“The last several decades have proven that, more than ever, we are all interconnected and interdependent,” said NACD Chair Karen Horn. “We will rise—or fall—together, based on that trust.”
NACD Board Chair Karen Horn
Horn’s opening speech at the recent 2016 NACD Global Board Leaders’ Summit revealed a compelling case for strong, conscientious corporate governance in light of recent political, economic, and social turbulence.
Horn’s governance experience is extensive and includes serving as a director at Simon Property Group, vice chair of the U.S. Russia Foundation, and vice chair of the National Bureau of Economic Research. She also previously served as chair of the audit committee at Norfolk Southern Corp., lead director and chair of the compensation committee at Eli Lilly & Co., and a director of T. Rowe Price Mutual Funds.
Horn began by thanking outgoing NACD chair Reatha Clark King for “her leadership and her positive influence on our organization’s growth,” and praised the audience for their own strength of leadership in the boardroom. She then turned to the guiding concept behind this Summit’s programming—convergence.
“Convergence is an important theme at a time when our world appears to be tearing itself apart,” Horn said. She pointed out that hostility seems to be the prevailing sentiment of our time and that frustrations with the current domestic and geopolitical environments are the impetuses for growing division. “I feel we must focus on a wider, longer view—a more broadly encompassing perspective that leads us back toward convergence,” she said.
Horn—who previously served as president of the Federal Reserve Bank of Cleveland and as an economist for the board of governors of the Federal Reserve—made several recommendations meant to address the evolving relationship between society and capitalism, using conscientious governance. (For more information on the roles of capitalism and corporations, view the NACD blog post “Re-Thinking Capitalism: Best-Selling Author Espouses Higher Calling for Boards.”)
Addressing Income Inequality
Directors can take a role in addressing social issues like income inequality, Karen said, adding that income inequality is an example of a challenge that “affects not only our immediate stakeholders, but everyone downstream who will be affected in the long term as well as the short term.”
Horn agrees that free trade is an excellent driver of economic value across the board, but that the path to growth can unintentionally leave some individuals behind. She suggested public, private, and government entities alike should develop programs that lift up those who are taken advantage of or otherwise harmed on the path to greater economic progress. “Looking at an issue like this from the perspective of those who will not benefit, or may even be hurt by it, is the first step toward finding compromises and solutions that will minimize negative fallout,” Horn said about the corporation’s role in growth as a greater good.
One such program that directors could collaborate with policy makers, social leaders, and other stakeholders on is how to address the controversial debate over minimum wage increases. “Everyone has an opinion, and it is clearly a divisive issue,” Horn conceded to the audience. “If we are to find a solution that works, again, we must become familiar with the divergent perspectives.”
The Imperative to Lead
Capitalism is being impacted by “globalism, social and demographic shifts, new technology, increased transparency and resource scarcity,” According to Horn. In the face of these paradigm shifts, directors have the opportunity to converge with stakeholders to build a better path forward for all, and have a unique opportunity to rebuild the public’s trust in the role of corporations.
“People are searching for leaders they can trust, leaders who are smart, confident and strong—who are understanding and compassionate,” Horn said. “This is a role sometimes filled by government, but trust in government is at an all-time low, so the leadership gap needs to be filled. I believe we are some of the leaders who can and should fill that gap.”
Horn’s address closed with a charge to directors that will resound through her term as chair of NACD and beyond.
“Corporate America has an immense amount of talent, and we need to step up before we are stepped over,” she entreated. “There is no question that we have the ability to take this leadership challenge, but only if we act responsibly, transparently, honestly and with careful regard for different perspectives. If we can do that, we can move our culture back toward civil discourse—toward convergence.”
Recently, the world’s largest ongoing study of the internal audit profession—the Global Internal Audit Common Body of Knowledge (CBOK)—was completed by the Institute of Internal Auditors (IIA) and Protiviti to ascertain expectations from key stakeholders regarding internal audit performance at organizations of varying operational models and sizes. The study sought input from members of audit committees all over the world about their expectations of the internal auditor’s role in the organization. We think all directors will find the results of the study applicable to their work in the coming year and beyond.
