This newsletter’s Table of Contents is as follows:
- Directors: are you asking any questions?
- Five questions to ask when creating a tech-savvy board
- The time for board/business leadership is now
- Is collegiality clouding your boardroom?
- Directors must oversee their organization’s risks – or else!
- The inclusion imperative: Boards need to encourage “belonging”
- Whistleblowers on the decline!
- High performing companies just as likely to “take shortcuts” and break the rules as under-performers.
- Latest Graduates of our Programs.
1. Directors: are you asking any questions?
Board members are elected to represent shareholders in the guidance and oversight of the company and its management team. To do so effectively requires directors to ask questions and not merely cheerlead for management’s proposals. Directors who do not ask questions, or probe potential problem areas or risks, are not doing the jobs they are being paid to do. When a long-term director at General Electric was asked by a new director, following approval of a series of management proposals with little discussion or debate, what the role of a GE board member was, he replied “Applause”. There could be no greater indictment of a board of directors.
Editor’s note: If you are unsure what questions you should be asking, then simply google the phrase “20 Questions Directors Should Ask” to find a thoughtful series of questions to which every director should know the answer for their particular organization(s).
Source: Corporate Board Member
2.Five questions to ask when creating a tech-savvy board
To guide board conversations and strategy development around the intersection of technology, governance, and transformation, here are five key questions that boards can use.
- Are we thinking about opportunities or solely about risks? A 2017 study by Deloitte reported that 48 percent of board conversations about technology are centered on cyber risk and privacy topics, while less than one-third (32 percent) are concerned with digital transformation driven by technology. While it’s critical for boards to understand technological risk, members also have an obligation to guide the company toward growth and innovation. To do that, boards must spend equal time discussing the many strategic opportunities technology affords.
- Are technologists represented? Other Deloitte studies show that high performing S&P 500 companies are more likely to have a tech-savvy board director than other companies (by 17 percent), yet less than five percent have appointed technologists to newly opened board seats.
- Are we committed to continuous learning? While not everyone on the board needs to be a technologist, it’s important for all members to gain a foundational understanding of, and be conversant in, the technologies that drive change and opportunity.
- Are we regularly engaged with technology experts inside (e.g. Chief Information Officer) and outside the company? Whether through a designated committee or as a full board, members should dive deeper on technology topics with subject matter experts outside the boardroom. It’s up to each board to facilitate regular technology conversations, and if done via a committee, to ensure takeaways from those conversations are reported to the full board.
- Are we effectively identifying and managing the ethical implications of technology? A true understanding of technology requires considering the ethical implications of where and how technology is being applied. This includes mitigating unintentional biases and consequences, creating a diverse and inclusive technology organization, and overseeing growing technology ecosystems beyond your organization.
These days, every board is a tech board, and therefore must focus on increasing their own tech-savviness—and helping their organizations do the same. In readying ourselves for the impact of technology, we can not only better manage its risks, but also leverage its many opportunities.
Source: Deloitte
3. The time for board/business leadership is now!
Should growing corporate influence go hand in hand with growing social responsibility? The public certainly thinks so. The 2019 Edelman Trust Barometer found that 76% of citizens want ceos to take the lead on change instead of waiting for government to impose it – an 11-point increase on the previous year. Almost as many (73%) believe a company can take actions that both increase profits, and improve economic and social conditions in the community. Organizations and their boards today have license to improve long-term performance by tackling global challenges head-on.
And there are signs of change. Many companies, such as those in the US Business Roundtable, have recognized that having a purpose beyond generating shareholder returns may differentiate them in the market. But few have stepped forward to fill the vacuum left by government.
A 2019 EY CEO Imperative Study reveals increasing pressure from stakeholders for leaders to engage with global challenges: 75% of board directors and 67% of CEOs say they feel moderate to extreme pressure. In companies with more than US$20b in annual revenue, the CEO figure rises to 77%.
Of those stakeholders, investors are the biggest advocates of CEO action on global challenges – even if it leads to a dip in near-term financial performance. In fact, no stakeholder is holding anyone back from recognizing that value is more than just short-term financial performance. For instance, intangible assets such as intellectual property, talent, brand and innovation increasingly make up an organization’s value, and while these haven’t been captured by traditional financial statements, initiatives such as the Embankment Project for Inclusive Capitalism are creating new metrics to measure and demonstrate long-term value to financial markets.
As such, boards and CEOs are facing increased pressure from investors, customers and society to better articulate their long term strategy and put financial profits within the context of their wider contribution to multiple stakeholders.
Source: EY
4. Is collegiality clouding your boardroom?
Is there such a thing as being too collegial? This is a question boards should be asking themselves. Having a collegial culture is something that has been important to boards for a long time, and it certainly helps foster a productive and respectful setting in the boardroom. But at some point, collegiality can become too much of a focus and start to stifle other important board activities. Boards should consider balancing collegiality by having more dissenters in the room, because too much collegiality can prevent healthy debate and disagreement— and even board turnover. PWC’s 2019 Annual Corporate Directors Survey strongly suggests that collegiality is clouding board effectiveness and that boards need stepping up, especially when it comes to: Replacing non-performing “good old boy” board members; Evaluating honestly individual directors; and recognizing their organization’s ESG responsibilities (ESG is not going away, so stop being ostriches).
