This is the second post in a series addressing the short- and long-term impacts of the 2016 presidential election. Read the first post here.
Directors gathered to discuss the impact of the recent presidential election on November 16, 2016 with audit and risk professionals from accounting firm EisnerAmper. While immediate-term changes were pressing on the minds of directors, they also discussed strategies to address societal and business challenges that coalesced around the following topics.
Can Corporations Bring Back Modern Manufacturing Jobs?
Directors were skeptical that the type of manufacturing jobs that have fueled American economic growth since the end of the second World War would ever return—and asserted that changes in trade agreements may directly impact the ability to create jobs.
EisnerAmper Chief Risk Officer Peter Bible outlined how the developing administration of President-elect Donald Trump could affect the ability of American companies to export their goods. The Trans-Pacific Partnership (TPP) “is basically on hold now” said Bible. “He wants tariffs on China and Mexico, wants to renegotiate NAFTA, and reconsider the U.S.’s involvement in international trade agreement.” Bible also pointed out that the president can act unilaterally on trade agreements, thus negating congressional checks on trade decisions.
Jill Wittels, chair at eMagin Corp., voiced concern about the pace at which companies could replace factories to offset the impact of tariffs and build more jobs for Americans. “Imposing currency restrictions and tariffs on goods coming in from China, South America, or other parts of Asia would be highly disruptive,” Wittels said. “You don’t instantly create replacement factories in the U.S. at a comparable cost.”
Robert Klatell, chair of TTM Technologies, concurred. “Realistically speaking, there is not that much flexibility. We cannot create in the United States the scale of manufacturing that exists in China,” Klatell said. “We don’t have the people or the capital to do it. We’ve rarely had a government willing to support manufacturing the same way that China has in the past 10 to 15 years.”
William Leidsdorf, director at Icahn Enterprises, offered a different viewpoint. “I think you have to look at how Congress may change or water down the president’s decisions,” Leidsdorf said. Trump “is a businessman. He’s a pretty good negotiator. He’s going to go in [to the presidency] and say he’ll do a lot of things and then negotiate.”
Educating the Workforce
Re-educating the American workforce has been a ubiquitous topic at roundtables co-hosted by NACD throughout 2016. This event was no exception.
A vigorous discussion about the modern workforce was ignited when Carol Robbins, principal of financial services strategic advisory group CER Consulting, cited the invention of a garment-sewing robot as a groundbreaking technology likely to replace countless garment manufacturing workers around the world. Sharon Manewitz, principal and executive director at Manewitz Weiker Associates, a firm that consults with struggling companies, responded: “But who will make the robots? Will they be made here? We need corporate America to help educational institutions change the nature of education in America” to meet the demands of a knowledge-based economy.
The ability of the workforce to be retrained for modern jobs, and how automation will continue to disappear unskilled and lower-skilled positions, was discussed at length. Klatell, however, looked to the future. “Some people won’t make the transition, so we should be focusing on their children,” Klatell argued. “Hopefully, we can get their kids through school with a more meaningful education to make them more employable.”
Laurie Shahon, president of Wilton Capital Group, placed a board lens on some companies’ struggle to fill open positions in certain fields. “Human capital is an issue boards have to deal with,” Shahon said. “We see jobs available in financial services and other industries, but they can’t be filled because there aren’t sufficient qualified people to fill them.The board can and should present alternate cases in its strategy planning to address these changes.”
If Trump makes good on his campaign promises, deregulation is expected under the new administration and the forthcoming Republican majority congress. How long, though, can directors anticipate deregulated policies to last? Bible pointed out that the current administration might attempt to press through lingering Dodd-Frank provisions. However, he warned that deregulation could cause disruption. “These things are deeply rooted, with a lot of capital behind them,” Bible said. “You can’t just say ‘poof—gone.’ It’s impossible.” Practices that companies have implemented as a result of post-financial crisis legislation [such as the Dodd-Frank Act of 2012] are likely not to disappear as governance best practices because companies invested time, energy, and money to comply with them.
Meanwhile, directors in the room considered what impact deregulation might have on enforcement of the Foreign Corrupt Practices Act (FCPA) and other international business policies by the Department of Justice. Andrea Bonime-Blanc, founder of GEC Risk Advisory, reminded attendees that enforcement of the FCPA, the False Claims Act, and other laws has been on the rise lately. “People are asking, ‘What’s going to happen with FCPA enforcement?’” Bonime-Blanc asked. “Companies can’t just say ‘oh, let’s stop worrying about bribery.’”
