Topics:   Corporate Governance,Leadership,Technology

Topics:   Corporate Governance,Leadership,Technology

June 25, 2019

Shaping a Better Future for Boards

June 25, 2019

This fall, NACD will release the findings of our latest Blue Ribbon Commission report (BRC). Carrying forward a tradition we have kept for more than a quarter century, seasoned directors and advisors will opine on yet another challenging new topic. In recent years we have tackled corporate culture and disruptive risk. This year, the topic will be the future of board leadership.

Despite the strong progress made in governance over the last decade, board leaders are now being confronted with a wave of interconnected and simultaneous forces that will only intensify in the next 5 to 10 years, requiring a profound transformation of how boards deliver value. The BRC will offer a blueprint that board leaders can use to prepare themselves and their boards for a much more demanding future that in some ways has already arrived.

Can an NACD BRC help to shape that future? With 25 BRCs to date, and multiple recommendations made in each BRC (typically 10), our overall impact is hard to trace. Still, as was shown four years ago in a blog post about “Blue Ribbon Impact,” our voice is being heard. If you compare governance practices in the year of any given BRC to practices two or so years later, you will undoubtedly see that our BRCs do move the needle.

To focus on reports that had significant impact, I turned to Chief Knowledge Officer Emeritus Alexandra Lajoux’s insights from her 2015 blog post (excerpted and condensed below) as a reminder of the prescience exemplified by these reports. That changes in board governance and oversight practices are brought about by these BRCs is supported by data collected in NACD’s public company surveys on how our members have adopted these practices over the years.

1995: The BRC on Director Compensation recommended director payment in equity, with dismantling of benefits. Before vs. After: Whereas in 1995 it was common for directors to receive benefits but no stock, by 1999 the trend was the opposite. By then, nearly two-thirds of companies included stock as part of director pay, and less than 10 percent paid benefits.

2001: The BRC on Board and Director Evaluation recommended formal evaluation of boards and directors. Before vs. After: The 1999 survey showed 32 percent of boards conducted evaluations; the 2003 survey showed that 85 percent did so. This was no doubt due to new stock exchange requirements mandated in the Sarbanes-Oxley Act of 2002 and issued in 2003. But, the stock exchange rules themselves were born in part out of NACD recommendations made March 4, 2002 (included in this NYSE report). In fact, 9 of NACD’s 10 recommendations—all based on the Blue Ribbon Commission’s recommendations (including one on board evaluations)—subsequently became stock exchange listing requirements.

2003: The BRC on Executive Compensation recommended an entirely independent compensation committee for all public companies. This change was notable because it suggested an independent compensation committee beyond those covered by the Sarbanes-Oxley–mandated stock-exchange rules that would be issued in November of that year. Before vs. After: The 2005 survey showed a rise in overall independence of compensation committees compared to 2003: “Three-fourths (75.9%) of firms overall, up from 65.5 percent in 2003, indicated that they had only independent outsiders on their compensation committees.”

2004: The BRC on Board Leadership recommended that boards consider using an independent lead director in cases where they did not have an independent chair. Before vs. After: In the immediate and near-term aftermath of this report there was an apparent surge in the use of the lead director—even greater than that seen when the “presiding director” disclosure requirement of the New York Stock Exchange became effective in 2003. The 2005 survey indicated that over a third (38.5%) of the boards studied had a designated lead director, almost four times the number (10.0%) shown in the 2003 survey. The 2007 survey said that “44.8 percent of respondents’ boards have a designated lead director.”

2007: The BRC on the Governance Committee recommended director orientation (as well as ongoing director education). Before vs. After: In 2007, 60 percent of respondents said that their boards had a policy or program on director education. In 2009, 72.8 percent said they had such a program.

2011: The BRC on Lead Directors recommended continued use of the lead-director role as a viable alternative to an independent chair. Before vs. After: The 2011 survey showed that at the time this group was convened, only 65.4 percent of respondents sat on boards with lead directors; the 2012 survey showed that 82.8 percent had a lead director.

2017: The BRC on Culture as a Corporate Asset recommended stronger oversight of this area, including not only oversight of the tone at the top, but also oversight of the buzz at the bottom. Within one year, the impact of this recommendation was already evident. Our 2018–2019 survey reported that directors’ understanding of the mood in the middle rose 10 percentage points, to 45 percent. It also found that 27 percent now say they clearly understand the buzz at the bottom levels of the organization, a 9 percentage point increase compared to 2017.

So, what will the 2019 BRC recommend, and will it help predict the future? The Future of Board Leadership report will recommend practices to future-proof the boardroom. Our Commissioners have already begun convening, and here are several of the action items that they foresee for boards and their leaders:  

  • Change the board’s structure to become more flexible.
  • Disclose more about governance methods and results to investors and stakeholders.
  • Deploy data analytics capabilities and new technology to enhance board oversight.
  • With accelerating turnover, become more diverse.
  • Increase accountability for individual and collective performance.
  • Prioritize the fastest-changing drivers of corporate strategy and risk.
  • Represent a wider variety of stakeholder interests.

These recommendations are all credible and important. Will they provide an accurate lens into the future of board leadership and predict where we’ll be in a few years? Perhaps. But the important thing is not predicting the future of board leadership. Rather, it is in making that future better through decisive, informed board leadership. That is the goal of this Commission, and I am confident that they will meet it.