At a mainstage panel during NACD’s 2016 Global Board Leaders’ Summit on September 19, directors, economists, and former regulators discussed the potential regulatory, economic, and geopolitical implications of the coming election and reflected on how corporate directors and executive teams should adjust to greater levels of ambiguity. One of the panelists, Nicholas M. (Nick) Donofrio, director of Advanced Micro Devices Inc., BNY Mellon Corp., Delphi Automotive PLC, Liberty Mutual Co., the MITRE Corp., and NACD, and the former head of innovation at IBM, characterized today’s external environment as “lumpier and more abrupt than even a few years ago,” forcing companies and their boards to be always on alert and to act quickly in response to change.
The panelists offered a range of projections to help corporate directors assess the business impact of the upcoming elections. They emphasized that aside from a new occupant of the White House, the elections also have the potential to drive significant changes in Congress, major regulatory agencies, and the judicial system. The discussion centered on four major questions of importance for companies and the boards that oversee them.
How likely is a major reform of the tax code?
Reform of the corporate tax code is long overdue, said former U.S. Senator Olympia J. Snowe, director of Aetna, Inc. and the Bipartisan Policy Center. For years, companies have learned to accept the “permanent temporary tax code,” and the resulting policy uncertainty has made investment and capital allocation decisions more challenging. Snowe suggested that even if House and/or Senate control switches from one party to another, it is unlikely that Democratic and Republican congressional leaders will be able to transcend their fundamental differences about taxation and break the current gridlock. Most likely, she believes, the incoming president will use the power of the pen to tweak the current tax code through executive orders.
Should we expect continued regulatory activism?
Troy A. Paredes, director of Electronifie and former Commissioner of the U.S. Securities & Exchange Commission (SEC), shared his concern that “the tidal wave of regulations” seen in the past few years won’t slow down, and it will force companies to commit more time and resources to compliance. “Elections are always major inflection points,” he said, that either sustain or reset the policy priorities of the SEC and other key regulatory bodies such as the Commodity Futures Trading Commission, Federal Trade Commission, and Federal Communications Commission. Meanwhile, Paredes urged directors to be alert as to whether Mary Jo White, the current chair of the SEC, will have enough time in her remaining tenure to finish rule-making on key corporate governance matters covered in Dodd-Frank.
Will our political system address skill shortages in the labor market?
Nick Donofrio offered a mixed view of how the country is addressing the looming crisis in the labor market where current skill sets do not align with the future industry needs. “Our political institutions are too polarized to take meaningful action,” he said. However, it’s crucial that the United States build a digitally competent and productive labor force that can be employed to deliver high-tech manufacturing. “We cannot afford to only create [financial] value in this country, but we must also [manufacture] value here. That means returning much more research and development and production to American soil.” In the absence of government investment, he’s optimistic that the private sector will step up to address this critical challenge and find innovative ways to reskill displaced workers.
How will the United States make itself more competitive globally?
Harry Broadman, a seasoned economist and the CEO and managing partner of Proa Global Partners LLC, reminded the audience that the United States faced a similar set of challenges to its global competitiveness in the 1980s when Japan was projected to become the world’s economic leader. A major difference today may be the backlash against free trade, which could jeopardize the adoption of the Trans-Pacific Partnership and threaten the underpinnings of the European Union. Broadman underlined that it will be critical for U.S. policymakers to remove barriers to foreign investments from high-growth emerging market companies that will contribute to quality job growth. This new generation of enterprises is important to the future of global business, which will no longer be dominated by firms headquartered in the West.
He and other panelists also spoke extensively about the importance of major investments in public infrastructure. America’s crumbling highways, bridges, ports, and technology infrastructure significantly impede further productivity growth, which Broadman believes is the country’s major Achilles’ heel.
Recently, the world’s largest ongoing study of the internal audit profession—the Global Internal Audit Common Body of Knowledge (CBOK)—was completed by the Institute of Internal Auditors (IIA) and Protiviti to ascertain expectations from key stakeholders regarding internal audit performance at organizations of varying operational models and sizes. The study sought input from members of audit committees all over the world about their expectations of the internal auditor’s role in the organization. We think all directors will find the results of the study applicable to their work in the coming year and beyond.
Below are six imperatives for internal auditors from the CBOK study based on feedback from audit committee members.
