February 3, 2020
February 3, 2020
Advances in technology and digital transformation abound, creating both pitfalls and new paths to success—and importantly, related calls to action for boards. At the same time, institutional investors and other stakeholders are challenging the long-standing shareholder primacy model.
During a recent NACD Pacific Southwest Chapter and USC Marshall School of Business Corporate Directors Symposium in Los Angeles, governance experts provided deep insights on an array of topics important for directors (photographed above: Larraine Segil, chair of the nominating committee for the NACD Pacific Southwest Chapter board, and Ronald D. Sugar, chair emeritus of Northrup Grumman Corp. and chair of Uber Technologies). The universal theme: Directors must embrace their oversight mandates and identify both challenges and opportunities—and actively address them.
Here are some of the key themes discussed:
Board diversity. Among other positives, board diversity can increase efficiency as directors draw on a variety of expertise, backgrounds, and perspectives to make smart and timely decisions. Heightened focus on efficiency is vital, and companies need to replace underperforming directors, opening the door for more diversity of thought.
According to a recent PwC study, 49 percent of directors believe at least one board member shouldn’t be there; that’s up from 35 percent five years ago. Additionally, fewer than 50 percent of S&P 500 companies conduct peer feedback and evaluations among board members, suggesting most of these companies could implement a well-known best practice to identify strengths—and weaknesses—to bolster performance.
Board oversight of data and cybersecurity threats. Many board members view Big Data as the most profound technological disruptor in business today. Data is both a strategic asset and a source of strategic risk, and boards must be involved in the creation and approval of their companies’ data-driven strategies. Typically, however, they are not.
Companies should have a high-level officer, even a C-suite executive, who is heavily involved with the IT process and who has a greater understanding than your average executive manager of a company’s data and how it is used. It’s worth considering the appointment of a chief data officer who is assigned responsibility for safe data practices.
Chief among deepening cybersecurity threats is ransomware, when a hacker breaks into a company database, encrypts the data, and demands money to decrypt it. To ensure payment, hackers typically find and delete the online back-up servers as well.
In this context, recommendations for best practices include:
ESG matters. Throughout the modern era, corporate purpose has centered on increasing profits. But in recent years, purpose has expanded to encompass the betterment of employees, communities, social organizations, shareholders, and other stakeholders.
Along these lines, environmental, social, and governance (ESG) concerns are increasingly important to influential investors. Boards must assess investors’ ESG demands, identify which are relevant, and help lead the formation of a strategy to minimize risk and identify opportunities.
Most people put “ESG” together under one umbrella, but it’s better to consider the specific issues in “E,” “S,” and “G” individually: determine how a company is exposed to each, target specific issues, and then build a plan accordingly. There has been some advancement in measuring ESG efforts to easily track performance, but there is still more to do.
Additionally, boards are increasingly aligning executive pay with progress on ESG initiatives. This is a challenge, and many directors worry that trying to be accountable on a perpetually increasing number of fronts may result in less accountability overall. Companies should begin with an ESG strategy—not metrics—and explore ESG topics that are core to a company’s business in order of priority. Next, they should determine steps to improve results on priority issues, such as minimizing waste, and how to measure and report results. Tracking progress on key initiatives is vital.
Digital transformation. Digital transformation once centered on cost reductions in supply chains and manufacturing processes. Today, more companies are investing in research and development programs and pairing them with comprehensive data analysis on consumer behavior in the pursuit of breakthrough innovations.
Technology advances are driving sweeping and rapid change across corporate America, and digital innovators are far more likely to raise new concerns over the long term. True digital transformation includes reimagining the company’s product or service portfolio, looking at changing customer behavior and our device-driven society.
Boards, human capital management, and the workforce of the future. Directors should be involved in the management of human capital: Boards should meet often with executives about the development and retention of talent and customers, and these communications should be strategic in nature and thorough in practice.
Directors should measure progress in multiple ways, such as surveying clients about company performance (quantitative) and by visiting places of business to assess sentiment among workers (qualitative). This gives directors diverse and comprehensive views on management’s execution of human capital strategies and helps them more effectively carry out oversight duties.
Furthermore, employees must be motivated to reach their full potential; the workplace must be diverse both in background and in skill set; and companies need to be committed to achieving their defined purposes.
The modern workplace is fast-paced and accelerating. Skills become obsolete far more quickly than they used to, which drastically affects practices in the workplace. Helping employees grow is a top priority, and a sense of healthy competition and inclusion within the company will foster an environment in which all employees can flourish.
A key concern for boards is how companies can adhere to the traditional organizational structures in the emerging “gig economy” of freelancers and independent workers, as well as how companies can build a shared purpose given this dynamic.
Investor perspectives. Many investors want companies to define their long-term plans for sustained value creation with a focus on their mission—their value-add to society, customers, and employees. If they do that, returns will take care of themselves. Boards need to provide strategic oversight on the long-term strategy and help the CEO and company execute on it.
In formulating the long-term story, boards need to challenge management to think about longer-term risks, including factors they cannot control and inevitable surprises. Boards should refer to the Sustainability Accounting Standards Board and the Task Force on Climate-Related Financial Disclosures and bring line managers, suppliers, and others into the conversation.
Defending capitalism. The nature of who we are and what we do defends capitalism by achieving the best possible returns for shareholders and stakeholders as a whole. Today’s society has a different set of values, and many don’t feel that capitalism embraces them.
A better understanding among generations and a realization that there are clear generational differences and worldviews between Baby Boomers and millennials are necessary. Younger people tend to be idealists, and companies do play key social and environmental roles. However, to reach millennials, they need to get better at, and be more active in, communicating the positive things they do for their employees, their communities, and the environment.