee engagement surveys. Ask: What do these results say about our ability to motivate talent and to retain them in the organization? This will help you get a better feel for the tone and culture of the company.

Look at diversity and inclusion initiatives. Understand the statistics and how those are changing over time throughout the organization. Also, spend time with talent management and succession planning the next level down. The board primarily works with the senior level, but the company’s future leaders are going to come from another level in the organization and the compensation committee can help with succession planning by taking an initial look at the next generation.

What are the best practices for the board to make sure the company has the right tone at the top?

Craig-Woodfield

Craig Woodfield

Craig Woodfield: I look at this from an auditor’s perspective, which defaults to the financial reporting side. The appropriate tone at the top deals with every risk of significance that could face a company.

Directors who are in a public company environment are probably familiar with the Committee of Sponsoring Organization of the Treadway Commission’s framework for internal controls and I would encourage private and nonprofit company directors to familiarize themselves with it. The revised framework from 2013 really is the gold standard and it applies to every company and every board. There are seventeen principles listed in that framework and the first five all deal with tone at the top issues. If you look at them, none of them are focused specifically on financial reporting.

As directors, we need to take these criteria seriously to ensure that there are structures in place that create a tone that promotes ethical values. The chief executive is the key here. As an auditor, I have a lot of exposure to public companies, and while most of them have a good tone, there are exceptions. The commonality among those exceptions is a chief executive who doesn’t have the right approach combined with a board that doesn’t have the right level of oversight.

Here are a couple warning signs: a chief executive who has a very domineering personality, that doesn’t take feedback well, or doesn’t respect the board’s responsibility to protect him or her. On the other side, if you have a weak leader and there’s a power vacuum at the top where there is no system of checks and balances, that’s an even greater warning sign because the board becomes dependent on each individual leader of each group within the organization. That situation is much more difficult to control.

We all want strong leadership in the companies we serve. One of the things that boards can do is help educate the chief executive about the nature of that relationship. And the role of the board is to help control that. A warning sign that that balance isn’t there is if we as board members don’t have access to the direct reports. And you want to empower the CEO—you don’t want to undermine or go around them. From an audit standpoint, it’s a real warning sign when the CEO or CFO tries to get in the way of the auditor or audit partner’s direct relationship with the board.


Want more? A panel of Fortune 500 company directors and subject matter experts will offer their insights on issues ranging from cyber resilience to the latest regulatory trends at Leading Minds of Governance–Southeast. Join us on March 16 in New Orleans, LA. Space is limited—register today.

Next week, coverage of the Leading Minds of Governance–Southwest event continues with highlights from a discussion on cyber risk and the legal liabilities of international companies.

The Board’s Role in Brand Oversight

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Jim DeLoach

Jim DeLoach

Branding is the process by which a company establishes a significant and differentiated presence in the marketplace that attracts and retains loyal, long-term customers. A strong brand has a significant impact on the company’s shareholder value. As such, the board should dedicate some time to oversight of the brand’s reputation and stability.

Several thoughts on the board’s governance and oversight of the company’s branding and brand management follow that are based on my firm’s experience and a recent NACD Dallas chapter roundtable discussion I facilitated in September involving active directors and marketing executives.

