Innovation and disruption are now commonplace in strategy discussions between the board and C-suite. Even innovations outside of a company’s own mission are changing everything from customer expectations to business operations. While the board’s agenda has evolved to include discussion of issues such as emerging technologies and workforce disruption, corporate directors must still contend with evergreen oversight tasks. Directors are feeling stretched, and reasonably so.
NACD’s Master Class board leadership forum convened more than 50 directors recently in Miami, Florida, to sharpen their focus on several pressing board oversight matters. The event highlighted lessons in effective board leadership and explored emerging disruptions that affect strategy and long-term value creation in today’s dynamic business environment. The discussions at Master Class revealed the following takeaways:
Review the outlook on the economy. The U.S. is on track to have its second-longest economic recovery, and it may even become the longest on record, according to Constance Hunter, chief economist at KPMG LLP. Unemployment is at an all-time low, and wages are slowly beginning to rise. Barring any global economic shocks, this could signal that the American economy is likely nearing peak growth. Hunter also reminded directors that though all signs point to stable economic growth this year, an economic downturn in the coming years is still possible.
Pay attention to increased complexity. From social and demographic changes to technological disruption, companies are facing increasingly complex challenges. Addressing these issues will require the board to keep up with today’s dynamic business environment. Being on a board is no longer simply about compliance or risk oversight. Fundamental conversations about company strategy and business models need to become regular topics of discussion. The board needs to ask hard questions of its executive team around the company’s data strategy, whether this team has the requisite set of skills to execute on strategy broadly, and how well the management team understands the competitive landscape and challenges specific to their industry.
Approach technology as an enabler of strategy. Board discussions about technology should focus on the current—or potential—application for the company. Directors should, therefore, approach such dialogues within the context of company strategy. The board should ensure that management understands and meaningfully engages with the company’s technology systems and the staff who use those systems, and assesses how the company invests in technology as an enabler of the broader strategy.
Wake up to disruption. Large companies are beginning to wake up to the disruptive players in their industries. Many so-called startup “unicorns” are now backed by corporate venture capital arms, enabling established, large-scale companies to gain a competitive edge with smaller companies leading transformative ventures and creating disruptive technologies. There are more avenues than ever before for businesses of all sizes to engage with emerging technologies, from pilgrimages to Silicon Valley, or attendance at events such as the annual NACD Consumer Electronics Show Experience, to setting up corporate venture arms.
Think outside—or about—the box. The concept of Innovation dos not have to be limited to a firm’s research and development department. A company can innovate in every facet of its business, from financing to product packaging. One director attending Master Class shared how one of her companies modified its package design for products that customers opened to peer inside. By redesigning the packaging to include transparent plastic, customers were able to see these products through the packaging and, thereby, didn’t feel compelled to open it. This helped the company dramatically reduce the number of products that were spoiled from being opened.
Demand better risk reports. Directors need to push management to enhance the effectiveness of risk reports provided to the board. If risk reports received from management look like audit reports, the board may not be receiving the information it needs to effectively oversee risk. Management teams often present so much information that directors may find it difficult to discern which risks demand the most urgent attention. In fact, the 2017─2018 NACD Public Company Governance Survey reports that in the past 12 months, 79 percent of respondents say they communicated with management about the types of risk information that the board requires.
Communicate what investors want to know. Institutional investors want to know whether the board is capable of being not only the board of today, but that of tomorrow. In this regard, the proxy statement is often underutilized as a way of communicating the board’s strengths and skills that will help strengthen their oversight of the company in the years to come. If effectively used, this document can enrich board-shareholder dialogue. More information is available in the publication Investor Perspectives: Critical Issues for Board Focus in 2018.
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.
One theme resounded in each session at NACD’s Master Class held in Scottsdale, Ariz., last week: the nature of directorship is in flux. In the 1990s, boards were subject to considerably fewer regulatory requirements. Sarbanes-Oxley created the “gatekeeper” of compliance, as observed by NACD President and CEO Ken Daly. Fundamentally, if boards fail to meet compliance requirements, little else will work.
But “you can’t comply your way to success,” according to opening speaker Bill Reichert. Today, long-term value creation necessitates innovative and inventive strategic planning—from management and the boardroom. As such, leading directors are shifting their focus not away from, but through, compliance efforts to the “next level.”
This concept of the “next level” was consistently brought up during discussions across the board. In some sessions, this meant critically assessing the skills and actions necessary to make the board a strategic asset to the company. In other sessions, “next level” addressed the information flow between the management and the board: how to fortify directors with the necessary knowledge to enable them to ask the “second layer” of questions that delve deeper into the data presented by management.
Innovation, however, brings risk—a concept Master Class attendees understood all too well. As noted in the 2009 NACD Blue Ribbon Commission Report on Risk Governance, “without risk there is no reward.” Risk is no longer limited to financial statements, though. The list of areas that pose potential threats to the organization has expanded over the last several years to include fields such as cybersecurity, emerging technologies such as e-commerce, and social media. Throughout the event’s sessions attendees discussed various methods that boards can use to assess and oversee these risks without becoming mired in granularity.
NACD’s Master Class in Scottsdale convened panelists with considerable experience in innovation, strategy, and risk oversight to lead attendees in discussions on how to effectively and intelligently ensure their company is ready to meet the challenges posed by the new economic climate. These panels were punctuated with multiple “deep dive” sessions in which participants could focus on specific topics of interest with experts and peers.