Below are six imperatives for internal auditors from the CBOK study based on feedback from audit committee members.
1. Focus more on strategic risks. According to the CBOK study, two out of three board members believe internal audit should have a more active role in evaluating the organization’s strategic risks. Study respondents indicated that internal audit should focus on strategic risks (as well as operational, financial and compliance risks) during audit projects (86 percent) and periodically evaluate and communicate key risks to the board and executive management (76 percent). Accordingly, chief audit executives (CAE) must focus their function sufficiently on the bigger picture to think more strategically when evaluating risks, proposing risk-based audit plans, and formulating audit findings. By understanding the organization’s business objectives and strategy, and identifying risks that create barriers to the organization achieving its objectives and executing its strategy successfully, the CAE increases internal audit’s value proposition.
2. Think beyond the scope. The call for internal auditors to think strategically leads to another challenge: thinking beyond the scope of the audit plan. Thinking beyond scope means, for example, that the auditor should:
“Connect the dots” when considering enterprisewide implications of the findings of multiple audits, particularly findings with significant business model underpinnings;
Broaden the focus on operations, compliance, and nonfinancial reporting issues; and
Watch for patterns or signs indicating a deteriorating risk culture.
By focusing more broadly on the implications of audit findings, and thinking beyond the expressed or implied boundaries set by the audit plan, internal audit is better positioned to deliver stronger, more practical, and harder-hitting recommendations aligned with what directors are seeking.
3. Add more value through consulting. In today’s era of slower economic growth, a high premium is placed on operational effectiveness and efficiency. The CBOK study respondents picked up on this point, as 73 percent of respondents recommended that internal audit advise on business process improvements. For example, consulting activities by internal audit can result in: strengthening of the lines of defense that make risk management work; more effective collaboration with other independent functions focused on managing risk and compliance; improvements in the control structure, including greater use of automated controls; and suggestions for improving and streamlining compliance. These study findings underscore the benefit of investing in consulting services that will strengthen business processes.
4. Facilitate effective, high-quality communication. Board members generally rate internal audit’s communication at a high level of confidence. For example, a large majority of directors give high scores for the quality (83 percent) and frequency (81 percent) of internal audit’s communication. That’s good news and a great foundation on which to build the board’s satisfaction with the internal auditor’s role.
5. Elevate stature and perspective. Intentionally positioning the CAE and internal audit within the organization is vitally important to their ability to meet elevated expectations. Access and perspective have always been keys to positioning. Access has typically been attained through direct reporting to the audit committee, as well as to the C-suite. But beyond these reporting lines, the study reports that two out of three board members rank the CAE’s participation in board settings beyond the traditional audit committee meetings as an effective strategy for broadening the CAE’s perspective. The board settings that are relevant in this context must be defined by directors to fit the organization’s specific needs. However the goal is defined, increased access to and more frequent interaction with the board broadens the CAE’s perspective of the organization and elevates the stature and visibility of the internal audit function within it. It also enables the CAE to establish relationships with directors, understand their views on addressing competing audit priorities, and earn the right to be viewed as a valued source of insight for the board.
6. Align with stakeholder expectations. In most organizations, not all stakeholders see eye to eye or want the same value from internal audit. This reality creates a significant challenge for CAEs tasked with building consensus among stakeholders. While directors may not expect their company’s CAE to address all of the above imperatives, they should initially and periodically assess whether internal audit is doing what matters based on previously-established imperatives. The CAE bears the brunt of the responsibility for addressing this challenge by articulating the value that a top-down, risk-based audit plan contributes to each facet of the organization, and by providing an assurance and advisory perspective that the board, executive management, and other stakeholders can understand.
Following are some suggested questions that directors may consider based on the risks inherent in the entity’s operations.