  • Understand the brand and brand portfolio. While the board’s governance role is rarely involved in the intricacies of managing or communicating the brand, directors should understand the company’s positioning and related brand promise. This baseline understanding is the price of entry into any conversation about a company’s branding. For example, what expectations does the brand inspire in current and prospective customers that differentiate the company’s offerings from competitors’ offerings? Does the company deliver on that brand promise in every customer interaction? Most importantly, how does management know this vital alignment exists? Consider brand implications from other aspects of the business, too: employee relations, supplier interactions, quality processes, research and development, and advertising.
  • Ask management where and when they would value input. Does the board clearly understand the type of interaction management would like to have with respect to the brand management process? Executives and directors should have a mutual objective: engage in dialogue in the right way and at the right time, and focus on the issues that most demand board oversight.
  • Think strategically about branding and brand management. Brand discussions are tied inextricably to discussions about strategy and markets. Therefore, the board’s focus should be directed to strategic oversight rather than to the tactical, day-to-day nuances of managing the brand or brand portfolio. For example, one company conducts a two-day strategy retreat where directors and senior management focus on important questions about what the future looks like, the pain points that present opportunities, what the company is doing to face the future confidently, and the adjustments necessary to the strategy. Debates about strategic direction incorporate discussions about the company’s markets, key differentiators, and brands.
  • Measure the contribution of branding to shareholder value. The level of investment in the company’s brands, the return on those investments, and the process for monitoring each brand’s performance are worthwhile topics on the board’s agenda. How is the company measuring the return on investment (ROI) and sustaining and increasing the contribution of branding to shareholder value? ROI can be difficult to measure because customer loyalty, which helps to promote stable cash flow over time, is an integral component. That said, the math underlying the cost of winning new customers versus that of retaining existing customers is not difficult to understand. Neither is the contribution of effective brand management to reducing the volatility associated with future growth expectations and economic downturns.
  • Be involved in discussions about new branding opportunities and building value from acquired brands. How does management decide whether to build or buy a brand to diversify the brand portfolio? This conversation can evolve into a mergers and acquisitions (M&A)-type dialogue that, if the transaction is significant, should take on all characteristics of board M&A oversight spanning the pre-acquisition, acquisition, and post-acquisition integration phases of the process. If the company is acquisitive, the board should understand the possible strategic contribution of acquired brands when approving the company’s strategic plan. The board may also want to become familiar with the M&A pipeline and the potential targets in management’s line of sight. If brand acquisitions are an integral part of the strategy, directors need to ensure that the management team includes individuals with the requisite skills to execute transactions and integrate acquired brands into the company’s portfolio.
  • Oversee the management of how risks impact branding. There are many risks to consider with respect to brand image. Risk management is an important skill from a branding standpoint because severe unmitigated risks can erode the value of a brand if there are persistent headlines about a high-profile crisis (e.g., data breaches, pervasive quality failures, corruption violations, litigation, and egregious financial restatements). In addition, when there is a re-branding with a new “look and feel” to the brand, a thorough search related to the proposed brand name, word marks, logos, tag lines, and other intellectual property (IP) should be conducted to ensure the new brand is unique and does not infringe on another company’s rights. As the initial years of using a new brand are a period in which opposition can be raised, an effective search process is a prudent investment to undertake before the company spends heavily on the roll out and advertising campaigns. Once a branding architecture is established and protected by trademark, there is a need to monitor and protect the brand from other users to avoid dilution.
  • Periodically evaluate the board’s experience and diversity. Directors with a background in marketing and/or experience with brand-driven organizations are more likely to be comfortable inquiring and raising issues about management’s branding process. Even though industry experience helps, this is an area where perspectives outside the industry may contribute even more value. As in other realms of oversight, the more diverse the board members’ experience and backgrounds, the healthier the debate leading to a more robust branding strategy.

An important closing comment: The board can help temper the propensity of an aggressive management team to develop or acquire new additions to the brand portfolio. Management must have the capacity to manage new and acquired brands to deliver to ROI expectations. The board can help management frame a realistic portfolio diversification strategy. Then, it’s up to management to execute.


Jim DeLoach is managing director with Protiviti, a global consulting firm. 

Directors Assess Long-Term Election Implications

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This is the second post in a series addressing the short- and long-term impacts of the 2016 presidential election. Read the first post here.

Directors gathered to discuss the impact of the recent presidential election on November 16, 2016 with audit and risk professionals from accounting firm EisnerAmper. While immediate-term changes were pressing on the minds of directors, they also discussed strategies to address societal and business challenges that coalesced around the following topics.

Can Corporations Bring Back Modern Manufacturing Jobs?

Directors were skeptical that the type of manufacturing jobs that have fueled American economic growth since the end of the second World War would ever return—and asserted that changes in trade agreements may directly impact the ability to create jobs.

peter-bible

Peter Bible

EisnerAmper Chief Risk Officer Peter Bible outlined how the developing administration of President-elect Donald Trump could affect the ability of American companies to export their goods. The Trans-Pacific Partnership (TPP) “is basically on hold now” said Bible. “He wants tariffs on China and Mexico, wants to renegotiate NAFTA, and reconsider the U.S.’s involvement in international trade agreement.” Bible also pointed out that the president can act unilaterally on trade agreements, thus negating congressional checks on trade decisions.

Jill Wittels, chair at eMagin Corp., voiced concern about the pace at which companies could replace factories to offset the impact of tariffs and build more jobs for Americans. “Imposing currency restrictions and tariffs on goods coming in from China, South America, or other parts of Asia would be highly disruptive,” Wittels said. “You don’t instantly create replacement factories in the U.S. at a comparable cost.”

robert-klatell

Robert Klatell

Robert Klatell, chair of TTM Technologies, concurred. “Realistically speaking, there is not that much flexibility. We cannot create in the United States the scale of manufacturing that exists in China,” Klatell said. “We don’t have the people or the capital to do it. We’ve rarely had a government willing to support manufacturing the same way that China has in the past 10 to 15 years.”

