This newsletter’s Table of Contents is as follows:
The 2018 boardroom agenda— Dealing with 9 major challenges old and new
The Risks and Opportunities of Blockchain and Crypto Currencies
Should someone on your board go? Nearly half your colleagues think so.
Busy Directors and Shareholder Satisfaction
According to Buffet: There is only one way to avoid audit issues: pry.
#METOO Where to? Women broke the silence. Now boards must make themselves heard
Focus on the Long Term: A New Stock Exchange
Silence of the Lambs: Director Liability
1. The 2018 boardroom agenda— Dealing with 9 major challenges old and new
- Board composition, refreshment and diversity. Boards will be pressured not only to become more diverse but also to expand the definition of diversity to include gender (in all its forms), race, ethnicity, age and thought.
- Innovation and disruption. Board members will be asked more and more to help the company’s management team to plot the right course by assessing whether a company’s innovation strategy is ambitious enough.
- Social impact. Companies will need to become increasingly aware that what is socially good for their brand is good for business, and conversely, that what is socially bad for their brand is bad for business.
- Technology risk. Fourteen percent companies surveyed say they added a director with cyber experience to the board in the past two years.
- Company culture. Culture is an off-balance sheet asset (risk) that is today demanding serious oversight by the board lest it becomes a significant liability, negatively impacting the bottom line.
- Strategy. Arguably, every topic on the board’s agenda ties back to the company’s strategy. The board, therefore, needs to be selected on the basis that they will be well-informed, actively engaged, and able to work with the management team to advise and guide—including recognizing when the company’s strategy needs to pivot. To provide such insight, boards need to understand and assess progress against the company strategy on an ongoing basis.
- Risk. A company’s risk appetite and tolerance must now be reviewed more regularly. This will help determine if there are specific risk areas that need more detailed board oversight, which risks to assign to specific committees, and which risks should be addressed by the full board.
- Compensation. Given the high level of interest in this disclosure, boards must receive updates on the status of the CEO pay ratio calculations and disclosures, gain a high level understanding of the methodology and assumptions used to estimate CEO pay ratios, and review the draft proxy disclosure to satisfy themselves that the company has a well thought out internal and external communication strategy to address employee, investor, and media inquiries. Outliers, in particular, are likely to get the most scrutiny, and boards of those companies should be prepared for potential adverse publicity.
- Stakeholder engagement. Boards and management need to review and reconsider the nature and extent of the board’s role in shareholder/stakeholder engagement. Board members have the opportunity to educate these groups and communicate strengths in governance and other areas along with management.
Source: adapted from Deloitte, On the Board Agenda
2. The Risks and Opportunities of Blockchain and Crypto Currencies
Trust continues to be one of the most essential elements in an organization’s ability to secure and retain support from the investor community, customers, and other external stakeholders. However, in an increasingly digital world of big data analytics, e-commerce and mobile payment platforms, organizations must fundamentally challenge the way they view and evaluate trust.
An understanding of the implications and impact of “trust” technologies such as Blockchain are now a vital component of an organization’s strategy and risk frameworks and as such boards must now develop a line of sight into the associated risks and opportunities they present.
In simple terms, and at its core, Blockchain technology secures and tracks digital transactions. Sounds straightforward – a digital, encrypted, decentralized, distributed ledger – but this “simple” solution has potentially vast implications for organizations – particularly across some sectors such as Financial Services, Health Care, and Energy.
Having rapidly outgrown its early roots in cryptocurrencies (such as bitcoin) Blockchain now has the potential to:
- Simplify and enhance transparency in core business functions such as supply chain management, auditing, tax, compliance and back-office operations.
- Rapidly increase the volume of automated transactions
- Help reduce fraud through enhanced identity management.
However, while Blockchain has the potential to revolutionize the way we do business, boards must also consider some of the associated challenges with the adoption of the technology such as:
- Regulatory and legal environments are still under development and as such are open for interpretation.
- Implementing and standardizing Blockchain requires significant investment, including legacy system integration and retraining of the workforce where appropriate.
- A lack of real-world enterprise testing, and the rapid development of Blockchain platforms make it difficult to stay ahead of the curve.
Questions for the board to consider.
- Has management identified who or which business function owns responsibility for managing the implications and exploring the potential of disruptive technologies such as Blockchain?
- Has management developed a strategy to manage the implications and impact of Blockchain to the business and the industry? If so, has this been communicated and shared with the board?
- What specific digital trust and information security concerns, if any, have customers, partners or suppliers raised? What has been management’s response and have the board been consulted?
Source: EY
3. Should someone on your board go? Nearly half your colleagues think so.
With the business landscape changing, more topics to oversee and technology pervading nearly every industry, the bar continues to get higher for corporate directors. Every board member must be high performing to meet the ever-rising expectations. So it’s increasingly important for boards to take a hard look at who’s sitting around their board tables. And many directors aren’t happy with how their fellow board members are performing: 46% of directors say someone on their board should be replaced. And 21% say two or more people should go.
Are boards doing anything to improve this? Some boards are using results from their self-assessments to better gauge how their directors are doing. In fact, 68% of directors say their board took action in response to their last assessment process – an improvement from the 49% who said the same a year ago. But 15% say their board leadership did not re-nominate a fellow director or provided counsel to a fellow board member.