Does the board periodically evaluate the scope of internal audit’s activities and discuss whether modifications are needed in view of changes in company operations and the business environment? Is the board getting the insights it needs?
Does internal audit provide adequate attention to strategic risk issues, including barriers to the organization’s execution of the strategy?
Does internal audit have an appropriate mix of consulting and assurance activities?
Does internal audit have the stature and access necessary to maximize its effectiveness?
Jim DeLoach is managing director with Protiviti, a global consulting firm.
Few issues invite more spirited discussion than the question of leadership style. Case in point: a roundtable discussion our firm hosted last month at the 2015 Fortune Most Powerful Women Summit in Washington, D.C., where a distinguished panel examined the behavioral patterns that individuals draw on when serving in leadership positions. Leadership style, the panelists agreed, is one of the most important keys for unlocking the full potential of the organization.
For directors, assessing leadership style is critical in discharging their most important responsibility: choosing a CEO. Although, as our panelists pointed out, the most effective leaders learn to flex
Anne Lim O’Brien
their style according to the situation, most nevertheless have a go-to style that dominates, especially when they face new challenges. Understanding and identifying the dominant styles of CEO candidates, rigorously and systematically, should be a part of every board’s succession process, enabling the selection of a chief executive whose leadership style is best suited to the organization’s business situation, strategy, and culture.
Pilot: strategic, visionary, embraces complexity. Pilots relish challenges and thrive in situations requiring visionary leadership. But they can sometimes leave little opportunity for others to lead, and charge ahead without learning from the past or thinking through the future.
Collaborator:empathetic, talent spotter, coaching-oriented.Collaborators take a team-first approach, share credit, and attract talent. But their focus on others may come at the expense of strategic vision and clear direction-setting, and they can have trouble holding others accountable.
Provider:action-oriented, loyal to colleagues, eager to provide for others. Providers are driven by two different, yet equally strong forces—the desire to lead from the front and to take care of those around them. Their teams may experience them as deeply caring and thoughtful, but also as confident in their own ideas to the exclusion of all others.
Harmonizer:reliable, quality-driven, execution-focused, inspires loyalty. Harmonizers prefer environments where everyone is using the same playbook to ensure reliable, efficient execution, and they are adept at finding the right people to make that happen. But while they are consistent and supportive, they may be cautious when it comes to large-scale, transformational change or significant shifts in the way business is conducted.
Forecaster:learning-oriented, deeply knowledgeable, visionary. Forecasters relish the chance to continually gather data, expand their knowledge base, enhance their subject-matter expertise, and generate new insights about the future. However, they tend to rely on the strength of their ideas to carry the day, shortchanging the importance of influencing skills.
Producer:task-focused, results-oriented, linear thinker, loyal to tradition. Producers value results, consistency, efficiency, and proven approaches. But their emphasis on reliable execution can get in the way of incorporating new perspectives, appearing rigid rather realistic.
Composer:independent, creative, decisive, self-reliant. Composers are often gifted problem solvers, with an instinct for innovation and trust in their ideas. But because they are most comfortable when operating independently they may find collaboration and relying on colleagues difficult.
Energizer:charismatic, inspiring, connects emotionally, provides meaning. Energizes combine a magnetic personality with an ability to create a strategic vision, build enthusiasm in others, and inspire strong performance. Nonetheless, their determination may at times blur into relentlessness that is perceive as dismissive of those who don’t think as they do.
These brief sketches only begin to suggest the richness that emerged from our research. A far more detailed analysis of each style—its particular power, its potential blind spots, and the work environments in which it may thrive or struggle—can be found in our recent Harvard Business Reviewarticle. There you will find not only a useful guide to the leadership styles of potential CEOs but also an opportunity to identify your own style, a thorough understanding of which can bring even greater depth to the succession decision.
Bonnie W. Gwin is vice chair and managing partner of Heidrick & Struggle’s board practice in North America. Anne Lim O’Brien is a partner in Heidrick & Struggles’ New York office and a member of the global Consumer Markets and CEO & Board of Directors practices.