Bible responded: “I believe that the FCPA will continue to be enforced as a worldwide standard, and that the new administration’s focus is going to be on executive compensation and on market regulation. I don’t think there will be an increase or a decrease in enforcement.” If anything, Bible indicated that directors should be concerned about the risk of tax repatriation from companies that have moved their headquarters offshore. “Is everyone familiar with how the overseas tax issue works?” Bible asked. “There is $2.6 trillion in money offshore, and $500 billion of that is held by tech companies. There are drives to get that money back into the U.S. economy that can be done without addressing the entire tax structure.”
Don’t Give Up on Culture of Inclusion
The social unrest incited or revealed by the vitriolic presidential election was discussed in the context of the culture of inclusion and tolerance that their companies have invested in building for decades. Aside of the moral imperative felt by many attendees, the disruption of hard-won corporate culture by internal or external actors could present a reputation risk to the company.
Wittels noted that a popular American shoe company had been endorsed by an incendiary website littered with forms of hate speech after a senior manager at the shoe company stated that it felt the country was moving in the right direction under the incoming president. While the company released statements strongly stating its commitment to principles of inclusion, “there are comments about boycott,” Wittels said. “This is a real reputational risk, and a risk with consumers, that could instantly in this communication age go viral and affect the bottom line.”
Klatell returned to the question of the board’s responsibility to ensure that the CEO, his direct reports, and management across the organization are responsible for maintaining a culture of respect, dignity, and inclusion. In the face of employees who may be looking to throw principles of inclusion out of the door, Klatell said: “I’d hope that most companies would stand up and say ‘No, this is what we stand for, and this is how we behave.’”
To see the full list of participants, please click here.
One of Steve Jobs’ last initiatives before his death in October 2011 was a personal pitch to the Cupertino City Council of his vision for a state-of-the-art research and development facility shaped like a spaceship, an integrated 21st century campus surrounded by green space, designed with a commitment to energy efficiency, environmental sustainability, and generous amenities for employees. The updated plans in December 2011 stated: “This new development will provide a serene and secure environment reflecting Apple’s values of innovation, ease of use and beauty.”
About the same time these new campus plans were being developed, Apple was linked with a very different work environment—that of Foxconn Technology Group, the biggest maker of Apple iPhones and iPads. A workers’ rights controversy at Foxconn had dogged both companies for a few years due to worker suicides and factory explosions. Photos of Foxconn’s dormitories and factories at the time show netting outside the windows to catch suicide-jumpers—an image clearly not aligned with a “serene and secure environment reflecting Apple’s values.”
As Bloomberg journalist Tom Randall noted in “Inside Apple’s Foxconn Factories,” “the relationship between the two companies shows how the reputation of global brands is increasingly tethered to the emerging-market companies they do business with.” This is especially true when it comes to the place where the work is done, whether it’s at an address controlled by the corporation or one of its suppliers.
Following the suicides, Apple published a set of standards spelling out how factory workers should be treated and it also moved some of its production work. It’s a continuous process. As Apple noted in response to a December 2014 BBC Panorama News program about Apple’s ongoing challenge to protect Chinese factory workers, Apple stated: “We are aware of no other company doing as much as Apple to ensure fair and safe working conditions. We work with suppliers to address shortfalls, and we see continuous and significant improvement, but we know our work is never done.”
Where the work gets done—planning, making, selling, and servicing the company’s core bundle of products and services—is the workplace. It can be physical space the company owns or leases; it can be cyberspace, where work is done from anywhere, anytime; and, as noted above, it can also be the physical space used by key vendors to whom various stages of the work have been outsourced. It is often a large asset: in 2014, AT&T’s domestic real estate portfolio was 240 million square feet while RadioShack had 4,400 company retail outlets before it declared Chapter 11 bankruptcy in February 2015. In addition, investment in the workplace can approach that of labor and information technology, yet boards often pay little attention to it until there is a crisis.
The workplace is changing, as seen in Harvard Business Review’s October 2014 cover story, “Why we Hate Our Offices and How to Build a Workspace We Can Love,” devoting three articles on 21st century workspaces and the impacts of technology and culture on how and where we work, how we feel about our workspace, and how it impacts our productivity.
Two industry thought leaders described workplace strategy (WPS) more than a decade ago as “a bundle of occupancy, connectivity, and support services to enable those who do the work to get it done.” Michael Joroff from MIT and Michael Bell of the Gartner Group wrote then: “In this definition, all activities are designed to help the workforce accomplish its mission in physical space and cyberspace.”
