NACD’s thought-leadership forum, Master Class, convened in Fort Lauderdale, Florida, late last year to discuss how corporate governance is adapting to the current operating environment. Dialogue among directors and session leaders at the event revealed 10 insightful takeaways:
Board engagement in strategy development is a sign of healthy board-management engagement. The board’s role is to question the CEO’s strategy assumptions, offer alternatives, and ensure a long-term value creation. Senior management’s job is to execute the strategy.
Given the complexity of today’s operating environment, it is even more important to stay attuned to disruptive competition in the company’s industry. Spend time outside of board meetings learning which changes—in technology, policy, or through stakeholder demands, for example—are emerging and how your company should address those disruptions.
Demonstrate directors’ commitment to continued education in communications with shareholders, employees, and other stakeholders. While your board may feel that current director evaluations and education requirements are sufficient, review your director education program to ensure that board members’ skills are being enhanced to keep pace with the changing operating environment.
Consider taking a few steps to enhance recruitment of and onboarding for new directors:
Consider not only the board’s recruitment needs in the next year, but also in the next several years as directors leave the board and as company strategy evolves.
Establish a requirement that the director pipeline includes candidates from diverse backgrounds.
Tailor new-director onboarding programs to individual directors.
Convey a sense of your board’s dynamics with each other and with management to both prospective and new directors.
Determine whether the skillset matrix tests for skills that are necessary for the company strategy. While directors currently serving on the board may have had the skills to help the company achieve its prior strategy, realize that the directors sitting on the board today should be measured against the new ruler of current and future strategy expectations.
Review your board’s bylaws and committee charters to determine whether the documents offer any detail about how directors oversee cultural risk. Probe management about culture. Given recent corporate scandals relating to unhealthy corporate culture, consider adding language to your bylaws and charters to demonstrate a commitment to healthy company culture. Take this commitment a step forward by probing management about how the company currently cultivates a healthy, ethical culture.
Look beyond the information management has presented you to determine the company’s cultural dynamics among not only senior management, but also lower- and mid-level managers. Review online employee satisfaction websites to gauge morale and determine whether behaviors incentivized are realistic and healthy.
Question the quality and volume of information being given to the board on enterprise risks. If the board is receiving 1,000 pages of information monthly about risks, ask whether the board can realistically absorb that information. Ask the chief risk officer to provide the board with a more brief and concentrated view of the risks that need to be addressed, and spend time drilling down on the most pertinent risks, including those that may be sleeping giants.
When stumped on strategy, go back to the beginning. Ask often why the company was founded and what problem the company should help clients or consumers solve. Having a renewed vision of the founder’s mission can help provide fodder as to how to revive that vision in light of today’s operating environment.
Dive deep into consumer trends and behaviors, when considering appropriate strategies. While it may be easy to become mired in the highly technical nature of directorship and oversight, realize that great insight can come from aligning company strategy so that it satisfies customers’ needs and wants.
The most powerful names in U.S. business have published guidance on Commonsense Principles of Corporate Governance (Commonsense Principles) to provide a framework to improve corporate governance and make it more long-term–oriented. Warren Buffett of Berkshire Hathaway, Laurence D. Fink of BlackRock, Jamie Dimon of JPMorgan Chase & Co., and others have outlined principles covering nine broad categories of governance issues that, while nonbinding, will likely spark an important dialogue in boardrooms. Eight of the categories have direct and far-reaching implications for boards, while the final group of principles relates to the role asset managers play in the governance arena. What makes this announcement unique is the unified position these leaders have taken behind one set of commonsense principles.
At the National Association of Corporate Directors (NACD), an organization that is advancing exemplary leadership among our community of 17,000 director members, our position is clear: We agree with many of the principles outlined and we can help boards implement effective governance practices. In fact, the Commonsense Principles reinforce the Key Agreed Principles to Strengthen Corporate Governance for U.S. Publicly Traded Companies that we introduced a few years ago.
While recognizing that the principles are not a one-size-fits-all solution, and that practices will likely differ based on size, industry, and specific company, we’ve included a practical list of next steps below that boards can take to implement the principles.
The Case for Improved Governance
Key drivers behind the 50+ nonbinding principles are the decline in the number of publicly traded firms, with many highly performing private companies delaying initial public offerings (IPOs), essentially reducing available investment opportunities; the current lack of trust between shareholders, boards, and management teams; concerns about the dominance of short-termism in the management of companies; and the complexity of current corporate governance rules.
The Commonsense Principles identify several areas for improvement:
Board agendas should include a focus on major strategic issues (including material mergers and acquisitions and major capital commitments) and long-term strategy, ensuring thorough consideration of operational and financial plans, quantitative and qualitative key performance indicators, and assessment of organic and inorganic growth, among other issues. A company should not feel obligated to provide earnings guidance, the business leaders suggest, and should determine whether providing earnings guidance for the company’s shareholders does more harm than good. Companies should frame their required quarterly reporting in the broader context of their articulated strategy and provide an outlook, as appropriate, for trends and metrics that reflect progress (or lack of progress) on long-term goals.
