This newsletter’s Table of Contents is as follows:
- Blowing up best practices
- PwC releases its annual CEO Survey
- Narcissistic CEOs: Masquerading in a Visionary’s Clothing
- Are smartphones “smart” for the boardroom?
- Talent (and culture) is key to corporate success, investors say
- SEC to Monitor Coronavirus Disclosures
- ESG Matters!!
- Challenging Times: The Hardening D&O Insurance Market
1. Blowing up best practices
The board’s most basic function is to challenge assumptions and push management to create and consider all options for success.
However, there’s a tendency among boards and their senior managers to assume that when something works once, it will keep working indefinitely. The same applies to so-called best practices. Some companies assume that when something works for one company, it will work for all companies. Again, not so much. In fact, if everyone follows a best practice, the practice is by no means “best.” It is, by definition, average. Blowing up best practices really means challenging convention and doing things differently—differently from the things that have made you successful in the past, and different from what others all around you are doing.
Going rogue doesn’t have to be a radical departure from what you’ve done in the past. You don’t need to break from the pack and make a beeline for the lion’s mouth. Rather, wander a few steps from the pack and then assess the situation. If it looks like a better route, wander a few steps more. But if it doesn’t, correct your course and try a different route. The key is to move as quickly as possible to take a small step, assess, and then take another step, never exposing yourself to undue risk.
The thing to be most concerned with is the emergent “best practice” of stapling the strategy development process to the annual budgeting process. No market operates according to a calendar. In a world of exponential change, a three- to a five-year plan may be unhelpful or worse. Instead, base it on the real world. For most industries, a long-term (i.e., 20 years) scenario plan (The Vision!) with a six- to twelve-month immediate action plan will likely be more appropriate.
To summarize: as applied to blowing up best practices, boards should:
- Overcome the reluctance to stray from the pack by making minimally viable moves
- Challenge management to be bold and take appropriate risks, and
- Exercise its oversight of strategy by basing it on the real world, not the calendar.
Source: NACD Magazine
2.PwC releases its annual CEO Survey
Navigating the rising tide of uncertainty PwC released the results of its 23rd Annual Global CEO Survey, which captured views from nearly 1,600 CEOs in 83 territories.
The following are two key findings from this year’s survey:
• To upskill or not to upskill is no longer the question. There are correlations among upskilling progress, economic optimism and revenue confidence. CEOs who have embraced the potential of upskilling are realizing the rewards, such as a stronger corporate culture (60%), greater innovation (51%) and higher workforce productivity (43%). Increases in automation, changes in demographics and new regulations will make it much harder for organizations to attract and retain the skilled talent they need to keep pace with the speed of technological change.
• Climate change: an opportunity cloaked in crisis. The tide has turned on climate change. Organizations worldwide are starting to recognize its risks and even its potential opportunities. Compared with ten years ago, CEOs today are far more likely to see the benefits of going “green,” such as reputational advantage (30% in 2020 vs.16% in 2010), new product and service opportunities (25% in 2020 vs.13% in 2010), and government or financial incentives (14% in 2020 vs. 5% in 2010)
Source: PWC
3. Narcissistic CEOs: Masquerading in a Visionary’s Clothing
Plenty of venerated CEOs, from Oracle’s Larry Ellison to Tesla’s Elon Musk to the late Steve Jobs at Apple, have been described as narcissists. Success for such leaders is often attributed to their bold vision, extreme self-confidence, and determination to win at all costs. Less palatable qualities of the narcissistic personality type — including entitlement, hostility when challenged, and a willingness to manipulate — are seen as part of the package.
“We see the 10% of narcissists that succeeded and call them visionaries,” argues Stanford’s Charles A. O’Reilly III. “We’re not looking at the 90% who flamed out and caused irreparable damage.
In a new paper called “When ‘Me’ Trumps ‘We,’” it was found that narcissistic managers tend to prefer and create organizational cultures with less collaboration and lower integrity, that they are more likely to lie, cheat, and steal. and that their subordinates are more likely to act accordingly.
