This newsletter’s Table of Contents is as follows:
- Making (big) data a board agenda issue
- Understanding the cybersecurity threat
- CEO group calls for end to quarterly earnings guidance
- Learning From Uber’s Mistakes
- Unchartered Board Territory: How boards should view CEOs who take the lead on political and social issues
- Delaware Court Finds Reasonably Conceivable a Minority Stakeholder Can Be Controlling Stockholder
- Boards’ response to #metoo
- More companies highlight ‘director skills’ & Shareholder Engagement
1. Making (big) data a board agenda issue
In a recent poll of Fortune 500 CEOs, the rapid pace of technological change was voted the single biggest challenge facing companies, with 67 percent of respondents saying they consider their company to be a technology company. This response is striking given that less than 10 percent of Fortune 500 companies are designated as being in the technology sector.
Yet, there’s an even more fundamental differentiator that will play a critical role in how companies effectively compete in the decade to come: getting the right data, extracting insights from that data, and identifying the platforms on which data can be used strategically. In short, every company should consider itself a data company with a differentiated platform.
Taking a leading role in the data revolution
The audit committee is uniquely positioned to help navigate these changes through the company’s finance function, which is privy to data spanning sales metrics, revenue, margin, marketing performance, valuation, manufacturing, and supply chain vendors. Directors can help their chief financial officer and finance team take a leading role in the data revolution by asking about the tools and technologies they’re using that are tied to the company’s strategy. How is the enterprise being digitized? What trends should be monitored using data analytics? Have data sets been identified that will provide insights to driving shareholder value?
Equally important is understanding whether the finance function has the data science skills needed today. In a recent survey of finance and internal audit leaders, Deloitte found that while 86 percent of respondents use analytics, only about one-third of them are using them at an intermediate or advanced level. Two thirds are still using basic, ad hoc analytics (like spreadsheets) or no analytics at all.
Source: Deloitte
2. Understanding the cybersecurity threat
In June 11–12, 2018, more than 30 board members and panelists met in Dallas for the EY Cybersecurity Board Summit. The event featured deep-dive discussions on cybersecurity risk and oversight.
The board members who participated sit on about 50 boards, representing a cross-section of industries, geographies and sizes, including many Fortune 500 companies. The goal was to learn more about cybersecurity threats, the systems and controls that could detect and mitigate such threats, and the oversight role the board should play from a governance perspective.
Discussions included an overview of the cybersecurity landscape, lessons learned from recent breaches, the cyber risk executive’s perspective, regulatory expectations and leading practices for board oversight. Here are the 10 key takeaways and a summary of the various sessions of the program.
Top 10 Summit takeaways
- Never stop being vigilant; the cybersecurity threat is dynamic and ongoing.
- The board’s role is not cybersecurity risk management; it is cybersecurity risk oversight.
- Boards may need to restructure their committees and develop new charters to adequately oversee cybersecurity risk management.
- Directors want and need more education on cybersecurity risk.
- Boards need to engage a third party to independently and objectively assess whether the company’s cybersecurity risk management program and controls are meeting its objectives.
- These third parties should have direct dialogue with the board to report on the effectiveness of the company’s cybersecurity risk management program.
- Boards and companies need to adequately plan for a cybersecurity crisis, including having an arrangement with all their third-party specialists in place before a crisis hits.
- The board and management need to routinely practice the cybersecurity response plan.
- Management should consider providing the board regular updates with key metrics on critical cybersecurity controls communicated in plain English.
- While improved detection efforts may increase the rate of cyber related incidents, the rate of noteworthy incidents should decline as organizations improve how they manage and contain these incidents.
Source: EY
3. CEO group calls for end to quarterly earnings guidance
In an opinion piece for the Wall Street Journal, JP Morgan Chase CEO Jamie Dimon and Berkshire Hathaway CEO Warren Buffett wrote that they, together with the Business Roundtable (an association of nearly 200 public company CEOs), are urging public companies to end their practice of quarterly earnings guidance. “In our experience, quarterly earnings guidance often leads to an unhealthy focus on short-term profits at the expense of long-term strategy, growth and sustainability,” wrote Dimon and Buffett.
They went on to say that to meet earnings guidance, companies may hold back on spending in areas such as technology or hiring—even though the earnings may ultimately be affected by a number of factors outside of their control. Dimon and Buffett’s messaging aligns with the Commonsense Corporate Governance Principles developed by investors and other leaders in 2016, which state that “Our financial markets have become too obsessed with quarterly earnings forecasts.”
Dimon and Buffett clarified that their views on earnings guidance should not be confused with quarterly and annual reporting, stating, “Transparency about financial and operating results is an essential aspect of US public markets, and we support being open with shareholders about actual financial and operational metrics.”
