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: 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: 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 NACD Atlanta Chapter recently hosted an expert panel to discuss what directors should know and, more importantly, what they should be asking of management about the impact of Brexit on their corporations. The panel was moderated by Ambassador Charles Shapiro—former US ambassador to Venezuela and current president of the World Affairs Council of Atlanta—and featured Jeremy Pilmore-Bedford, consul general from the British Consulate-General in Atlanta; Mary Shelton Rose, PwC East Region advisory leader and leader of PwC’s US Brexit Response Office; and Lynn Clarke, CEO of MetroKitchen.com and director for ABARTA, Inc., Kahiki Foods, Inc., Visii.com, and the NACD Atlanta Chapter.
The takeaways from the event fell into three categories.
Takeaway 1: The Brexit outcome is uncertain, but a more moderate outcome is likely to prevail in the European Union.
To assist directors as they consider how to approach discussions about Brexit, the panel highlighted possible outcomes of the Brexit vote. Clearly, the path that would leave the least uncertainty is the one under which Britain retains access to the European single market through a series of bilateral agreements. However, a model where Britain does not continue to benefit from any part of the single market is also possible. Since the panel met, a UK court ruled that the British government requires parliamentary approval to trigger the process of exiting the European Union (EU), which adds additional complexity and uncertainty to the situation, and could give pro-EU lawmakers more opportunity to influence the direction of the exit.
While some may believe that other EU countries may want to punish the UK for Brexit by offering unfavorable trading terms, the panel seemed to agree that cooler heads will likely prevail as EU member countries focus on Britain’s role as a significant trading partner for the EU. According to Pilmore-Bedford, an upside of Brexit that is often overlooked is that Britain could begin to negotiate its own free-trade deals beyond Europe with growing countries like India.
Takeaway 2: The UK is trying to mitigate uncertainty.
Britain is attempting to mitigate some of the uncertainty about possible outcomes through outreach to companies. For example, British Prime Minister Theresa May recently met with top executives from such companies as Amazon, Goldman Sachs, IBM, and Morgan Stanley in an attempt to reassure investors.
UK officials like Pilmore-Bedford are quick to remind companies that the free movement of labor between Britain and the EU will continue until 2019 at a minimum. Also, the British government is working to enact laws that enhance legal stability for businesses. Still, with no crystal ball in hand and uncertainty even among those closest to the situation, the panel made clear that directors and management must remain vigilant.
Takeaway 3: Directors must exercise due diligence now.
Panelist Lynn Clarke showed the audience a jar of Marmite, a much-loved Unilever product in the UK. She cited an example of how, in the current climate in the UK, otherwise routine operational decisions can have significant impacts on a company’s reputation and bottom line. In the case of Marmite, Unilever decided to raise the price of Marmite in the UK, ostensibly to compensate for the sharp drop in the pound’s value following the Brexit vote. Behemoth grocery chain Tesco reacted by removing the product from its website. Analysts and consumers criticized the price hike, particularly since Marmite does not contain ingredients from outside of the UK. Clarke suggested that companies must exercise additional caution in how business is approached in the UK during this tumultuous time.
In addition, directors may pose a number of questions to management to prepare for Brexit’s impact, depending on the type of operations the company has in Europe:
Strategic Planning: Have we included flexibility in our planning to allow the company to react to scenarios as they unfold?
Investment: Do we want to consider either moving forward with investments or holding off on investments related to UK operations or acquisitions?
Clarke, on the board of a UK tech start-up, noted that start-ups in the UK may move to the EU to access existing seed-funding programs.
Pricing and Margins: Will we be affected by margin compression from goods sold to/from the UK? Should we modify our prices?
Talent: Have we assessed the likely impact of Brexit on talent sourcing to and from the UK should migration be restricted?
Supply Chain: How well do we understand our suppliers’ financial positions? Do we know which of our critical suppliers are most vulnerable to price fluctuations?
Investors: How will we communicate the financial and strategic effects of Brexit and how we plan to mitigate them to investors?
Pension Plans: Will there be concern about pension plans (underfunding, for example, due to asset devaluation)?
Technology: How will all of the above affect technology/systems as changes are needed to HR systems, VAT systems, regulatory systems, etc.?
PwC expert Mary Rose Shelton emphasized that preparing for Brexit will give directors the opportunity to explore less emphasized areas of the company such as the supply chain, human resources outside of the US, and European and other overseas operations. Given that the greatest certainty at this point is that uncertainty will reign for some time to come, smart directors will begin asking the right questions now, helping their companies adapt to conditions as they evolve. Please reference NACD’s recent publication The Board’s Role in Brexit Oversight for additional questions boards can consider in response to Brexit.
Kimberly Simpson is NACD’s first regional director, providing strategic support to NACD chapters in the Capital Area, Atlanta, Florida, the Carolinas, and the Research Triangle. Simpson, a former general counsel, was a U.S. Marshall Memorial Fellow to Europe in 2005.
The uncertainty of looking to the future presses boards to consider how confident their senior executives and supporting teams are in executing strategy. How can the board help the companies they oversee to face the future with a greater sense of confidence?