1. Focus more on strategic risks. According to the CBOK study, two out of three board members believe internal audit should have a more active role in evaluating the organization’s strategic risks. Study respondents indicated that internal audit should focus on strategic risks (as well as operational, financial and compliance risks) during audit projects (86 percent) and periodically evaluate and communicate key risks to the board and executive management (76 percent). Accordingly, chief audit executives (CAE) must focus their function sufficiently on the bigger picture to think more strategically when evaluating risks, proposing risk-based audit plans, and formulating audit findings. By understanding the organization’s business objectives and strategy, and identifying risks that create barriers to the organization achieving its objectives and executing its strategy successfully, the CAE increases internal audit’s value proposition.
2. Think beyond the scope. The call for internal auditors to think strategically leads to another challenge: thinking beyond the scope of the audit plan. Thinking beyond scope means, for example, that the auditor should:
“Connect the dots” when considering enterprisewide implications of the findings of multiple audits, particularly findings with significant business model underpinnings;
Broaden the focus on operations, compliance, and nonfinancial reporting issues; and
Watch for patterns or signs indicating a deteriorating risk culture.
By focusing more broadly on the implications of audit findings, and thinking beyond the expressed or implied boundaries set by the audit plan, internal audit is better positioned to deliver stronger, more practical, and harder-hitting recommendations aligned with what directors are seeking.
3. Add more value through consulting. In today’s era of slower economic growth, a high premium is placed on operational effectiveness and efficiency. The CBOK study respondents picked up on this point, as 73 percent of respondents recommended that internal audit advise on business process improvements. For example, consulting activities by internal audit can result in: strengthening of the lines of defense that make risk management work; more effective collaboration with other independent functions focused on managing risk and compliance; improvements in the control structure, including greater use of automated controls; and suggestions for improving and streamlining compliance. These study findings underscore the benefit of investing in consulting services that will strengthen business processes.
4. Facilitate effective, high-quality communication. Board members generally rate internal audit’s communication at a high level of confidence. For example, a large majority of directors give high scores for the quality (83 percent) and frequency (81 percent) of internal audit’s communication. That’s good news and a great foundation on which to build the board’s satisfaction with the internal auditor’s role.
5. Elevate stature and perspective. Intentionally positioning the CAE and internal audit within the organization is vitally important to their ability to meet elevated expectations. Access and perspective have always been keys to positioning. Access has typically been attained through direct reporting to the audit committee, as well as to the C-suite. But beyond these reporting lines, the study reports that two out of three board members rank the CAE’s participation in board settings beyond the traditional audit committee meetings as an effective strategy for broadening the CAE’s perspective. The board settings that are relevant in this context must be defined by directors to fit the organization’s specific needs. However the goal is defined, increased access to and more frequent interaction with the board broadens the CAE’s perspective of the organization and elevates the stature and visibility of the internal audit function within it. It also enables the CAE to establish relationships with directors, understand their views on addressing competing audit priorities, and earn the right to be viewed as a valued source of insight for the board.
6. Align with stakeholder expectations. In most organizations, not all stakeholders see eye to eye or want the same value from internal audit. This reality creates a significant challenge for CAEs tasked with building consensus among stakeholders. While directors may not expect their company’s CAE to address all of the above imperatives, they should initially and periodically assess whether internal audit is doing what matters based on previously-established imperatives. The CAE bears the brunt of the responsibility for addressing this challenge by articulating the value that a top-down, risk-based audit plan contributes to each facet of the organization, and by providing an assurance and advisory perspective that the board, executive management, and other stakeholders can understand.
Following are some suggested questions that directors may consider based on the risks inherent in the entity’s operations.
Does the board periodically evaluate the scope of internal audit’s activities and discuss whether modifications are needed in view of changes in company operations and the business environment? Is the board getting the insights it needs?
Does internal audit provide adequate attention to strategic risk issues, including barriers to the organization’s execution of the strategy?
Does internal audit have an appropriate mix of consulting and assurance activities?
Does internal audit have the stature and access necessary to maximize its effectiveness?
Jim DeLoach is managing director with Protiviti, a global consulting firm.
One of my favorite comments from an attendee at last year’s Global Board Leaders’ Summit went something like this: “I was expecting to be informed; I wasn’t expecting to be inspired.” For a team that works year-round scouring the globe to discover and deliver to you voices that are shaping the future, that’s about as good as it gets.
