This year, NACD began a series of programs designed to address the changing nature of directorship. Intended to identify the board composition, processes, and resources necessary for the future board, the time frame lends a twist to this launch—no defined outcome has been chosen at this initial stage. Instead, with the awareness that the economy, and the boardroom, is in a state of unprecedented change, NACD Directorship 2020™is a multi-year initiative designed to help provide clarity to an uncertain picture regarding the future of directorship.
This initiative started with three exploratory meetings in New York, Chicago, and Los Angeles, the last of which concluded this week on the West Coast. In each city, feedback has allowed NACD to continually refine the program design, as well as re-think the questions posed to attendees. Perhaps mirroring the movement of the meeting’s locations from east to west, the conversations have become more focused on the processes directors can implement to meet the coming challenges.
At the SLS Hotel in Los Angeles, more than 100 directors attended the afternoon session to discuss two topics: the future state of information flow between the board and C-suite, and how to select performance metrics that will generate sustainable organizational profit. Sessions were led by NACD Managing Director and CFO Peter Gleason; Akamai Technologies Lead Director and Audit Committee Chairman Martin Coyne; Investor Responsibility Research Center Director and current NACD Director Richard Koppes; and former Bell and Howell CEO, current NACD Director, ContextMedia Non-Executive Chairman, 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:
Asymmetric information risk is inherent in directorship. If the board had the same level of operational knowledge as management, directors would be running the company.
An imbalance in information can occur within the boardroom as well. Boards are at a higher risk if one director is viewed as an expert in a technical area. In these situations, the rest of the directors may defer to his or her proficiency and not exercise the necessary skepticism. Further, board structure, with committees that delve deeper into technical areas, adds to the potential for information imbalance.
The risk of information asymmetry is not an issue, but a catalyst. Discussing the balance of information flow between the board and C-suite can expand into many interconnected topics, including board composition, culture, metrics, and leadership.
Board portals may be “greener,” but they encourage information dump. Attendees agreed that their board books have largely grown in length, due to the ease of transferring files rather than creating physical board books. Today, it is more important than ever for the board to communicate what information it needs from management.
By bringing more viewpoints to the boardroom, directors that are diverse in skill set and experience are more likely to explore all sides of an issue. Diversity of directors will change the dialogue in the boardroom going forward.
Boardroom culture should welcome constructive challenges from directors.It is necessary for directors to ask probing questions on issues without fearing negative repercussions. A culture that welcomes constructive criticism will enable more effective individual director evaluations that address problems head on.
There is no one-size-fits-all solution to addressing the current and future challenges posed by legislators, regulators, and stakeholders. While the underlying principles are consistent, application of new processes will be tailored to each company.
As a result of the rapid pace of marketplace change, directors need to adopt a mindset that their business is going to be disrupted. This adjusted mindset will allow for continuity planning to be built into the strategy to help offset future disruptions. As Bill White observed: ”If you have the mindset, the metrics will follow.”
In the year 2020, metrics will increasingly focus on speed and agility. Attendees largely agreed that there is no such thing as a competitive sustainable advantage, as a result of disruptive technologies. Speed and agility not only apply to the operations (speed of execution, acceptance of new products), but also to talent (willingness to change, ability to adapt).
In the era of big data, you can “metric yourself to death.” Directors should not look at metrics and dashboards blindly, but instead they should view them in a broader context, including what implications they may hold. It is also important to counter internal metrics with data that shows how the company is viewed externally.
NACD Directorship 2020 will officially kick off next month at the 2013 NACD Board Leadership Conference. Until then, 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 in the years to come.
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.
As a delegate to NACD’s Advisory Council on Risk Oversight recently said: “Directors don’t know what they don’t know.” This Fortune 500 director was referencing one of the challenges facing corporate boards today: asymmetric information risk.
Asymmetric information risk refers to the risk inherent in the imbalance in the information flow between management and the board. Directors serve in a part-time capacity while the management team operates full time. Naturally, senior-level executives have a much deeper knowledge about the organization’s operational processes and risks than the board. As such, directors rely on senior management for the information necessary to carry out their oversight duties.
In our experience working with boards, we’ve found an effective solution for mitigating asymmetric information risk is to develop a systematic process in which the board is given access to the executive team – beyond the CEO. Examples of senior staff with whom the board should regularly meet include the chief risk officer, chief compliance officer, head of internal audit, chief ethics officer, general counsel, CFO, and chief information officer. NACD’s C-Suite Expectations: Understanding C-Suite Roles Beyond the Core helps directors understand the types of information they should provide.
One way to ensure that this systematic reporting occurs is to include a recurring slot for key executives and functional leaders to present – perhaps during the board and or committee executive sessions. The goal here is to help the board understand what keeps these executives up at night and anticipate issues in advance.
The board is responsible for providing oversight on the appraisal of strategic and enterprise risk. The inherent nature of a director’s role, however, results in a reliance on the information presented in the boardroom and between meetings, by select members of the management team. For the board to mitigate this natural imbalance in information flow, directors should have in place a systematic process for engaging with key executives, in addition to those limited few who traditionally participate in board meetings.
For more on leading practices in risk oversight, read the latest Summary of Proceedings from the NACD Advisory Council on Risk Oversight.