December 2, 2020
December 2, 2020
As a chaotic year comes to a close, questions loom as to how the health and humanitarian crises will shape corporate governance in the year ahead—especially as dust begins to settle and companies focus less on crisis response and more on recovery. To help directors frame how they approach 2021 and the concerns they need to keep top of mind in the new year, NACD associate director of partner relations Lindsey Baker moderated a panel of governance experts who offered their perspectives. What follows are highlights from that conversation with Orlando Ashford, a director at Array Technologies, Hershey Entertainment & Resorts Co., and ITT; Robin Ferracone, founder and CEO of Farient Advisors and a director of Trupanion; Heather Redman, managing partner and cofounder of Flying Fish Partners and a director of Beneficial State Bank and Coldstream Holdings; John Rodi, leader of KPMG’s Audit Committee Institute; and Warren de Wied, a partner at Fried Frank.
There has been some bad news with the rise in COVID-19 cases across the country and around the world, coupled with recent positive news about a vaccine hopefully becoming widely available soon. What do you think will be the impact on people and business and how should directors work with their companies to best prepare?
Orlando Ashford: Our world has changed a lot. We’ve all had to adjust. As difficult as 2020 was, we’re getting a sense of the complex challenges to be managed in 2021. We’ve had some good news in terms of the vaccines from Moderna and Pfizer and others. Now the question is: how does that work? Who gets it? In what order? I’ve heard expectations to have 20 million doses delivered by the end of 2020 and 70 percent of the country [vaccinated] by the spring and similar ambitions for the rest of the world. That is a huge undertaking, but there are some big questions each of us must answer as individuals and organizations. How many would sign up for that first shot? Those of you who are on boards who have international participants, how are you going to manage travel expectations next year? I talked with a CEO who said that people in his Atlanta facility want to continue teleworking not because of COVID, but because of traffic. In Dallas, the sentiment is about getting back into the office. I think boards are going to have to have serious conversations. Do we come into the workplace? What’s driving the decision? What types of choices are we going to give directors and employees? Will we hold their decisions against them? What’s the right decision culturally for our organization? There are going to be a number of big questions for boards and organizations to answer.
How are boards providing oversight of the three “legs” of environmental, social, and governance [ESG] issues? Have you seen a shift between the “E,” “S,” or “G” conversations over the last several months?
Robin Ferracone: Boards have a critical role to play in overseeing ESG policies, including developing the strategy, monitoring the culture, crafting the message, and ensuring that executive and stakeholder interests are aligned. To that end, there needs to be a home for various aspects of ESG that are important to all stakeholders. Farient and our partners in the Global Governance and Executive Compensation Group just finished a global report on stakeholder incentives—part of that research highlights the fact that the full board often provides oversight of environmental and sustainability issues. With regard to human capital management, we are seeing compensation committees changing their names to better reflect the broader mandate of the committee. Think about human capital strategy with respect to diversity, inclusion, equity, recruitment, performance management, employment value proposition, as well as the traditional things to do. This has been the year of stakeholder prominence and we will continue to see more measures, reporting, and accountability in this area.
We’ve heard for many boards ESG lives in the nominating and governance committee, but some are putting the responsibility on the audit committee as the information is being looked at more closely by investors, and given the increasing demands for better ESG reporting. How are you seeing ESG responsibility allocated across committees?
John Rodi: While ESG reporting continues to be taken up by more and more public companies, oversight at the board level is often a matter of preference. Of course, ESG risks and opportunities that are financially material are covered by the full board. When it comes to ESG-linked strategy, companies might have separate environment, health, and safety committees or cover ESG-related risks and opportunities as part of the governance committee.
However, the audit committee does have a role. Audit committees should take time to understand stakeholders’ priorities and the company’s material ESG issues, particularly where those two things overlap. Fundamentally, reporting should reflect both what the company is doing now and where it is going, with accompanying metrics and goals. Collecting data in a consistent way is important, especially for businesses with global operations. The audit committee should understand the procedures and controls in place for data collection. Lastly, you’ve probably seen or heard of companies receiving assurance on data contained in their ESG and sustainability reports. The audit committee is well-positioned to understand which metrics merit assurance or whether an entire sustainability report should be assured.
On the topic of appropriate and effective oversight of crucial cultural issues of resilience and reframing, what are some methods for boards to potentially upgrade their governance?
Heather Redman: How do you get good data regarding culture? I think establishing a regular pattern of getting data in the wild as opposed to structured data from staff makes a ton of sense, and companies would be well served to surface that to the board level—issues of harassment, for example. We also need to seek one-on-one interactions, but be very deliberate about how we do it. You want to both convey a message about the attentiveness of the board and how it is walking the talk of the culture you seek to nurture and get good data. For example, think about the cultural signal of asking for feedback as to what we [the board] are not doing well. You’re not likely to get someone who will risk their job by bluntly telling you really bad news about the board’s or CEO’s performance, but they will leave breadcrumbs that, if you have a good EQ [emotional quotient], you will pick up on.
And make sure you have the right board member matched with the right teams. For example, at my venture firm, I think I generally have a better EQ than my partners, but definitely not when we are trying to understand highly technical founders. In that case, my partners are the same species and can identify happiness and unhappiness much better than I can. So, they have to be in the room if we are going to get answers about how it is really going from subtle cues that aren’t apparent to me. You can’t be a good listener in all cases, so choose the right listener for the situation.
How do you think corporate governance will change as a result of the events of this year?
Warren de Wied: In fact, I don’t think there’s going to be a major shift in board governance as a result of the crisis. I think there will be reflection on the processes people had in place before the pandemic. Two years ago, I said at this forum that directors’ priority should be to think about their companies’ crisis planning. In light of the pandemic, board members should look at how their companies handled this crisis. How did our infrastructure hold up? How did our people hold up? How did our facilities hold up? What will we change going forward?
I’m a believer that the fundamentals of good governance don’t change. There are five pillars of governance: understanding financial metrics; understanding business strategy; risk management and legal compliance; management recruitment, retention, and compensation; and culture and values. And I believe those pillars don’t change. What changes is the number of things that get glommed onto those basic pillars, many of which can distract boards from these fundamentals.
What should change as a result [of the crisis]? One thing is taking a harder look at how many boards one director can be on. Directors are stretched thin as a result [of too many board memberships]. Can a director really sit on four or five boards given the increased demands of the crisis? Does a sitting CEO today have time to be on an outside board? This is taking place in an environment in which investors are demanding more diversity on boards. So, I think that one of the big changes you will see is a change in board composition.
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