This year’s Global Board Leaders’ Summit is on track to be our biggest ever, and one big feature of the Summit remains the same: a diverse array of thought leaders will share paradigm-shifting insights that will challenge the way you think about leadership, give you new tools to approach your directorship practice, and perhaps inspire you in surprising ways.
Here’s a sampling of some of the most exciting sessions at Summit this year:
Michelle Crosby’s start-up Wevorce is not only shaking up Silicon Valley, it’s turning the historic, antagonistic model of divorce on its head. The company’s mission is to “help couples ensure their divorce is less damaging to themselves, their finances, and the people they love.” Crosby was named one of the American Bar Association’s Legal Rebels in 2014, a distinction reserved for “lawyers who are breaking new ground using technology.” “Every institution is subject to change, and the more entrepreneurs who learn to work in the system to create that change, the further we’re going to get,” Crosby said in an interview with USA Today. In an intimate fireside chat, Crosby will discuss innovation, entrepreneurship, disruption, and how the company applies the Wevorce model to talent management inside the company.
Howard Ross, one of the most highly rated thought leaders at last year’s Summit, is back again to share insights from his groundbreaking work on unconscious bias, diversity, leadership, and organizational change. The question directors should ask themselves, says Ross, is not “Is there bias?” Rather, directors should ask one another, “What biases do we have that keep us from making choices counter to the values that we say we believe in?” Ross will open the Diversity Symposium on Saturday and will lead an in-depth workshop on Monday focusing on board dynamics.
The United Nations estimates that by 2025, two-thirds of the world’s population may face fresh water shortages, a critical concern for business and society. Whitewater rafting guide turned CEO Pat Crowley is betting that the solution to that crisis might literally be in our backyards. Crowley’s passion for the outdoors led him to work as a water resource planner, which drew his curiosity to crickets, of all things. “I heard about insects as a more environmentally friendly form of nutrition. From a water perspective, it was clearly a game-changer,” he said. Crowley founded Chapul, a company that makes cricket-based energy bars, in 2012, “to leap over this psychological hurdle of eating insects in the United States.” With explosive growth— 500 percent annually for the past two years alone—Crowley is on track to break through those barriers. On the summit mainstage on Monday, Crowley will discuss what it means to be part of building a new industry that is challenging societal norms, reshaping the competitive landscape, and may just help save the planet.
Phil Gilbert has been working with start-ups for the past 30 years, the most recent of which was acquired by IBM in 2010. Now Gilbert leads IBM’s design team with a focus on an empathy-centered workforce. Bringing a start-up mentality to 100-year-old company can be a challenge and almost immediately Gilbert was forced to confront a disconcerting question: “Is the entire way we’re working an anachronism?” Embracing that hard truth has been nothing short of transformational. Gilbert comes to the Summit mainstage to discuss lessons learned in this transformation. “We’re at an interesting crossroads in business. I think the way business is done and businesses work inside themselves has got to fundamentally change in the twenty-first century,” he said.
As managing director of famed Silicon Valley venture capital firm Andreessen Horowitz, Scott Kupor has been part of building brands like Airbnb, Buzzfeed, Facebook, Foursquare, Lyft, Pinterest, and Skype—companies that have become synonymous with disruption. “Things that are fringe today might become mainstream over time,” Kupor explained on Fox News back in June, describing the philosophy that underpins Andreessen Horowitz’s approach to finding the next disruptive trend. In a mainstage fireside chat Tuesday, Kupor will discuss this philosophy in context with everything from M&A activity and shareholder activism, to IPO trends and the next big innovations he sees poised to disrupt the business landscape.
When Chelsea Grayson took on the role of general counsel at American Apparel, she faced a daunting task: to help turn around a company that was operating in an increasingly competitive industry and was coming off of a tumultuous series of events, including high-profile sexual harassment allegations, layoffs, bankruptcy, and protests. In February, Grayson told the legal blog Above the Law, “I have been in-house for over a year now, and I have encountered just about every legal issue a general counsel might experience in an entire career.” Next month, Grayson will share her insights on governing complexity, a subject she has become adept at navigating during her tenure at American Apparel.
These are just a few snapshots of the incredible line-up of thought leaders who will join us in September. Want to learn more? View the full list of speakers and sessions at www.NACDonline.org/summit.