Topics:   Corporate Governance,Risk Management,Technology

Topics:   Corporate Governance,Risk Management,Technology

December 12, 2019

In 2020, Directors Worry About Balancing Economic Downturn, Business-Model Disruption

December 12, 2019

The 2019-2020 NACD Public Company Governance Survey, released this week, received responses from over 500 public-company directors to more than 80 survey questions. The questions discussed the trends most likely to impact organizations over the next year; areas in which boards would like to improve; the size, shape, and structure of boards and committees; and oversight of key areas of focus for the board, including strategy formulation, enterprise risk, cyber risk, human capital, compliance, and environmental, social, and governance (ESG) issues.

Overall, the survey results show that in the year ahead, boards face two conundrums: navigating a disruptive operating environment while preparing for a slowdown, and pushing forward with digital innovation while pausing to ensure a secure cyber environment. Directors also report important progress in two emerging areas of oversight: human capital and ESG risk.

Public companies face a conundrum navigating two divergent business forces.

Directors identify growing business-model disruptions (52 percent) and a slowing global economy (51 percent) as the trends most likely to impact their organizations over the next 12 months. While not contradictory, these divergent trends create a challenge for many public companies: how to balance a growth and disruption mindset to stave off competition while preparing for the impact of a potential recession.

More proactive and continuous board involvement in shaping strategy may be needed to navigate this conundrum. This includes recognizing the potential need for more frequent course corrections as conditions change. Boards should also work with management to create a shared short- and long-term picture to understand where the markets, industry, and competition are heading and what that means for strategy and growth prospects. Tools and tactics to do so can be found in the NACD Blue Ribbon Commission reports on preparing for the future and on adaptive governance.

Public companies must also confront growing friction between the need to digitally innovate and the effective management of cyber risks.

Companies have no shortage of opportunities to adopt emerging technologies in order to buttress their growth and respond to disruptive competitors. However, new technologies also come with risk, increasing opportunities for cyber-attackers and heightening exposure to data-privacy missteps. Boards must work with management teams to reconcile the need to transform themselves digitally with the need to ensure underlying data assets are properly secured. Sixty-one percent of directors report that they would be willing to compromise on cybersecurity to achieve business objectives, while 28 percent prioritize cybersecurity above all else.

Directors and boards can turn to the NACD Director’s Handbook on Cyber-Risk Oversight to enhance their oversight practices and to the NACD report Governing Digital Transformation and Emerging Technologies to help ensure that the right balance between the two needs is maintained.

Board oversight of human capital is maturing.

Most directors (77 percent) are comfortable with their board’s oversight of current and future talent needs, although just 43 percent said they have reviewed charters to ensure that talent oversight responsibilities are effectively allocated across the board. Additionally, only 34 percent responded that their boards have set clear expectations for what they require from management to effectively oversee human capital risk.

To address this issue, boards could expand the discussion of human capital strategy and risk to ensure that it aligns with the overall strategy development process. They should consider updating their governance guidelines and committee charters to formalize human capital oversight responsibilities, as well as consider expanding the set of voices reporting on talent issues to include the information technology, audit, and operating business units. NACD’s recent report Board Oversight of Human Capital Strategy and Risks provides boards with actionable guidance on how to improve their oversight of human capital.

ESG is becoming commonplace in the boardroom, though more work remains.

Nearly 80 percent of public-company boards now engage on environmental, social, and governance (ESG) issues in some meaningful way, according to the directors surveyed. Most focus on ensuring links to strategy and risk. Discussions with investors often center on elements of the “S”in ESG, with an emphasis on human capital (65 percent) and diversity (74 percent).

To provide effective oversight, boards need to ensure a common definition of ESG across the organization. This definition should be used by management to identify and prioritize ESG risks and opportunities, and it should be presented to the board in the context of the company’s strategy. Guidance is available in NACD’s handbook Oversight of Corporate Sustainability Activities.

Learn more in the full report. In addition to more on these findings, the full report contains data and insights on board size and structure, types and size of committees, board refreshment, and enterprise risk and compliance oversight. All six oversight topics have rich dashboards to show the current state of board oversight in these areas.

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