Boards therefore need to distinguish carefully between true visionaries and harmful personality types when hiring executives. That doesn’t mean boards need to start administering personality tests. A more direct way is not to hire anyone unless you have lots of data from previous subordinates about how they were treated. If the person stole people’s ideas, abused people, or was impulsive, those are all earmarks of narcissists.
Source: Stanford Insights
4. Are smartphones “smart” for the boardroom?
Directors and boards, along with the rest of society, have embraced smartphones, tablets and other forms of technology over the past several years. The plugged-in boardroom however presents some challenges. Over the past few years, many have complained about the distractions posed by technology use in meetings, with participants paying more attention to their phones than to the matters discussed. If board members are scrolling through their phones or scanning their tablets or laptops, they are not present or paying attention to the board discussion.
Recently, another challenge has emerged – the perception that phones are being used as tools of surveillance. The WhatsApp security flaw was exploited by a third-party and facilitated the surveillance of targeted journalists and activists. But, smartphones are not the only technology that can be used illicitly – tablets, laptops, Bluetooth-enabled equipment, etc., may also be compromised by malware or software glitches, and used illegitimately.
So what can board chairs and directors do in response to these challenges?
Context is important. If a board is discussing something highly confidential, chairs should – at a minimum – ask that smart devices be turned completely off, not just on silent, to reduce the risk of eavesdropping.
Ask directors for their full attention. To help them avoid the temptation of electronic distractions, make sure you are making good use of their time. Regular meeting evaluations or feedback provided to the board chair may be beneficial to improving meeting quality.
If you have asked directors to not use their devices during meetings, allow for breaks so that directors may check their devices for important messages.
Source: ICD
5. Talent (and culture) is key to corporate success, investors say
Asked which factors are critical to their portfolio issuers’ fate over the next three to five years, almost two thirds (64 percent) of institutional investor in a recent EY research study point to talent management – in reference to the workforce as a whole – and 56 percent cite environmental issues/climate change. Corporate culture and board composition and diversity rank next, with each being named by 38 percent of respondents.
The research also found that institutional investors were dissatisfied with issuers’ current human capital disclosures, particularly given its importance to driving corporate competitiveness and value.
These findings are in line with SEC plans to modernize corporate reporting to include an amended Item 101(c) that would insert as a topic for disclosure ‘human capital resources’, such as any human capital measures or objectives that management focuses on in managing the business. Depending on the nature of the company’s business and workforce, these would be measures or objectives that address the attraction, development and retention of personnel.
Investors also stressed that a culture of inclusivity is key as workforces become more diverse, and that a good culture supports strategic adaptability and innovation.
Accordingly, there is now a widespread appreciation of the importance of managing corporate culture – and not just to avoid downside risks such as reputational damage. There is now a recognition of the positive connections between values and culture and that culture can help companies achieve their strategic aims, he says.
Expect therefore to see increasing disclosures regarding culture in shareholder reports. It is notoriously tricky to assess and measure culture. But companies should look to metrics such as workforce turnover rates, engagement scores or external awards. In the future, companies may start to present such information in comparison to their peers.
Source: Corporate Secretary
6.SEC to Monitor Coronavirus Disclosures
On January 30, 2020, the World Health Organization (WHO) declared that the recent coronavirus outbreak was a global health emergency, recognizing that the disease represents a risk outside of China, where it emerged in the last couple of months.
On the heels of the WHO’s announcement, on the same day in a public statement, Securities and Exchange Commission (SEC) Chairman Jay Clayton stated that he had requested SEC staff “to monitor and, to the extent necessary or appropriate, provide guidance and other assistance to issuers and other market participants regarding disclosures related to the current and potential effects of the coronavirus.”
