Understanding the behavior of investors, employees, and consumers is a critical success factor for all companies. This can be difficult for corporate directors, however, as America’s demographics are constantly evolving. At this year’s second Directorship 2020® event, NACD partnered with Broadridge Financial Solutions, KPMG’s Audit Committee Institute (ACI), Marsh & McClennan Cos., and PwC to provide an in-depth look at today’s social and demographic trends and how boards can harness the opportunities these often-disruptive forces create.
In his keynote address, Scott Steinberg, CEO of TechSavvy Global and author of Make Change Work For You, affirmed that change is the “new normal.” He emphasized that companies must constantly innovate in order to survive in today’s volatile business environment. Some companies, such as Apple, Amazon, GE, and Samsung, have maintained their competitive edge by mastering the art of “sustainable innovation.” Steinberg pointed out that these companies foster highly collaborative relationships with their employees, who also represent the company’s customer base. By creating avenues for employees to share their observations on emerging threats and opportunities, these organizations are simultaneously constructing platforms to prototype new business products. These collaborative relationships thus enable management to harness the full range of talents that allow an enterprise to continually adapt and grow.
In the second keynote speech, Paul Taylor, former executive vice president of the Pew Research Center and author of The Next America, focused on two major demographic trends that are happening in the United States. First, the bulk of the country’s population is aging. Older generations have always needed the younger ones to drive the economy; the millennials, however—the youngest generation in today’s workforce—are collectively experiencing great difficulty in launching their careers and remain largely dependent on their forebears. Taylor observed that businesses need to mimic these new domestic norms and similarly nurture and invest in millennials to ensure the success of their firms’ future leaders.
Second, Taylor pointed out that by 2050, immigrants will comprise the largest-ever share of the American population: while 20 percent of Americans were of immigrant descent in 1960, that proportion is projected to climb to 37 percent. Not only will this expand the workforce and brainpower of the American economy, but it will also change the demographic complexity of the country’s consumer base. Furthermore, this modern immigration wave has begun to alter traditional attitudes toward racial and ethnic boundaries. For example, children of immigrants are more likely to marry someone of a different race or ethnicity. These trends are already driving business behavior, as contemporary television commercials clearly demonstrate: in an ad for Coca-Cola, the anthem “America the Beautiful” is sung in several languages; and two recent Cheerios ads featured a multi-racial family.
The presentations and discussion in Atlanta generated three key takeaways for directors:
Assess your corporate culture. Corporate culture can often be a significant roadblock to innovation, and many companies stumble because they fail to periodically rethink their identity. A corporate culture that allows for evolution is, by definition, resilient and adaptable. Regard your employees as a wellspring of innovative ideas, because they have the most direct interaction with your customers. Their insights into evolving consumer demands can, in turn, generate your business’s next game-changing idea. A big challenge for many firms is how to encourage employees to speak up, especially at established companies where a the corporate culture has been in place for some time. (FedEx, for example, has a 40-person team that is charged with driving innovation throughout the entire organization.) By contrast, the smaller size and absence of inhibiting precedents at start-ups enable them to be more adept at mining creative solutions from their entire employee base. Spurring and sustaining innovation is about institutionalizing a love of change within your organization. Create forums through which everyone—from the mailroom to the boardroom—feels free to share ideas.
Make educated bets. A lack of risk tolerance is a major barrier to innovation. For companies that are doing well, staying the course may seem like a safe bet; but as the competitive landscape shifts, this approach will ultimately cause the company to falter Create systems that allow the company to take smart risks. In line with the company’s established risk appetite, it’s acceptable—and expected—that a company will have to weather some level of failure. The board can openly discuss unsuccessful ventures with management, leveraging those experiences as learning opportunities instead of viewing them solely as a misstep.
Embrace diversity of all types. According to the Report of the NACD Blue Ribbon Commission on The Diverse Board:
[A] company’s ability to remain competitive will rely on its understanding of global markets, changing demographics, and customer expectations. Diversity is a business imperative, not just a social issue. The new business landscape will require boards to cast a wider net to find the very best talent available. As a natural corollary, the board’s mix of gender, ethnicity, and experiences will likely increase.
