Two NACD panels recently tackled issues surrounding sexual harassment in the corporate setting, and how directors should act and react to issues that could have profoundly negative impacts on company reputation and workforce satisfaction.
Key takeaways for directors ranged from careful CEO hiring to board composition. The following concepts could be readily applied to your own board’s conversation about overseeing this risk.
Aggregate Data to Spot Problems Before They Happen. Given that the board is ultimately responsible for overseeing company culture (including a culture that tolerates sexual harassment), the board should work to mitigate risks rather than taking up sexual harassment issues once a problem has surfaced, according to Michael Aiello, chair of the corporate department at Weil, Gostshal & Manges LLP. Lucy Fato, executive vice president and general counsel for American International Group (AIG), stated that boards should aggregate information to get the full picture, including:
Internal audit findings related to culture;
Employee relations/human resources reporting, including hiring trends, turnover statistics, and reports from exit interviews;
Hotline reporting, including whether there are too many or too few complaints; and
Company legal settlements and insurance payouts.
Board members should also probe whether the company’s investigative processes are fair and thorough.
Go the Extra Mile in CEO Hiring. In light of the board’s primary role of hiring and firing the CEO, along with the fact that fallout from CEO misconduct can significantly impact shareholder value, a board should take steps to ensure that its candidate of choice does not have a history of sexual misconduct or even tolerance for a culture in which harassment is an open secret. According to Sabina Menschel, president and chief operating officer at Nardello & Co., to really know who you are hiring into the corner office, conduct an investigation that includes public records, social media, and supplemented standard reference checks. With regard to CEO hiring, Fato stressed, “Ethics, integrity, and how you carry yourself as a public figure should be a factor in whether you can lead the brand.”
Risk Starts at the Top. The CEO and senior management are not alone in the potential spotlight of the #MeToo movement. Board members also must be vetted fully, and once in place, board members should receive code of conduct training, just as employees do, said Fato. In addition, the board should pick one corporate policy per year on which to do a deep dive as part of its oversight duties. Tabletop crisis preparedness exercises also should be conducted.
Superstar? Irrelevant. A board may face a difficult choice if a superstar CEO is found to have violated the company’s code of conduct, fearing that a dismissal could impact short-term shareholder value. According to Brenda Gaines, director, Tenet Healthcare, Southern Co. Gas, and NACD, superstar status is always irrelevant when investigating misconduct. She suggests that the board should take action to remove an offending CEO and then have a separate conversation about revenue and valuation implications. She added that the company must be clear about its culture and key principles, and should have zero tolerance for misconduct, applied to everyone in the company equally. “Board members have to keep each other honest,” she said.
Expand the Company’s Enterprise Risk Management (ERM) Framework. Sexual harassment should be a part of each company’s ERM framework, given that fallout from a misstep can be quite severe, emphasized Fato. Also, when doing employee surveys, ask specifically about harassment issues. To do so demonstrates that the company cares about these issues, said Menschel. Also, in terms of monitoring potential issues with long-tenured employees or even board members, consider updating background checks at regular intervals, stressed Fato.
Diverse Boards Matter. The #MeToo movement will have an impact on the boardroom, as well as on investor relations, according to Renee Glover, director, Fannie Mae, Enterprise Community Partners, and NACD Atlanta. Indeed, large shareholders are asking about diversity on the board, and they may request sexual harassment policies and pay equity measures. Gaines emphasized the clear-cut nature of the need for more diverse boards. “Diversity is good business,” she said, “and we are nowhere near where we should be. We need more gender diversity and more people of color on boards. Don’t miss this in the search for skill sets.”
Find an Ally. Rochelle Campbell, manager for board recruitment services at NACD, says that she encourages boards to have at least two diverse members on the board, as such boards tend to be more successful. For women and people of color who are new to a board, they can play an important role in discussions about sexual harassment and equal pay for equal work. When asked for practical advice for new board members, Gaines shared best-practice approaches to oversight of misconduct:
Get the facts right.
Take the emotion away.
Look for an ally on the board.
Glover summed up the issue: “We can do better. And when we do, we can get on with realizing the deeper value that a diverse board can deliver.”
Kimberly Simpson is an NACD regional director, providing strategic support to NACD chapters in the Capital Area, Atlanta, Florida, the Carolinas, North Texas and the Research Triangle. Simpson, a former general counsel, was a U.S. Marshall Memorial Fellow to Europe in 2005.
When it comes to innovation, boards are notorious for sending conflicting messages. They want to hear assurances of innovation and predictability from management in the same breath. Unfortunately, innovation and predictability don’t go hand-in-hand. Simply put, innovation can’t exist without risk. In fact, the two are easily understood as a marriage—they show up together and work in unison.
Those of us who work in cybersecurity—where staying ahead of adversaries can mean life or death for a company—know that better than most. We have to invest in new ideas, technologies, and processes to adapt to an ever-changing threat landscape. Such investment, like any investment, entails some risk.