The CEOs noted that eliminating earnings-per-share guidance won’t be the antidote to short-term pressure facing US public companies, but that it would a good place to start.
Source: PWC
4. Learning From Uber’s Mistakes
What fast-growing startups — and their boards — must understand about building culture.
Not many company-bashing hashtags go viral, but #deleteuber became a social media sensation in 2017 as the ride-sharing service infuriated regulators in cities from San Francisco to New Delhi, and became known for a toxic, fraternity-like atmosphere.
After months of scandal, management missteps, and a consumer boycott that reportedly saw hundreds of thousands of users delete their Uber apps, the company’s board of directors stepped in and fired co-founder and CEO Travis Kalanick.
The company’s terrible year is something of a case study in poor corporate governance and holds numerous lessons for other companies, particularly fast-growing startups, Larcker says. “Uber is an example of a company that started small with a good idea, grew rapidly, became disruptive, and grew into a monolith. But along the way, [management] didn’t pay enough attention to how they wanted to do business from a cultural and ethical standpoint.” Here are the major lessons learned:
Uber grew explosively; is fast growth a particular problem in this context?
Really fast growth can become disruptive. You are focusing more of your attention on the product and service you are providing. When you’re very successful, it can be hard at a board or management meeting to say, “Let’s stop and look at claims or issues,” when the world is moving at light speed. But at some point you have to do a gut check and say, “We are really successful, but what problems are being caused by the way we’re doing things?”
How important is the CEO’s personality and behavior in influencing the collective behavior in an organization?
Founders are revered and their personality is embedded in the company’s culture, especially when the CEO is charismatic. When the CEO is a founder, the board has to be especially diligent about asking questions. You’ve got to have the instinct to tell you how this person will behave and what you need to look out for.
What can a board do to recover after a series of disasters?
You need to bring in outside experts, and you have to be pretty transparent about what you find and what the corrective actions will be. Not the least of which you have to admit there was a problem and you have to own it. [Uber hired two law firms and former U.S. Attorney General Eric Holder to investigate the allegations and the company’s culture, and make recommendations for change.]
How does a corporate culture change?
Culture is embedded throughout an organization, so it’s not just about replacing a person or two. You’ve got to show you’re very serious by bringing in experts to assess the situation, and you’ve got to put concrete processes in place. You need to hold town meetings and say, “This isn’t how we’re doing business anymore.”
Source: Stanford University
5. Unchartered Board Territory: How boards should view CEOs who take the lead on political and social issues
Traditionally, CEOs tried to avoid commenting on contentious topics for fear of alienating customers, employees, political leaders and other stakeholders. CEOs may have advocated on traditional business issues, especially those directly related to their commercial interests such as corporate tax rates, but largely left political and social discourse to others.
Recently, however, we have seen CEOs, especially in the United States, willing to speak openly on issues formerly considered off-limits. Tim Cook, Apple’s CEO, has spoken in defense of diversity, human rights, immigration, education, and privacy rights.
Why are we seeing this trend in CEO activism? Researchers point to the influx of millennials into the workforce who are more motivated to work in organizations that reflect their values and to work for leaders willing to defend those values publicly. Increased polarization in the U.S. has also led to speculation that some CEOs are participating in the political sphere in order to advocate for mainstream positions.
In a well-known example, Marc Benioff, of Salesforce, actively lobbied against the Religious Freedom Restoration Act in Indiana. Salesforce, a large employer in the state, highlighted the bill’s discriminatory elements and promised sanctions against the state if the bill went forward as drafted. The legislation was eventually changed to reduce its discriminatory impact. And the impact on Salesforce? Its stock appreciated 120% during Benioff’s campaign.
Benioff advises other CEOs who wish to be more vocal to build a good working relationship with their boards so that as controversial issues are raised publicly, directors are not taken by surprise. It is important that the values of the CEO and the board are aligned, enabling both to effectively address any potential criticism or backlash.
The trend toward increased CEO activism may also be strategic. For example, Wal-Mart CEO Doug McMillon has taken more liberal stances on political issues as a way of enhancing its reputation with stakeholders and regaining lost market share to competitors like Amazon. If a company’s chief executive is speaking out on social issues as part of a corporate strategic initiative, then the role of the board in overseeing activism as a strategic initiative seems much more clear.
Will we see the advent of more active CEOs? In the most recent Edelman Trust Barometer, 80% of the survey’s respondents felt that business leaders should take action to improve economic and social conditions in their communities.
This is unchartered territory for both (Caribbean) CEOs and boards. What will be the new rules of engagement for CEOs and the board of directors? Speaking out brings with it certain risks. However, as the expectations about the role of business in society change, saying nothing may no longer be the safe harbour it used to be.