Directors need to understand the risks to the business if there is no WPS or if the latter is not aligned with enterprise priorities and opportunities. WPS needs to be agile enough to keep pace with ever-changing business requirements and risks. Here are questions directors can ask senior management:
Does the company have a WPS? The fact that a company leases or owns real estate and facilities does not mean it has a strategy. WPS requires an analysis of the supply of and demand for space wherever work is done throughout the enterprise and across divisions, departments, subsidiaries and state, national, and international boundaries, combined with plans to address the gaps or oversupply of space consistent with enterprise goals. The demand side of the equation is the current and forecasted hiring plans for employees and contractors. The supply side is the existing inventory of work space to accommodate that demand, with the added complexity of alternative ways of working from almost anywhere anytime.
The risks of not having a WPS include:
Wasted costs from sub-optimizing the enterprise portfolio of workplace assets. For example, owning vacant real estate with no known or forecasted demand and/or potentially securing and building out new work space for a line of business when those costs could have been avoided by using under-utilized space from another business unit
Lost sales and market share. WPS can become an obstacle to getting the product or service to the customer if workplace is not available when and where it is needed or if it is not adaptable to enable evolving work processes
Impact on talent attraction and retention. Workplace can impact employee satisfaction, especially if it is disconnected from enterprise values that commit to provide a productive and satisfying work environment or if it is in a labor market that cannot meet the business requirements for specific skills
How can WPS support enterprise goals? WPS is becoming part of big data. Collecting, maintaining, and analyzing the data requires collaboration across myriad services including finance and accounting, human resources, information technology, and data analytics, sourcing/supply chain management, real estate and facilities, sales and marketing, and operations. Which group leads WPS varies by company so a report to the board on WPS might come from any of these groups. A WPS report includes trends in the total costs of occupancy with a breakdown by subsidiary, division, or line of business, and by region and real estate asset utilization, which include trends such as vacancy, the amount of square footage, and total workplace costs allocated per employee compared to industry benchmarks.
A good WPS includes performance metrics that flow from enterprise goals. WPS tactics and metrics should support enterprise goals such as cost containment, scaling business for high-growth initiatives, enterprise risk management, corporate social responsibility, sustainability, employee satisfaction, and retention goals.
WPS has long been a part of risk management—disaster preparedness from floods and blizzards, for example—but outsourcing has expanded the risks by including the working conditions of the workplace of one’s global vendors as well as cyber-risks of the supply chain. Consider these reputational risks:
Your product is manufactured in a Bangladeshi building that collapses and kills 900 workers inside
Your point-of-sale machines are breached by attackers whose first step is the theft of credentials of one of your vendors and ends with the theft on a massive scale of your customers’ personally identifiable information and credit card and debit card data.
Part of the update to the board should include an overview of workplace-related supply chain risks. It also includes an explanation of the governance structure that specifies how WPS decisions are made, executed, reinforced, and challenged in the company–at the enterprise level? At the line of business level? Who owns and is accountable for these decisions that can have a major impact on the business?
How agile is our WPS? Business is being disrupted at an accelerating pace. Whether it’s the impact of online shopping on a brick-and-mortar retailer or a merger, acquisition, or disposition of a business unit, directors should consider if the company’s WPS is flexible to enable a rapid response to sudden, unexpected risks and opportunities. Real estate is illiquid. There are ways to make a workplace more agile, but flexibility comes at a cost premium. The premium may be worth it compared to the impact to the business of not having space when you need it or of locating in a “low cost” place where the company cannot hire enough people qualified to meet the business requirements, or being stuck with millions of square feet of vacant space that can only be disposed of at pennies on the dollar. Service providers can help identify risks in the enterprise workplace portfolio and ways to mitigate these risks that align with your company’s goals and needs for agility.
Strategic questions to ask about WPS include:
How much are we spending on Workplace and how much should we spend?
How agile does our Workplace need to be given our competitive environment?
Does our Workplace reflect the values and strategy of the enterprise and align with corporate goals?
How do we know if the Workplace of our key suppliers aligns with our WPS and enterprise values?
A Reflection of Culture
The workplace is a reflection of corporate values and priorities. A headquarters campus, a retail store, a manufacturing plant, a call center, and the cleanliness and safety of an amusement park are all reflections of the culture, personality, and values of the founder or CEO. Office or facilities space is an indicator of the attention paid from the top down to where and how the work of the company gets done.