Source PWC
5. Directors must oversee their Organization's Risk - or else!
Delaware Courts are often the bell weather of things to come in the world of corporate governance. Two recent Delaware cases have recently reemphasized the importance of ‘Caremark duties’, which require directors, in order to satisfy their duty of loyalty, to make a good faith effort to oversee their company’s operations by implementing board level oversight and monitoring. On June 19, 2019, in Marchand v. Barnhill, the Delaware Supreme Corporate Court held that directors may be found to have breached their duty of loyalty under Caremark if there is no board-level system in place for monitoring and reporting on key risks and compliance issues facing the company. Then, on October 1, 2019, the Delaware Court of Chancery in In re Clovis Oncology, Inc., declined to dismiss a stockholder derivative suit on Caremark grounds after finding that, although the board had established a robust board-level compliance system with respect to clinical trials, it had consciously failed to monitor that system by ignoring clear red flags. In light of these cases, directors should ensure that their companies have reasonable compliance systems and protocols in place with respect to the key risks facing their companies and that they provide direction for managing and addressing key risks once identified.
Source: Sullivan and Cromwell
6.The inclusion imperative: Boards need to encourage"belonging"
The push for diversity on boards continues to be a front-and-center conversation among the investor and corporate governance communities. Shareholders, employees, customers, and business partners are increasingly pushing for their organizational leadership to better represent the demographics of the general population. As a result, organizations are beginning to see some progress, however incremental in nature. The percentage of women on Fortune 500 boards rose to 22.5 percent in 2018, up from 15.7 percent at the start of the decade. Minorities on Fortune 500 boards increased to 16.1 percent in 2018, from 12.8 percent in 2010.
While such a push and focus on diversity is essential, it’s not enough. According to a recent article in Harvard Business Review about diversity in the boardroom, researchers concluded that an inclusive culture is required for an organization to capitalize from the diversity of its board members.
Research has found that a board’s impact on an inclusive culture can be substantial, not only to create a diverse workforce but also to generate financial results. Now there is an opportunity for boards to recognize their ability to influence inclusion for the sake of their own organizations and other stakeholders.
The first step for boards is to understand the difference between diversity and inclusion. Diversity refers to the presence of people who, as a group, have a wide range of characteristics, seen and unseen, that they were born with or have acquired. Inclusion refers to fostering a culture where all members of an organization feel welcome and have equitable opportunities to connect, belong, and grow—to contribute to the organization, advance their skill sets and careers, and feel comfortable and confident being who they are.
The main difference between the two is that diversity is a state of being and is not itself something that is “governed,” while inclusion is a set of behaviors and can be “governed.” For boards, promoting diversity as a strategic goal is itself an inclusive practice, as doing so demonstrates that the company is welcoming of all backgrounds and experiences. However, boards must also look for ways to ingrain and encourage inclusive practices into the five key areas of board oversight: strategy, governance, talent, integrity and performance.
Source: NACD Directorship
7. Whistleblowers on the decline!
According to The Wall Street Journal, the SEC reported its first annual decline in tips from whistleblowers as the agency prepares to finalize a proposal that may limit the size of big awards. The SEC received 5,212 tips during the 2019 fiscal year ended in September, down 1 percent from a year earlier, the agency said. The largest drop was in tips about potential cases of fraud in securities offerings, which had spiked the year before.
The SEC may start setting limits on its largest awards under a proposal introduced last year that would give the agency discretion to scale back awards above $30 million.
Whistleblower advocates and attorneys have criticized the proposal, saying it could discourage people from reporting on corporate wrongdoing.
SEC chair Jay Clayton addressed those concerns in a statement, saying critics have mischaracterized the proposal as imposing a cap on future awards. ‘Congress vested in the commission the authority and responsibility to use our good judgment and experience to determine award amounts,’ Clayton said.
Source: Wall Street Journal
8.High performing companies just as likely to "take shortcuts" and break the rules as under-performers.
The Guardian said that, according to new research, hubris and overconfidence caused by excellent financial performance is a major cause of irresponsible corporate behavior. Di Fan, a senior lecturer at the business school of the Australian National University, said his research shows that companies earning above-average profits are more likely to breach their environmental or social obligations. He said corporate governance had failed to curb bad behavior and, based on his earlier research of US companies, fines needed to be increased as much as six-fold to encourage better behavior.
Fan said his research shows companies are more likely to break environmental and social regulations if they are either financial under-performers or financial over-performers. Under-performers were under economic pressure to ‘take shortcuts’ but in the case of very successful companies ‘we find that it is hubris behind this tendency,’ he said.
Source: The Guardian
8.Latest Graduates of our Programs!
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