Sources: ICD
6. Delaware Court Finds Reasonably Conceivable a Minority Stakeholder Can Be Controlling Stockholder
On March 28, 2018, in In re Tesla Motors Inc. Stockholder Litigation, the Delaware Court of Chancery denied the defendants’ motion to dismiss, finding it reasonably conceivable that Elon Musk as a 22.1 percent stockholder of Tesla was a controlling stockholder. As a result, Tesla’s 2016 acquisition of SolarCity would be subject to a stringent entire fairness standard. Delaware courts seldom find stockholders with “relatively low” ownership levels to be controlling, but the Court considered Musk’s ability to rally other stockholders, role as the company’s visionary and chairman of the board, strong personal business connections with directors and influence over the company in public filings to reflect virtual control. Companies contemplating transactions with influential stockholders might not be able to rely on a shareholder vote to prevent an entire fairness review of the transaction. Such transactions may require approval of an independent special committee and the uncoerced, informed vote of a majority of the minority stockholders.
Source: Sullivan & Cromwell
7. Boards’ response to #metoo
#MeToo may no longer dominate daily headlines but its indelible impression remains. Corporate boards’ mandate to act in their shareholders’ best interest includes not only overseeing strong financial performance, but also recognizing the ways that corporate culture impacts shareholder value. Reputational harm can cost a company in multiple ways, literally, and produce lasting damage.
Claims regarding sexual misconduct should be treated with proper diligence, and while it may warrant more sensitivity due to the nature of the grievance, boards should reinforce that employee misconduct is not tolerated. The care that boards exercise in reviewing their companies’ existing procedures and controls governing corporate conduct already provides sufficient incentives for management to consider whether appropriate action is taken when misconduct complaints are received.
However, while ensuring that compliance systems function as designed is important, there is an opportunity for boards to improve corporate reputation through greater engagement in the root cause of the #MeToo problem, the lack of women in business leadership positions.
Recognizing the need for a broader, proactive approach to the shifts that #MeToo may engender, rather than simply assuring themselves that the right response will be deployed once the need arises, is the right answer for boards as they continually evaluate changing corporate risks. In this environment of tight labor markets, 24/7 news and incidents going viral immediately, a company’s employment culture is a clear indication of how it manages its most important asset, its reputation.
Source: Davis Polk
8. More companies highlight ‘director skills’ & Shareholder Engagement
Nearly half of big companies issued skills matrices this year
Proxy statements this year show a sharp rise in willingness to disclose board members’ skills, as companies become increasingly attuned to targeting their reporting at investor demands.
Almost half (46 percent) of S&P 500 companies include a skills matrix in their 2018 proxy, up from 27 percent last year and just 11 percent in 2015, according to a new report by the EY Center for Board Matters (CBM).
The top director qualifications highlighted in skills matrices this year include: corporate finance or accounting (68 percent of directors), industry or related industry (55 percent), international or global (51 percent), board experience or corporate governance (50 percent), risk (44 percent) and government, public policy or regulatory (37 percent).
Jamie Smith, associate director with EY CBM, notes that skills matrices are part of a wholesale evolution in proxy statements as companies shift from a strictly compliance-focused effort to using proxies as a communications tool. Investors have explained that it’s useful to have a snapshot of directors’ qualifications, and now information that many boards previously held but didn’t disclose is being released.
Despite the increased use of matrices, the quality of disclosure they provide varies, Smith tells Corporate Secretary. Good practice is to align the matrix with directors’ biographies so that it is clear which board member has which skills, she explains.
In a similar vein, the research finds that 56 percent of S&P 500 company proxies used graphics this year to highlight different aspects of board diversity, an increase from 20 percent three years ago. The most frequently highlighted feature is tenure, followed by gender, race/ethnicity and age, according to the report.
Shareholder Engagement
The survey further finds growing levels of investor engagement. So far in 2018, more than three quarters (77 percent) of S&P 500 companies have disclosed engaging with investors during the previous year – an increase of 21 percentage points since 2015. Directors are also increasingly involved in talks with shareholders, according to the research, supporting anecdotal evidence. One third of the companies disclosing engagement this year say board members were involved, up from less than a fifth of companies that disclosed engagement three years ago.
The disclosure on engagement varies widely, Smith says. It ranges from simply stating that a company spoke to its largest shareholders, to providing a detailed breakdown of which investors were contacted, how many responded, which topics were discussed and who from the company was involved, she adds.
Forty-five percent of companies that disclosed engagement this year also disclosed making engagement-related changes – most commonly in terms of executive compensation. That focus on compensation appears to pay dividends, with overall support for say-on-pay proposals remaining at around 91 percent for nearly all companies, and the proportion of proposals failing to receive 50 percent backing continuing to stick at around 2 percent, the research finds.
Source: Corporate Secretary