We can apply lessons learned about cybersecurity innovation to just about any industry. That’s because every company needs to innovate to remain competitive, which inherently means taking risks. How much risk is enough? How much is too much? And what’s the best way to foster innovation while balancing the need to take risks with the need for predictability?
The best way to answer these questions is to develop clear processes around innovation. It all starts with good communication and diversity of viewpoints.
Talk It Through
Effective communication is key between senior leadership and the engineers and others responsible for innovation. Communication reveals ideas worth taking chances on. There are two structural processes that can work well for this that the board could suggest.
Encourage management and engineers to engage in ad-hoc sharing of observations. This means forming groups to share candid observations about what’s working and what’s not working within an organization.
At Rapid7, we pull in team members across the organization to bring a variety of perspectives to the table. I recommend creating small cross-functional teams and getting them in the habit of observing and sharing ideas to generate more innovation. This continuous dialogue pushes people to think more broadly and differently while sharing learnings that can then be reported to the board when discussing innovation.
Facilitate thought-provoking discussions. Encourage management to create thought experiments designed to spark new ideas and challenge conventional thinking. Those facilitating the conversation might start by asking, “If I gave you an unlimited amount of money to double our efficiency, what would you do?” Or, “If we were going to build a business plan to destroy our business and at the same time gain twice the profits and twice the customer loyalty, what would we do right now?”
These processes can be quite powerful in uncovering places to innovate. But in order for a leadership team and those responsible for innovation to maintain a firm grounding in the reality of the industry while also allowing room for creativity, they need a source of external truth. That means urging management to get outside of the company bubble.
Learn from the Field
To gather new ideas, people across functions should spend unmanaged time outside of the organization, bringing observations back to leadership and to their work. Spending time with customers and partners, engaging with peer groups, observing and engaging with competitors, reading, and attending conferences are all ways to gather the insights that are crucial for effective innovation. The board should challenge management to build a culture of curiosity within the company.
That said, directors should beware of herd mentality taking over the minds of management. Emulating companies that have non-sustainable positions or those in which you have too little insight into the success they are having often doesn’t play out well. Instead, encourage management to pay attention to well-performing companies in their quest for ideas that will improve your company’s position.
At Rapid7, I frame these jobs as learning. I don’t need my teams to come back with concrete action steps or specific outcomes but instead with a learning plan and details on what they saw that has the potential to transform the business over the next year.
Anything a team learns that can potentially create an advantage opens the doors to innovation. Therefore, this culture of learning should not focus only on technology, but instead on the combination of process, technology, market, and customer needs.
Create an Innovation Culture
To flourish, innovation also must be nurtured in the culture of the organization as expressed in the attitudes, beliefs, and behaviors of its people. Cultures that punish failure, demand certainty, or reward short term results kill innovation before it can even be expressed as an idea. On the other hand, cultures that emphasize learning, encourage experimentation, and focus on rewarding long-term growth behaviors tend be much better at innovation. One of the keys to this is encouraging transparency and reinforcing that it’s okay to discuss possibilities even when the path to delivery is unclear. Lastly, innovation demands an environment built on trust. When people don’t trust each other, they can’t be vulnerable and share their ideas, hopes, and aspirations. Directors should cultivate a culture of open conversation with their management team, and then encourage the same candor between management and employees across the company.
Embrace the Right Level of Risk
Many organizations pursue the minimal amount of innovation because they fear taking too big a leap and risking too much. Others may aggressively pursue transformational innovation that comes with a high degree of risk. What’s the right balance?
To make that assessment, directors and management can consider the three main levels of innovation, in order of increasing risk.
Incremental improvement innovation. You will generally have a high degree confidence about this level of innovation because others in your industry are already doing it and you have real-world observations to back up planning for those innovations.
Outside-in innovation. Somewhat riskier, this level of innovation involves implementing ideas that you are confident could be successful based on outside observation—perhaps from beyond your industry—and adapting them for your organization.
Moon shot innovation. The ultimate risk, with a potentially high-reward payoff. Think SpaceX’s success at launching a sports car to Mars in its quest to ultimately get settlers there.
For a company that’s doing well inside a stable industry, it’s most likely not wise to take a huge risk. Incremental innovation in this case may be enough, always with an oversight-focused eye on what others in the industry are doing.
A company in a more volatile industry, however, may need to get more aggressive in pursuit of game-changing innovations, with ideas borrowed from other industries. A moon shot in this case, appropriately managed and nurtured over time, may be just what’s needed. Directors should ask management to develop plans and evidence for these innovations that are clear, concise, and geared toward oversight of the project’s successful execution and value creation.
Manage the Learning Cycle
Innovation takes time, starting with the learning cycle.
In our experience, the learning cycle takes about a year, and is crucial for properly managing the risk involved in investing further. For implementation, two to four years is a good rule of thumb to start to see a return on investment. Here’s the typical timeline from idea to implementation.
Year 1: Learn a concept.
Year 2: Decide to learn more or kill it.
Year 3: Learn a few more things and try some ideas. Refine the concept.
Year 4: Get traction.