In his speech, Paul Taylor addressed the issue of age diversity specifically. Younger directors with relatively little board experience may be passed over for a directorship because seasoned directors perceive them as lacking the experience and credibility necessary to be effective. However, seeking out non-traditional director candidates (whether that status is determined on the basis of age or other criteria) can be critical to effectively managing a board’s talent pipeline. Established directors have the ability to mentor and develop the next wave of board leadership and, in turn, benefit from the perspectives of new directors who bring varied backgrounds and skill sets into the boardroom.
Look for full coverage of this NACD Directorship 2020 session in the May/June 2015 issue of NACD Directorship magazine.
The rate and complexity of change in the marketplace is greater than ever before—and not showing any signs of slowing. From innovation and disruptive technologies to regulatory activity and stakeholder scrutiny, companies are constantly presented with new risks and challenges. As NACD’s new Chair Reatha Clark King observed, writer William Gibson captured the inflection point most corporate boards find themselves approaching: the future is here, it’s just not evenly distributed. As these changes force global economic shifts, it is necessary for those in the boardroom to understand and prepare for the future structure of directorship now.
This week, NACD held the second in a series of exploratory meetings in Chicago to discuss how the boardroom can define and prepare for the challenges and opportunities expected in the next five to seven years. This meeting series—held in New York City, Chicago, and Los Angeles—will culminate in the kickoff of NACD Directorship 2020 at the 2013 NACD Board Leadership Conference. An effort to provide directors with a clear vision of what their roles will resemble in the future, NACD Directorship 2020 will extend from educational programs and roundtable exchanges to publications, all shaped by feedback from these events.
At the Langham Hotel in Chicago, more than 100 directors attended the afternoon session to discuss two topics: the future state of communications between the board and C-suite and how to select performance metrics that will generate sustainable organizational profit. Sessions were led by NACD President and CEO Ken Daly; Akamai Technologies Lead Director and Audit Committee Chairman Martin Coyne; NACD Chair King; and former Bell and Howell CEO, current NACD Director, and Northwestern University Professor Bill White. During the highly interactive sessions, each table was given a specific set of questions to discuss and provide thoughts among their peers. Takeaways from the event include:
Directorship is a part-time job with full time accountability. Inherent in the board/C-suite relationship is an information imbalance. However, with the right culture and board leadership, the board and senior management can easily communicate expectations and necessary information.
A CEO’s leadership style can serve as an indicator that the risk of information asymmetry has become too high. Directors establish a level of trust with the CEO and management to allow for board access to other members of the senior team, as well as site visits to see the company’s operations.
With an expanding board agenda, process and expectation setting are critical. The board should clearly communicate to management the types and format of information that need to be presented.
An empowered lead director or non-executive chair can help mitigate the risk of information imbalance. By facilitating communication channels and work between the independent directors and the CEO, this leadership position can break down some of the road blocks that may develop between the C-suite and directors. The relationship between the CEO and lead director or chair should be transparent.
Culture is critical in effective dialogue between the board and senior management. With the right culture, directors can be sure they are aware of the risks that are keeping the CEO up at night.
Sharing information via performance metrics, which are focused on what directors need to know, can bridge gaps in information flow. Ultimately, the board has to make winning decisions which are informed by data.
Today, directors balance short-term shareholder expectations with generating long-term sustainable profit. The role of the stakeholder, though, is more significant than ever before and expected to grow. In the future, directors will have to be increasingly focused on balancing shareholder return with stakeholder concerns.
It may be difficult for the board to address and to communicate with every stakeholder. The board should identify which stakeholders are critical to the strategic plans, and target communications to those groups.
Balance also extends to leading versus lagging indicators. The board should first approve the right strategy and set goals accordingly. Leading indicators will drive ensuing performance—but lagging indicators are also necessary to provide the right feedback loop.
Innovation is important to the success of any company. How innovation is defined, though, is largely dependent on the company, and should be rooted in the corporate strategy. For some, innovation will manifest in processes, products, or both.
