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.
Confidence in the economy is a broad topic to discuss. Just as one area starts to show positive growth, the world is shaken by a different downturn or disaster. In an article last month in the New York Times, economist Paul Krugman discussed the increased complexity of the current economy, compared to the months following the most recent financial crisis. In late 2008, the world’s collective attention was on the falling stock market. Today, there are many areas contributing to overall economic confidence: inflation, employment, oil prices and so forth. As Krugman notes, “we’re living in a world that is characterized not so much by the sum of all fears as by some of all fears.”
NACD’s most recent Board Confidence Index (BCI) reflects this conflicted view. In Q2 2011, the Index fell from 64.9 to 63.1, the first time it has dropped since its creation in the autumn of 2010. When asked to characterize the current state of the economy compared to one year ago, directors registered a confidence index of 68, a decrease of five full points since Q1 2011. Directors also feel less confident in the progress made in the short run—looking at changes in conditions over the past quarter, confidence dropped to 59 from 61.
However, the slight decline in confidence is countered with a more optimistic view for the coming months. Just this week, Federal Reserve Chairman Ben Bernanke projected increased growth for the next six months in remarks following the Central Bank’s Beige Book release. According to Bernanke, policymakers will be focused on the labor markets. According to the Q2 2011 BCI, the boardroom agrees. Despite slowed growth, nearly half of corporate directors (43%) plan to expand the workforce in the upcoming quarter. In addition to hiring practices, directors are generally more confident regarding the future. Expectations for the next year stand at an assured 67.
Recently released data from The Conference Board (TCB) echoes the caution seen in the boardroom. Despite higher predictions, TCB’s Consumer Confidence Index fell to 60.8 from a revised 66 in April. Unsurprisingly, American consumers are troubled by the current combination of increased costs for food, the increased cost of oil and the depressed real estate market.
The Board Confidence Index is conducted by NACD in conjunction with Heidrick & Struggles and Pearl Meyer & Partners. Q3 2011 results can be expected in September.
NACD’s most recent Board Confidence Index (BCI) mirrors this view of restrained optimism. First exhibited last winter, directors no longer feel the hesitancy that somewhat immobilized companies in autumn of 2010, but current business conditions have not yet improved to a level encouraging outright enthusiasm. The overall BCI rose to 64.9 in Q1 2011, a slight improvement over the previous quarter’s overall index of 64.4.
Despite this incremental improvement, directors are less confident about the future in the short run, as opposed to a year out. Waiting for final rules from the Securities and Exchange Commission on shareholder voting and transparency, proxy access, and the new whistleblower programs, it is no surprise that on the cusp of proxy season boardroom expectations for the next quarter dropped to 57 from 60 in Q4 2010.
It should be noted that the BCI is a snapshot, taken nearly a month ago. Since then, significant events have dominated the news. The economy has been shaken by the aftermath of the terrible natural disasters in Japan, the unrest and turmoil in the Middle East, and the near-shutdown of the U.S. federal government over budget debates.
While fewer consumers believed jobs were plentiful in March, directors were more optimistic. In Q1 2011, 48% of directors responded that their hiring remained the same, while a third said their companies’ hiring practices resulted in a net gain. Looking forward, more than half responded that their hiring practices would remain the same.