A successful organization prepares for innovation in the same way a runner prepares for a marathon. Innovations and marathons both take time, conditioning and learning the course. That includes understanding the role that risk plays in innovation. Starting with that foundation will put boards and the companies they serve on the right track for success now and into the future.
Corey E. Thomas is CEO of Rapid7. Read more of his insights here.
Companies today fall into two groups: those that have been breached and know it, and those that have been breached but don’t know it. The realities of managing cyber risks are that breach risks are impossible to eliminate, resources for managing them are finite, risk profiles are ever-changing, and getting close to secure is elusive.
Our December 2017 discussion with a group of active directors during a dinner roundtable at a National Association of Corporate Directors (NACD) event identified some interesting insights into cyber-risk oversight at the board level.
Winning battles does not necessarily win the war. The discussion focused on how state-sponsored attacks targeting government institutions, industrial facilities, infrastructure, and many business organizations are increasing in both power and sophistication. Combatting so-called advanced persistent threats (APTs) requires faster detection and more advanced response tactics. In the arms race to keep pace (or, in most cases, catch up) with these threats, organizations need to commit adequate resources to tapping into available government intelligence and using it to facilitate their preparedness. Directors should suggest to their management team that they develop and maintain relationships with the correct contacts in the government sector needed to stay informed of emerging risks.
Upgrading detection capabilities. If management and the board believe the entity is an APT target based on what it represents, what it does, and the intellectual property it owns, the directors raised concerns over the maturity of most companies’ cybersecurity countermeasures and what can be done from the board level to encourage more effective mitigation of the risks. Capabilities need to be upgraded beyond the controls, tools, and response mechanisms traditionally used to contain sophisticated attackers and corporate insiders. Our experience is that detective and monitoring controls remain immature across most industries relative to the evolving threat landscape.
Clarifying expectations with management. One director noted that when a chief information officer (CIO) or chief information security officer (CISO) asserts, “Don’t worry, we’re taking care of that,” or delivers a similar pushback, it tends to stifle the dialogue and leaves directors with nowhere to go and an incomplete understanding of cyber-risk mitigation. The group’s ensuing discussion pointed to several themes. Directors should ask the right questions (an appendix in the 2017 NACD publication on cyber risk oversight suggests relevant questions), consider changing board composition if more expertise is necessary, and establishing a separate cybersecurity or technology committee of the board. Although directors have limited time to get into details, they should set clear expectations for management at all levels with respect to cyber incidents that can affect the company’s reputation, brand image, and standing with customers. Expectations regarding cybersecurity strategy and risk tolerances should be incorporated into the entity’s risk appetite statement.
Improving board cybersecurity reporting and metrics. The severity of the Equifax breach as well as others raises the question as to whether boards are probing deeply enough to determine what they don’t know. To that end, the directors noted that too often board reports deliver high-level information only. So, the question then becomes, what reporting and metrics on cybersecurity should the board request? The discussion pointed to several examples of key areas to consider:
The number of system vulnerabilities
The length of time required to implement patches
The length of time to detect a breach
The length of time to respond to a breach
The length of time to remediate audit findings
Percent of breaches perpetrated through third parties
The number of security protocol violations
Paying attention to “blocking and tackling.” The group brought up several cybersecurity issues, including prioritizing high-risk patches, raising awareness of phishing, implementing security segmentation, and refreshing incident response and recovery plans continuously. One director noted that every organization should have multi-factor authentication access controls in place; accordingly, the board should discuss this security measure with management.
Conducting independent cybersecurity assessments. As innovative transformation initiatives constantly expand an organization’s digital footprint, they outpace security protections companies have in place. Accordingly, organizations should consider assessing the current state of their overall cybersecurity using an established framework, in relation to their desired state. If such reviews identify gaps or areas of weakness requiring immediate remediation, the board should satisfy itself that management addresses those areas in a timely manner.
Being aware of challenges in the information technology (IT) and security organizations. The point was raised that many organizations need to seriously consider re-architecting themselves from both a technology and security standpoint. The question the board needs to ask management is: How quickly are we able to get an issue resolved? Management assertions that a solution will disrupt existing operations and legacy systems and, thus, will take time to implement, are a red flag. Our discussion also touched on the issue of inadequate IT and security resources, and the need to innovate the business. The point is, cybersecurity must be focused on what’s important and cannot consume the entire budget.
Considering the value of cybersecurity insurance. One director brought up the importance of cybersecurity insurance coverage as a means to transfer some of the financial risk associated with a variety of cybersecurity incidents, including data breaches, business interruption, and network damage — particularly since the entity’s directors and officers liability policy may not cover these issues. If a company invests in a cybersecurity policy, the insurer may require the business to follow certain guidelines and provide evidence through a cybersecurity assessment, as discussed earlier. If the company hasn’t benchmarked itself against an appropriate framework, directors should inquire as to why not.
Dig into deeper insights from Protiviti by visiting their Board Perspectives piece on the challenges directors face when overseeing cybersecurity risks.