Topics: Corporate Governance
Topics: Corporate Governance
May 14, 2020
May 14, 2020
The 2019–2020 NACD Private Company Governance Survey details responses from 283 private company directors—the same directors who today find themselves guiding companies that are among those hardest hit by the COVID-19 crisis. The questionnaire was in the field from July to August of 2019. And while that might seem like a lifetime ago, the lessons drawn only take on greater significance as we project toward a new normal. What follows are some the key findings from this survey, and what they could mean for the recovery of private companies.
Macroeconomic shifts were not at the top of respondents’ lists of the trends most likely to impact their organizations in 2020. A potential slowdown in the global economy was only the fifth most-selected trend at the time that this survey was in the field. The impact of the COVID-19 outbreak has surely changed this outlook for many, as the economy has since slowed to a standstill.
Yet one gets the sense that the disruptive trends that concerned directors most a few short months ago continue apace. In fact, while the economy has stagnated, many workers, business leaders, and directors will find that they return to a business world that has not merely hibernated in their absence, but rather metamorphosed.
Even before the prolonged COVID-19 crisis, private company directors rated a number of fast-moving and disruptive trends as those most likely to impact their organizations this year. Fifty-nine percent included the impact of business-model disruptions in their top five, closely followed by
The two latter trends, in particular, have gained profound significance. With an unprecedented number of US employees working remotely due to the outbreak of COVID-19, many companies have been or will be forced to rapidly adopt new processes and technologies that previously may have been rolled out gradually or on an experimental basis. Large numbers of employees and employers have little experience with working remotely, and they may either unwittingly expose organizations to new cyber threats or exacerbate existing threats.
Nearly two-thirds of private company directors (62%) report that their companies can no longer count on extending their current strategies over the next five years. This majority has likely grown since the start of the COVID-19 crisis. Several economists anticipate a recession, and the pandemic is already wreaking havoc on supply chains. Additionally, changing consumer spending behavior, selected among the top five trends for 2020 by only 30 percent of respondents, has suddenly taken on new significance with many jurisdictions mandating business closures and limiting travel.
This, and overall reactions to the COVID-19 crisis, may change consumer and customer behaviors in new and unexpected ways. While few directors could have anticipated these dramatic shifts in the business landscape in recent months, few private company boards, too, have been involved with forward-looking scenario-planning exercises that could have conditioned them to respond optimally to even more modest shifts. This is especially the case at smaller private companies—just about one in six firms under $1 billion in revenue report being involved with such exercises.
Most private companies prioritize improvement in areas such as the oversight of strategy execution, strategy development, and innovation. A majority of directors reported that it is important to improve their oversight of 10 out of 13 specific thematic governance areas. Meanwhile, out of a separate list of 13 areas related to board operations, composition, and processes, board respondents prioritized only three as important improvement areas. Many of these processes, however, provide for more efficient oversight of specific topics. While it could indeed be the case that many directors view their boards as already performing at a sufficiently high level, evidence from elsewhere in the survey would seem to suggest otherwise.
Take, for example, the issues of board composition and evaluation. Private company directors generally agree that the skills and experiences of current board members are well aligned with the needs of the business (83%). However, this confidence masks some difficulties that seem to reside under the surface. For example, one in four, or 25 percent of, private company respondents indicate that at least one of the independent directors on their board should be replaced because of diminished performance. Effective board leaders should address such issues; however, 26 percent of private company directors could not affirm that their board chair or lead director effectively leads their board. If anything, the crisis has thrown into stark relief the need for effective leadership, and the importance of having the right contributors at the table.
An additional fundamental area that may now merit more attention is agenda setting. Less than half (48%) of respondents noted this as an important area of improvement in the coming year. Timely reactions to crisis events may call for more frequent meetings, and most of these meetings are likely to be held virtually. Efficient creation and execution of an agenda is all the more important as directors attempt to work through a growing list of urgent items.
Only 51 percent of private company boards have focused on ESG over the past 12 months, compared to 80 percent of their public company peers. New interest in ESG issues among private companies is likely. In the public company sphere, ESG-focused funds were largely found to have weathered the initial flux of the crisis better than the broader S&P 500, with some attributing this difference to the nontraditional risks with which ESG-focused companies concern themselves. Meanwhile, most private companies focus on the S—the social element—of ESG: Human-capital management was rated as the ESG issue of greatest concern (72%). Even after this crisis, organizations are likely to be judged by how they treated their employees, customers, and communities.
The latest NACD Private Company Governance Survey provides an interesting look at the state of the private company boardroom pre-COVID-19, and highlights issues that are likely to persist throughout the pandemic and beyond. As the crisis evolves, continue to look to NACD for insight as we poll our membership to understand the changing governance challenges faced by directors and help to identify potential solutions.
COVID-19. Uncertainty. Fear. Recession. Fiduciary Duties.
It’s essential that directors know what to focus on and when.
NACD: Tools and resources to help guide you in unpredictable times.