Here’s a thought experiment:
Recall Merrill Lynch CEO John Thain’s $1.2 Million office renovation in 2008. Because his private office sported luxury items that included a $38,000 commode and $87,000 rug, the CEO’s workplace became an embarrassing emblem of banking industry excess as global financial markets were crashing. The workplace renovation caused so much negative publicity that Thain soon agreed to pay back the shareholders
Now, think of your boardroom as the workplace of your board.
What does your board workplace convey about corporate values to your stakeholders?
Is the board’s workplace aligned with the priorities of the enterprise?
What do you know about the workplace of your key suppliers?
To go back to the example of Apple’s supply chain and the implications for a workplace, a March 27, 2015 article by Eric Pfenner in TheWall Street Journal hints at another way to outsource that has the potential to change the discussion about workplace. In “Japanese Robot Maker Fanuc& Reveals Some of Its Secrets—Company helps make iPhones and Teslas”, Pfenner reported that Fanuc’s giant Robodrill machine tools are used to help shape the aluminum cases for smartphones from Apple, Xiaomi, and other brands.
The efficiency of Fanuc’s robots is breathtaking. “One 86,000 square foot factory in Oshino, making industrial robots, is staffed by only four people at a time,” Pfenner writes. “In another factory, robots can assemble an industrial motor in 40 seconds.” As more industries accelerate the automation of work processes, reputation risk shifts from workplace conditions to workforce and impact on jobs. What WPS most closely aligns with your company’s goals and values?
In today’s evolving world of off-shoring, on-shoring, near-shoring, and right-sourcing, executives and the board would do well to think about the workplace as that bundle of occupancy, connectivity, and support services that enable those who do the work to get it done efficiently and effectively—wherever, whenever, however and-increasingly-whoever is doing the work on behalf of the company—and oversee that their company’s WPS enables enterprise goals and reflects the company’s values.
Margaret Latshaw’s experience includes seven years as an officer at Bank of America and at H&R Block and 10 years as a director on the board of a private real estate company. She is an advisory board member of the real estate center at the University of Missouri-Kansas City and an NACD Fellow since 2013. She currently advises on corporate real estate and business strategy. Contact her at email@example.com.
As the marketplace grows in complexity and turbulence, it is increasingly clear that true success depends on people. As boards face more disruptions, they will need to ensure the company has the right skills and agility in the talent pipeline to meet these challenges. This topic—talent development—was the subject of this year’s Blue Ribbon Commission (BRC) report. In the second session of Tuesday’s Board Leadership Conference, NACD’s Managing Director and CFO Peter Gleason was joined by the chairs of the 2013 Report of the NACD Blue Ribbon Commission on Talent Development: A Boardroom Imperative Gregory Lau, managing director of the board of directors practice at RSR Partners, and Mary Pat McCarthy, director of Mutual of Omaha and Tesoro, to discuss the commission’s findings and examine the “next” practices in executive talent development.
Why Talent Development?
The reasons for the board to prioritize talent development are obvious. Over 50 percent of a company’s expenses are related to talent and people. “With the right talent,” observed McCarthy, “you can take on more risk than you might otherwise be able to do.” And yet, for the first time in decades, the talent pool is shrinking. When companies do find themselves at an inflection point, they may not easily have the necessary talent on deck.
Both chairs observed that traditionally, the board has focused on CEO succession. One of the report’s recommendations, however, is to have a multi-level, multi-year talent pipeline overseen by the full board. “Directors,” according to McCarthy, “need to think beyond the CEO and the current year.”
Building vs. Buying Talent
Directors need to take a critical look at the organization’s hiring philosophy. Does the company develop and promote from within, or hire from outside? Although there are situations that may require a significant external recruitment strategy—for example, a turnaround situation—internal hires are often less expensive and on average more successful.
Further, oversight of the talent pipeline should not be a “start and stop” process. The chairs recommended that the board continuously monitor the talent pipeline. Directors should spend time as a board thinking about strategy and the skills the company is going to need, and actually allocate time to do a deep dive. Going beyond the company, Lau recommended looking at competitors’ talent to figure out how they are developing their pipeline. A red flag for directors should in fact be that their competitors are consistently recruiting talent from them.
Strategic Human Resources Function
At BRC meetings, a significant portion of the debate was where the authority of talent development should rest in the company. The commission came to the conclusion that the human resources function should serve as a “strategic architect” to the company. The chief human resources officer or equivalent position, in fact, should make sure that the talent development process is “constant, moving, with good results,” according to Lau. “That person should have time on the board agenda, throughout the year, talking to the directors on talent.”
The Report of the NACD Blue Ribbon Commission on Talent Development: A Boardroom Imperative is available at the NACD Bookstore and free to download for all NACD Full Board Members.