Every board needs a strong leader who is independent of management, the principles emphasize. The board’s independent directors usually are in the best position to evaluate whether the roles of chair and CEO should be separate or combined, and if the board decides on a combined role, it is essential that the board have a strong lead independent director with clearly defined authorities and responsibilities.
Diverse boards make better decisions, so every board should have members with complementary and diverse skills, backgrounds, and experiences. It’s also important to balance the wisdom and judgment that accompany experience and tenure with the need for the fresh thinking and perspectives that new board members can bring.
In financial reporting, the use of Generally Accepted Accounting Principles (GAAP) should not be obscured by the use of non-GAAP metrics.
Action Steps for Directors
You and your board/company may consider taking certain steps:
Review the principles in detail and benchmark your current governance approach against them.
Determine if identified differences are areas ripe for further discussion and possible change.
Engage your largest investors to get their take on the principles and how they plan to use them when assessing corporate governance effectiveness.
NACD Alignment With Commonsense Principles
Below I’ve highlighted just a few examples of how NACD aligns with the most significant principles. I have included links to NACD reports that can help boards make the Commonsense Principles common practice.
Focus on Long-Term Value Creation
The principles advocate for the creation of long-term shareholder value. Our guidance to members over the past several years has skewed unabashedly toward boards prioritizing long-term value creation. In fact, our 2015 Report of the NACD Blue Ribbon Commission on the Board and Long-Term Value Creation emphasizes the need for directors to align short-term goals—and executive compensation—with long-term strategy. The report provides tools and practical recommendations including, among others, the following:
Boards should consider recommending a move away from quarterly earnings guidance in favor of broader guidance parameters tied to long-term performance and strategic objectives.
The board’s CEO selection and evaluation processes should include an assessment of the extent to which he or she can be an effective advocate for the firm’s long-term strategy.
The nominating and governance committee should approach board composition and succession planning with long-term needs in mind, based on the director skills that will be most relevant to the company’s strategy in three, five, or more years.
Role of the Lead Director
The role of the lead independent director emerged as another key area where board effectiveness can improve. We at NACD believe that the lead independent director should spearhead efforts to intensify the board’s efficacy by identifying and addressing weaknesses in process and individual director performance. An effective lead independent director should be able to provide criticism that is both respectful and objective, and be able to ensure every director’s voice is heard. To put it simply, the lead independent director should bring out the very best in the board. Our NACD Blue Ribbon Commission Report on the Effective Lead Director provides practical guidance on how to do that.
Board Composition and Diversity
Public-company boards should have a diverse and complimentary mix of backgrounds, experiences, and skills, according to the Commonsense Principles. While this is an area in which we’ve not seen much movement—aside from a slight increase in gender diversity, with 79 percent of NACD survey respondents reporting they have at least one woman director on their board compared with 77 percent in 2014—our Report of the NACD Blue Ribbon Commission on the Diverse Board: Moving From Interest to Action provides very practical advice and tools, including a board-level discussion guide on diversity, that can help boards make diverse board composition a priority. Additional information can be found in NACD’s Board Diversity Resource Center.
Non-GAAP Financial Metrics
The use of non-GAAP metrics in financial reporting has been widely scrutinized by regulators. Mary Jo White, chair of the U.S. Securities and Exchange Commission, stated last December that non-GAAP metrics deserve “close attention, both to make sure that our current rules are being followed and to ask whether they are sufficiently robust in light of current market practices.” NACD’s Audit Committee Chair Advisory Council, a prestigious group of Fortune 500 committee chairs, met a few months ago to discuss the use of non-GAAP metrics. The council made an important recommendation:
From a governance perspective, audit committees should ensure that there are adequate controls in place to help mitigate the risk of management bias in measuring and reporting non-GAAP measures, and that these controls are frequently assessed.
Our resources and messaging have always been—and will continue to be—shaped by directors who actively contribute to better board-governance practice. As the largest gathering of directors in the United States, NACD’s 2016 Global Board Leaders’ Summit will convene some of the best minds in governance to continue the dialogue on how boards can adopt leading practices. We believe in and strongly support good corporate governance and will continue to provide resources to help directors effectively oversee U.S. businesses. For more information on the governance principles NACD has established, please review our Key Agreed Principles to Strengthen Corporate Governance for U.S. Publicly Traded Companies.
If you attended last year’s NACD Global Board Leaders’ Summit, you already know that mushrooms really are the new plastic. When Ecovative President and CEO Eben Bayer told an audience of 1,200 directors how his company could change the future of packaging during last year’s Future Trends:Short Takes on Big Ideas, we’re not sure he even believed IKEA would be knocking on his door a mere six months later.
From future trends to big ideas, big data to getting your next board seat, leading through disruption to breaking through bias, the agenda for our largest event of the year is designed with one major thing in mind: keeping you—the director—relevant.
And speaking of relevancy, we’re excited to share our brand-new 2016 NACD Global Board Leaders’ Summit website—your fresh, everything-you-need-to-know-about-Summit headquarters. Before you check out it out, however, don’t miss this 2016 Summit Trailer:
We’ll see you in September!
2016 NACD Global Board Leaders’ Summit | CONVERGENCE
September 17-20, 2016
Marriott Marquis | Washington, DC