At the National Association of Corporate Directors’ (NACD’s) Master Class program in Philadelphia June 3-4, nearly 50 experienced directors engaged with corporate leaders on the key elements that will shape the boardroom in the coming decade.
NACD’s Master Class takes place over two days and comprises eight modules presented as panels, keynote speeches, and intensive breakout sessions. Modules are highly interactive and are led by veteran directors, leading business executives, and corporate governance experts. Each Master Class is organized around a specific theme.
In Philadelphia, discussions centered on ensuring effective boardroom dynamics and strengthening the board’s role in strategic planning, cybersecurity, and mitigating global risks. Below are five takeaways that emerged in Philadelphia.
Search out the enemies of effectiveness. Vague expectations, absence of process, inadequate delegation of authority, and individual sabotage can individually or collectively compromise board effectiveness. Independent chairs and lead directors should be attentive to poor board dynamics, which often have root causes that can easily be addressed. Boards can also help counter dysfunction by establishing a foundation of shared principles that will guide the board’s decision-making, agenda-setting, discussion management, and self-assessment.
Analyze the causes of gradual deterioration in performance. Management often rationalizes small performance drops by pointing to macro-economic trends or solvable business execution problems. Boards should consider adopting a forward-looking posture in order to understand the long-term impact of disruptors on business performance. They can do this by engaging with management in frequent discussions about the assumptions that undergird the company’s strategy and the “what-if” events that could invalidate those assumptions.
Think like an activist shareholder. Activists usually know the industry and sometimes even the company better than the board does. To avoid being ambushed by well-informed activists, boards should learn from the consultants and investment banks that serve their company, industry, customers, and competitors. They must also challenge management’s conventional wisdom about the firm’s current performance and future direction.
Clearly delineate the roles of the board and management in developing and executing strategy. Boards can offer more value by engaging “early and often” in the strategy development process, by pressure-testing management assumptions, and by selecting the appropriate metrics to assess strategy success or failure. When seeking a more active role, boards must collaborate with management on defining the boundary between directing strategy and managing it. Addressing this tension over where the lines should be drawn is a critical challenge that will demand ongoing attention from the CEO and the lead director.
Anticipate the consequences of global disruptors. In a hyper-connected global marketplace, economic and political shifts in distant corners of the world can instantaneously impact company performance through supply-chain disruptions, foreign-exchange volatility, and regulatory activism. Boards can increase their understanding of emerging cross-border interdependencies and evaluate whether management is sufficiently agile to respond when conditions change.
The state of the economy was remarkably different the last time NACD issued a governance survey dedicated to nonprofit organizations. In 2009, companies were just starting to stage a recovery from the financial crisis, and action plans were in the formative stages. At that point, survey respondents indicated the areas of most critical importance to their board were “board leadership,” “ethics and social responsibility,” and “board effectiveness.”
Fast forward three years to the 2012–2013 NACD Nonprofit Governance Survey, which shows that nonprofit boards have altered structures to meet the economic climate. Across the board, nonprofits have shifted focus to areas directly related to performance and strategy. Today, survey respondents indicate the priority governance issues are those that drive results: “strategic planning and oversight,” “fundraising,” and “financial oversight/internal controls.”
In addition to a more performance-driven outlook, nonprofit organizations have also increased the number of diverse directors present in the boardroom. According to NACD’s 2012 Blue Ribbon Commission on the Diverse Board, this development is a logical step, as boardroom diversity is a business issue: a means to competitiveness. Nonprofits are therefore more than competitive—female representation is ubiquitous with 97.7 percent of respondents reporting at least one female director on their board. The percentage of boards with at least one minority director has increased nearly 20 percent since 2009 to 76.4 percent.
Nonprofit organizations are ahead of their public and private company peers with respect to boardroom diversity. For public companies, diversity is a focus of pension funds and other institutions, as noted in last week’s NACD Directors Daily. Groups such as the Thirty Percent Coalition are urging Russell 1000 companies to increase gender equality on boards specifically—setting a goal that 30 percent of board seats are held by women by 2015. To meet this, U.S. public companies would need to work fast—current reports estimate that just 12 to 16 percent of board seats are currently held by women. Furthermore, according to NACD’s 2012–2013 Public Company Governance Survey, 27.4 percent of boards have zero female directors.
Reflecting on the second anniversary of the passing of the Dodd-Frank financial reform legislation, the business media were quick to notice regulatory agencies’ slow pace in putting the mandates into effect. For the past two years, directors have waited for the numerous rules on corporate governance as promulgated by the landmark legislation to become final.
Although regulators are not nearly finished with the resulting rules from Dodd-Frank, the role of the boardroom is to provide oversight while considering the challenges coming around the corner. Directors must monitor current corporate performance with an eye on the company’s long-term strategy.
NACD’s latest publication, Governance Challenges–2012 and Beyond, offers a forward-looking perspective on the priority topics dominating boardroom discussion. Governance Challenges–2012 and Beyond features current guidance and thought leadership from six of NACD’s Strategic Content Partners, on issues ranging from executive compensation and director liability to risk oversight and board effectiveness.
Here are just a few highlights:
Mastering CEO succession planning from Heidrick and Struggles, CEO succession is critical to the long-term success of any company. Today, full board engagement is necessary for proper management of the leadership pipeline. That means ongoing boardroom involvement to ensure that succession plans can be readily adapted to changing circumstances, with a particular eye toward both predictable and unpredictable leadership disruption. Among other practicable suggestions, the report suggests mock board meetings to identify CEO successors and strategies to ease the transition.
Do financial statements and disclosures tell the company’s whole story? According to KPMG’s Audit Committee Institute, this question has become more important than ever, given the call for greater transparency from regulators and investors. In disclosures, directors should go beyond what is required to address expectations and provide a clearer context for the decisions made. To assist in this process, the board may choose to enlist the management-level disclosure committee.
Understanding the drivers of the business. In this section, Marsh and McLennan Companies continues this discussion originally visited in 2010 by the Report of the NACD Blue Ribbon Commission on Performance Metrics. To effectively identify and mitigate risks, it is critical that directors understand what drives profit and growth throughout the organization. While directors often receive an abundance of data on performance, they are less likely to receive information on the paths that lead to profit or loss. As Marsh & McLennan suggests, the board needs information on the trajectory of the enterprise if they are to serve as a strategic asset.
Legislators, regulators and shareholders have had greater influence on the boardroom than ever before. With insights and practical guidance from the nation’s leading boardroom experts, Governance Challenges–2012 and Beyond is an essential resource for directors who understand the need to stay ahead of the curve.