William Leidsdorf, director at Icahn Enterprises, offered a different viewpoint. “I think you have to look at how Congress may change or water down the president’s decisions,” Leidsdorf said. Trump “is a businessman. He’s a pretty good negotiator. He’s going to go in [to the presidency] and say he’ll do a lot of things and then negotiate.”

Educating the Workforce

Re-educating the American workforce has been a ubiquitous topic at roundtables co-hosted by NACD throughout 2016. This event was no exception.

sharon-manewitz

Sharon Manewitz

A vigorous discussion about the modern workforce was ignited when Carol Robbins, principal of financial services strategic advisory group CER Consulting, cited the invention of a garment-sewing robot as a groundbreaking technology likely to replace countless garment manufacturing workers around the world. Sharon Manewitz, principal and executive director at Manewitz Weiker Associates, a firm that consults with struggling companies, responded: “But who will make the robots? Will they be made here? We need corporate America to help educational institutions change the nature of education in America” to meet the demands of a knowledge-based economy.

The ability of the workforce to be retrained for modern jobs, and how automation will continue to disappear unskilled and lower-skilled positions, was discussed at length. Klatell, however, looked to the future. “Some people won’t make the transition, so we should be focusing on their children,” Klatell argued. “Hopefully, we can get their kids through school with a more meaningful education to make them more employable.”

Laurie Shahon, president of Wilton Capital Group, placed a board lens on some companies’ struggle to fill open positions in certain fields. “Human capital is an issue boards have to deal with,” Shahon said. “We see jobs available in financial services and other industries, but they can’t be filled because there aren’t sufficient qualified people to fill them. The board can and should present alternate cases in its strategy planning to address these changes.”

Deregulation Fallout

If Trump makes good on his campaign promises, deregulation is expected under the new administration and the forthcoming Republican majority congress. How long, though, can directors anticipate deregulated policies to last? Bible pointed out that the current administration might attempt to press through lingering Dodd-Frank provisions. However, he warned that deregulation could cause disruption. “These things are deeply rooted, with a lot of capital behind them,” Bible said. “You can’t just say ‘poof—gone.’ It’s impossible.” Practices that companies have implemented as a result of post-financial crisis legislation [such as the Dodd-Frank Act of 2012] are likely not to disappear as governance best practices because companies invested time, energy, and money to comply with them.

Meanwhile, directors in the room considered what impact deregulation might have on enforcement of the Foreign Corrupt Practices Act (FCPA) and other international business policies by the Department of Justice. Andrea Bonime-Blanc, founder of GEC Risk Advisory, reminded attendees that enforcement of the FCPA, the False Claims Act, and other laws has been on the rise lately. “People are asking, ‘What’s going to happen with FCPA enforcement?’” Bonime-Blanc asked. “Companies can’t just say ‘oh, let’s stop worrying about bribery.’”

Bible responded: “I believe that the FCPA will continue to be enforced as a worldwide standard, and that the new administration’s focus is going to be on executive compensation and on market regulation. I don’t think there will be an increase or a decrease in enforcement.” If anything, Bible indicated that directors should be concerned about the risk of tax repatriation from companies that have moved their headquarters offshore. “Is everyone familiar with how the overseas tax issue works?” Bible asked. “There is $2.6 trillion in money offshore, and $500 billion of that is held by tech companies. There are drives to get that money back into the U.S. economy that can be done without addressing the entire tax structure.”

Don’t Give Up on Culture of Inclusion

The social unrest incited or revealed by the vitriolic presidential election was discussed in the context of the culture of inclusion and tolerance that their companies have invested in building for decades. Aside of the moral imperative felt by many attendees, the disruption of hard-won corporate culture by internal or external actors could present a reputation risk to the company.

Wittels noted that a popular American shoe company had been endorsed by an incendiary website littered with forms of hate speech after a senior manager at the shoe company stated that it felt the country was moving in the right direction under the incoming president. While the company released statements strongly stating its commitment to principles of inclusion, “there are comments about boycott,” Wittels said. “This is a real reputational risk, and a risk with consumers, that could instantly in this communication age go viral and affect the bottom line.”

Klatell returned to the question of the board’s responsibility to ensure that the CEO, his direct reports, and management across the organization are responsible for maintaining a culture of respect, dignity, and inclusion. In the face of employees who may be looking to throw principles of inclusion out of the door, Klatell said: “I’d hope that most companies would stand up and say ‘No, this is what we stand for, and this is how we behave.’”

To see the full list of participants, please click here