Source: PWC
4. Busy Directors and Shareholder Satisfaction
The job of a corporate director has become increasingly time-consuming. The Wall Street Journal recently reported that the director of a public firm spends an average of 248 hours a year on each board, up from 191 hours in 2005. In light of this growing time demand, corporate directors face increasing investor scrutiny regarding the number of boards on which a given director sits. On average, shareholders perceive that the costs of busy directors exceed their benefits. The percentage of “For” votes that a busy director receives is, on average, about one percentage point lower than that of a non-busy director. This is 28% of the standard deviation of within-board shareholder voting across firms. Importantly, this drop in shareholder satisfaction for busy directors holds when controlling for various observable director characteristics, such as age, tenure, gender, retirement status and committee membership, and all observable and unobservable firm characteristics through the within-firm-year design.
Clearly, one of the primary concerns with a busy director is the time constraints that multiple directorships can impose on the individual’s ability to diligently monitor and advise management. Across an array of proxies for director time constraints, we find strong evidence that busy directors with greater (lesser) external time demands receive lower (higher) shareholder satisfaction. Specifically, we find that busy directors who are retired from full-time employment receive greater shareholder satisfaction, while busy directors who are executives at another firm receive lower satisfaction. Nevertheless, Shareholders also seem to recognize that busy directors may be more beneficial when the firm has relatively high advising needs.
Source: Harvard University
5. According to Buffet: There is only one way to avoid audit issues
If the auditor were an investor, would the audit have produced all relevant According to Warren Buffet….The audit committee occupies a central role in today’s financial reporting ecosystem, yet directors cannot conduct the audit and sometimes feel overwhelmed. Buffett’s advice is to focus on what is possible, which is simply getting the auditors to candidly divulge what they know. Buffett prescribes getting answers to these four issues:
- If the auditor were solely responsible for the financials, would the audit have been done differently?
- information to understand the company’s performance?
- If the auditor were the CEO, would the internal audit procedure differ?
- Is the auditor aware of any actions involving shifting revenues or expenses between periods?
Source: CNBC
6. #METOO Where to?
Women broke the silence. Now boards must make themselves heard
The deluge of workplace sexual harassment claims surfacing as a result of the viral #MeToo movement should cause many Caribbean boards of directors to take a hard look at whether their organizations’ anti-harassment policies and procedures are indeed effective. Indeed, recent high-profile accusations of sexual harassment in the workplace are compelling boards to tighten their oversight and reinforce a culture of respect and inclusion. New amendments to Labour Codes are meant as a means to crack down on employers that fail to take the issue seriously.
Accordingly, board members should work to understand the culture of the organizations they oversee and ensure that the workplace is safe and respectful.
Directors should be required to sign off on codes of conduct attesting that they understand their roles and responsibilities in upholding the values embodied in
those codes. Doing so pushes any board members who are too comfortable with their lack of bias awareness. Finally, smart employers are setting up whistle-blower lines, conducting respect-in-the-workplace training courses for staff and directors, and carrying out regular compliance surveys.
Source: ICD Canada
7. Focus on the Long Term: A New Stock Exchange
A discussion paper from the McKinsey Global Institute in cooperation with Focusing Capital on the Long Term found that long-term focused companies, as measured by a number of factors including investment, earnings quality and margin growth, generally outperformed shorter-term focused companies in both financial and other performance measures. Long-term focused companies had greater, and less volatile, revenue growth, more spending on research and development, greater total returns to shareholders and more employment than other firms.
This empirical evidence that corporations focused on stakeholders and long-term investment contribute to greater economic growth and higher GDP is consistent with innovative corporate governance initiatives. A new startup, comprised of veterans of the NYSE and U.S. Treasury Department, is working on creating the “Long-Term Stock Exchange”—a proposal to build and operate an entirely new stock exchange where listed companies would have to satisfy not only all of the normal SEC requirements to allow shares to trade on other regulated U.S. stock markets but, in addition, other requirements such as tenured shareholder voting power (permitting shareholder voting to be proportionately weighted by the length of time the shares have been held), mandated ties between executive pay and long-term business performance and disclosure requirements informing companies who their long-term shareholders are and informing investors of what companies’ long-term investments are.
In addition to innovative alternatives, numerous institutional investors and corporate governance thought leaders are rethinking the mainstream relationship between all boards of directors and institutional investors to promote a healthier focus on long-term investment.
Source: Harvard
8. Silence of the Lambs: Director Liability
The Australian Securities and Investments Commission case against former Australian Wheat Board Chair Trevor Flugge is a key development in Director liability relating to corporate reputation. Told by Austrade that Australian wheat sales to Iraq were in breach of the United Nations oil for food program, Flugge did nothing. B securities commission alleged several breaches of section 180 of the corporations act relating to the director’s duty of care and diligence, losing on all but one allegation. The court ruled that a reasonable director in Lucas’s position should remain specific inquiries with the United Nations or commission legal advice as to the propriety and legality of various payments made to the Iraqi government. Last April, Flugge was fined $50,000 and banned from managing corporations for five years. The case poses challenges for directors as to how to handle the many market rumors, indirect feedback, and information relevant to the corporate reputation that inevitably comes across a person’s desk.
Source: Business News Western Australia