U.S. public companies across various industries could be impacted materially by the coronavirus. For example, on January 28, 2020, Starbucks disclosed with its Q1 Fiscal 2020 results that it had temporarily closed more than half of its stores in China, the outbreak is expected to materially affect its results for the next quarter and full year, and it would update its guidance for the year when it can reasonably estimate the impact of the coronavirus. For many companies, supply chains are adversely affected. And limitations on travel, whether on people or cargo, could have significant impacts. Reporting companies have a duty to ascertain and disclose the outbreak’s impact on their businesses, if material. Coronavirus-related disclosures may be required in, among others, the Business, Risk Factors, and Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) sections of SEC filings. MD&A requires companies to consider and disclose certain known trends and uncertainties. Even if a company’s risk factor already states that its business may be adversely and materially affected by outbreaks of diseases, the company would need to consider updating the risk factor if the impact of the coronavirus is no longer just a hypothetical one.
Source: Weil
7. ESG Matters!!
There appears to be a link between ESG – Environment, Social, and Governance – and financial performance.
While one can argue that the relationship between ESG and financial performance is perhaps due to the fact that more profitable firms have the resources to invest in areas that positively influence ESG, it could also be that profitability rises as a result of a company better managing its material ESG risks, or it could be a little bit of both.
If it is a little bit of both, then this means that good-ESG initiatives drive up financial performance, which then provides the monetary resources to invest to be an even better-ESG firm, which then drives up performance again, and so on.
People may choose not to invest in a firm that has poor ESG, thereby limiting its access to capital and raising its cost of capital.
Firms that get in trouble on the environment may be distracted by the regulatory headache (higher costs) and customers may avoid the firm (lowering revenue). If one does not treat employees right, this could lower morale, increase turnover, and therefore lower productivity.
Source: ISS
8. Challenging Times: The Hardening D&O Insurance Market
Directors and officers (D&O) liability insurance has always been an important tool to protect public companies and their management against claims by shareholders for violations of the securities laws, including claims for inadequate disclosures in public filings and allegations of securities fraud. D&O insurance, however, is becoming increasingly challenging to purchase and maintain. Premiums and deductibles have been increasing, sometimes dramatically, and some insurers are cutting back on the number of companies they insure, causing the supply of insurance to lag behind demand.
What is Causing the Hardening Market?
Insurers are reporting that they have seen record numbers of securities claims over the last several years and a related record number of payouts under their policies. Insurers point to factors such as a significant number of IPOs in recent years that have attracted securities litigation, including in state court. Other factors cited by insurers include increased settlement values, litigation caused by adverse events such as cyber-attacks, weather or product liability claims (referred to as “event-driven” litigation) and a growing number of plaintiff shareholder law firms eager to bring claims.
What Can Be Done From the Client’s Perspective?
First, it is important to plan any D&O insurance renewal or insurance purchase well in advance. This will allow companies sufficient time to engage with their insurance brokers and coverage counsel, who can provide feedback on current market conditions, including projected pricing. Companies should also plan on engaging in substantive underwriting discussions with insurers, in order to differentiate themselves from their peers and position themselves as attractive insureds. In the event that insurers do impose higher premiums or deductibles, having sufficient time before renewal can allow insureds to seek potential alternative markets. Finally, in the event that an insured is ultimately required to pay higher premiums, it is important to have sufficient time to adjust internal budgeting.
Given daunting premium increases, insureds are also increasingly considering alternative ways to structure their insurance programs. For example, insureds may consider increasing the amount of their deductibles in order to reduce insurer risk, and thereby reduce the amount of premium charged (or reduce the size of a premium increase). In certain situations, insureds have also considered “captive insurance” programs to replace or supplement traditional insurance programs. (Captive insurance programs are in essence self-insurance programs owned and controlled by insureds rather than insurance companies).
Insureds may also consider reallocating more of their insurance program to so-called “Side A Difference-in Conditions (DIC)” coverage, which is less expensive coverage that is for the dedicated benefit of directors and officers only, excess of all other insurance and indemnification available to those individuals. Care should be taken with respect to any of these changes, however, in order to avoid unduly reducing important insurance protections in the event of claims.
Source: Harvard Law School