Confidence is neither a cliché nor an assertion of mere optimism. Rather, it is a quality that drives leaders and their companies forward. The Oxford English Dictionary defines confidence as “the state of feeling certain about the truth of something” and “a feeling of self-assurance arising from one’s appreciation of one’s own abilities or qualities.” This definition focuses on the board and management’s appreciation of the collective capabilities of the enterprise, including the ability to carry out a company’s vision. It raises three fundamental questions:
Do weknow where we’re going directionally and why? Are our people committed to achieving a common vision that is clearly articulated, meaningful, and aspirational?
Are we prepared for the journey? Does our staff have the capabilities to execute our strategy? Do we have a great team, a strong roadmap, and the required processes, systems and alliances, and sufficient resources to sustain our journey?
Dowepossesstheability, will, anddiscipline to cope withchange alongthe way,nomatterwhathappens? Does our board have the mental toughness to stay on course? Is our management team agile and adaptive enough to recognize market opportunities and emerging risks, and capitalize on, endure, or overcome them by making timely adjustments to strategy and capabilities?
Definitive, positive responses to these questions from the board will enable confidence across the organization.
Looking back on experiences working with successful companies, seven attributes were identified that organizations must have when facing the uncertainty of future markets.
How to Build the Foundation for Confidence
Confidentorganizationssharecommitmenttoa vision. Commitment to a vision provides a shared “future pull” that is both inspiring and motivating. This perspective fuels enterprise-wide focus and energy to learn, which encourages participation and altruistic camaraderie. An effective vision crafted by the board and executive team leads people at all levels of a company to recognize that the enterprise’s success and their personal success are inextricably linked.
Confident organizations have a heightened awareness of the environment. A confident organization constantly reality tests its market understanding by facilitating effective listening to customers, suppliers, employees, and other stakeholders. Boards should encourage companies to generate sources of new learning, encouraging systemic thinking in distilling and acting on the environment feedback received, with the objective of driving continuous improvement. The confident organization fosters a culture of sharing and supports formal and informal continuous feedback loops to flatten the organization, get closer to the customer, and promote a preparedness mindset.
Confidentorganizationsaligntheirrequiredcapabilities. It is a never-ending priority of the board to ensure that the right talent and capabilities are in place to achieve differentiation in the marketplace and execute strategies successfully. Capabilities include an enterprise’s superior know-how, innovative processes, proprietary systems, distinctive brands, collaborative cultures, and a unique set of supplier and customer relationships.
How to Sustain Confidence
Achieving a foundation of confidence is necessary, but alone is not enough without concerted efforts to sustain confidence. Astute directors and executives know that the ability, will, and discipline to cope with change are also needed to sustain their journey. Those winning traits are enabled by the attributes below.
Confidentorganizationsare risk-savvy. The confident organization is secure in the knowledge that it has considered all plausible risk scenarios, knows its breakpoint in the event of extreme scenarios, and has effective response plans in place (including plans to exit the strategy if circumstances warrant). Most importantly, the confident organization should have an effective early-warning capability in place to alert decision-makers of changes in the marketplace that affect the validity of critical strategic assumptions. In a truly confident organization, no idea or person is above challenge and contrarian views are welcomed.
Confidentorganizationslearnaggressively. Confident organizations improve their learning by: creating centers of excellence; embracing cutting-edge technology to drive the vision forward; fostering an open, transparent environment of ongoing knowledge sharing, networking, collaboration, and team learning; perceiving admission of errors as a strength and requiring learning from the missteps; and converting lessons learned into process improvements. Aggressive learning stimulates the collective genius of the entire enterprise.
Confidentorganizationsplaceapremiumoncreativity. Innovation should be an integral part of the corporate DNA of the confident company, and should be evidenced by setting accountability for results with innovation-focused metrics at the organizational, process, and individual levels to encourage and reward creativity. Companies committed to innovation have the creative capacity to take advantage of market opportunities and respond to emerging risks. When innovation is a strategic imperative, companies empower and reward their employees to take the appropriate risks to realize new ideas without encumbering them with the fear of repercussions if they aren’t successful.
Confidentorganizationsare resilient. Confident organizations have adaptive processes supported by disciplined decision-making, and are committed to adapt early to continuous and disruptive change. They have the will to stay the course when the going gets tough, and are prepared to act decisively to revise strategic plans in response to changing market realities. They do not allow competitors to gain advantage by building large capital reserves, having great relationships with their lenders, and by cultivating trusting relationships with their customers, vendors and shareholders. The strategies that their boards approve include triggers for contingency plans that directors and management will implement if certain predetermined events occur or conditions arise.
In summary, the speed of change continues to escalate, creating more uncertainty about future developments and outcomes. If there was ever a time for a board to assess an organization’s confidence, we believe it is now. It’s one thing to have a confident CEO, but if the people within the entity lack confidence, the organization itself may not have the creativity and resiliency needed to sustain a winning strategy.
Jim DeLoach is managing director with Protiviti, a global consulting firm.