The next NACD Directorship 2020 event will be held Sept. 10 in Los Angeles. Between events, NACD’s blog will feature viewpoints and research from our NACD Directorship 2020 partners—Broadridge, KPMG, Marsh & McLennan Cos., and PwC—that will take a deeper look into the emerging issues and trends that will redefine directorship.
Without a doubt, directorship has changed. In the last 10 years, the effects of legislation and regulatory activity such as Sarbanes-Oxley and Dodd-Frank have significantly expanded the role of the director. Taking into account the current trends of increased shareholder activism, heightened media scrutiny, emerging technologies, and disruptive innovations, it is expected that this role will continue to morph. As these shifts in the economy increase in amplitude and frequency, it is necessary for those in the boardroom to understand and prepare for the future structure of directorship—today.
With this in mind, NACD has launched NACD Directorship 2020 to help directors define and prepare for the emerging challenges and opportunities expected to impact boardrooms in five to seven years. More than an initiative, NACD Directorship 2020 extends from educational programs and roundtable exchanges to published research. Using topics informed by an advisory council composed of boardroom luminaries, academics, and governance experts, feedback from educational programs will shape ensuing research on leading practices for the future. In the coming months, several symposiums will be held across the nation, and the conversation will be continued at our annual Board Leadership Conference in October.
This week, NACD held the first of such symposiums at the Harvard Club in New York City. More than 100 directors attended the afternoon session to discuss two areas: the future state of the risk agenda, and how to select performance metrics that will engender sustainable organizational profit. The symposium was led by NACD President and CEO Ken Daly; Akamai Technologies Lead Director and Audit Committee Chairman Martin Coyne; and former Bell and Howell CEO, current NACD Director, and Northwestern University Professor Bill White. During the highly interactive sessions, questions were posed to attendees who were then able to discuss and provide thoughts among their peers. Takeaways from the event include:
Composition and resourcing is essential to navigating the current and future risks to the boardroom. With the right resources and information and the right people around the table, the boardroom can effectively engage in the critical issues.
Inherent in their role as part-time overseers, directors will always run the risk of information asymmetry: management has the full suite of information about the company’s operations that is then selected and parsed out to the board. The challenge for the board is to communicate its expectations on the type and amount of information it needs for effective oversight.
It is essential that directors trust, but verify. In the boardroom, the culture should be fostered so the executive staff feels they are able to report on the high-risk items and things that keep them up at night. To verify the information presented, directors should go beyond the C-suite, even outside the company. This can include meeting with the heads of business units, or gleaning outside sources of data.
In risk oversight, the board can informally meet with senior management and the internal audit team to develop a list of the top organizational risks. After these risks are identified, the board can have an executive session with an outside expert to gain more knowledge of the areas.
Industry experts on the board may not anticipate the disruptive technologies that have the potential to pose either a huge risk or opportunity to the company. While extremely valuable at the table, industry experts may not always be able to see beyond their acumen. Boards can recruit experts from other industries—who bring the perspective and knowledge of different risks and market forces—to serve as directors.
Total shareholder return (TSR) and financial and operational metrics reflect hindsight. These data can be bolstered with a healthy balance of “early warning” metrics derived from the company’s strategy, such as customer and employee satisfaction, dollar investment per employee, or retention.
Metrics are the operationalization of strategy. If the strategy’s underlying assumptions are flawed, however, the metrics have less significance. Is the board looking at metrics that question the strategy itself? This could include a measurement of the organization’s adaptability changes in the marketplace.
Reputational and stakeholder risk is an area that should receive boardroom attention. Directors should encourage metrics that foster stakeholder engagement as a strategy for risk mitigation.
The long-term health of most companies is determined by its success in being innovative. The company should establish early warning metrics that monitor how its innovation systems generate sustainable cash flows.
The next NACD Directorship 2020 events will be held July 16 in Chicago and Sept. 10 in Los Angeles. Between events, NACD’s blog will feature viewpoints and research from our NACD Directorship 2020 partners—Broadridge, KPMG, Marsh & McLennan Companies, and PwC—that will take a deeper look into the emerging issues and trends that will redefine directorship.