This newsletter’s Table of Contents is as follows:
1. Why Royal Bank of Canada took home the 2019 Corporate Governance Award for best overall governance – international
2. Five questions to ask when creating a tech-savvy board
3. C Suite Transformations: Does your’s need overhauling?
4. Blackrock: Climate is reshaping finance and how Blackrock will invest
5. Boardroom Buzz: 5 Topics for the Board’s Agenda this Quarter
6. Glass Lewis Announces new “PEER GROUP” methodology for Say-on-Pay
7. “Mission Critical” Risks Become Mission Critical for Directors
8. Cybersecurity Insurance 101: Focus on What’s Excluded
1. Why Royal Bank of Canada took home the 2019 Corporate Governance Award for best overall governance – international
Royal Bank of Canada’s (RBC) corporate secretariat recently went back to the drawing board and asked committee chairs and other board members what they would like to improve. Here is what they discovered and implemented to improve the governance of the Bank:
- A key improvement was enhanced board and committee effectiveness via meetings, forward agendas and materials. This was done in part by looking at what actions could be taken ahead of meetings to avoid spending time on unnecessary discussions. The team also looked at the documents that management gives to board members to focus them on key information. The aim was to avoid meetings involving repetition of what is in those materials and instead make strides toward constructive discussions.
- Another improvement has been to increase directors’ focus on key issues such as strategy, risk and talent. The governance committee also continued to improve board and committee reporting on conduct and culture matters.
- Over the past year, the board has overseen improvements in RBC’s approach to climate change. These include: creating an enterprise climate-change strategy and enhancing climate-related disclosures by integrating them into the annual report and RBC’s ESG performance report and public accountability statement.
- The governance committee also recruited a third-party consultant to help identify skills and experiences needed on the board to support RBC’s future strategic objectives and review the board matrix to ensure it focuses on talent the board will need.
- In addition, RBC undertook a major revamp of its proxy circular. The changes include structural, drafting and design updates intended to engage institutional investors and enhance the circular’s accessibility to retail investors. The process included talking to people at RBC to review the entire text of the proxy and reframe it with plain language using simplified text, shorter sentences and less technical language. There was also an increased use of graphics, tables and workflows to take the burden off the text.
RBC takes a proactive and broad approach to shareholder engagement, which has led to the withdrawal of 64 shareholder proposals by their proponents over the past nine years, the bank says.
Source: Corporate Secretary
2.Five questions to ask when creating a tech-savvy board
At a time when technology is the driving force behind change and growth in the business world, leaders must be able to anticipate and adapt to new technology. Yet a recent survey conducted by Deloitte revealed that only 26 percent of employees believe their organizations are “ready” or “very ready” to address the impact of disruptive technologies. At a minimum, readiness requires having a fundamental understanding of the technologies advancing business today, such as artificial intelligence (AI), robotics, blockchain, and cloud computing.
Organizations must increase the tech-savviness of the board as a whole.
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.
- 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? Given the rapid rate of disruption and change, the future of work requires everyone from the boardroom to the workforce at large to be committed to lifelong 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 engaged with the office of the chief information officer? 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.
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. C Suite Transformations: Does your’s need overhauling?
- Today’s C-suite model is a legacy of the post-War period, a vastly different time. In 1964, the average tenure of a company on the S&P 500 was 33 years; today, it is 22 years and headed to 12 years by 2027.
- C-suite change has come mainly by companies adding new roles to bring organizational focus to new market challenges. This practice continues apace — 82% of CEOs report adding a C-level position in the last five years. The additions telegraph new C-suite positions: innovation, digital and strategy.
- New C-suite capabilities that will be critical to continued growth. Chief among these are digital transformation, artificial intelligence, innovation and data science. Behavioral science, increasingly recognized as an important capability for driving a human centric organization from the perspectives of customers and employees, emerges in the top five. For example, behavioral science capabilities can help in improving customer experience and product adoption.
- Gone are the days of Peter Drucker and the belief that anybody can be a CEO of any company. “In the time of the Fourth Industrial Revolution, where technology and expertise matter, companies have to have industry experts or sector experts to move really quickly. The next CEO, apart from having the qualities like integrity and high values, has to be a subject matter expert.
- Boards are going to get more and more involved in talking to investors, and with the CEO and the management. As a result, the C-suite is going to become at a minimum a hybrid C-and-B-suite. But eventually the Board will become a multi-stakeholder suite where the investor has a say, the customer has a say, along with the board and CEO. You may have a rotational CEO!
Source EY
4.Blackrock: Climate is reshaping finance and how Blackrock will invest
In his annual letter to the CEOs of public companies in which BlackRock invests, Larry Fink, Chairman and CEO, outlines why he believes that “we are on the edge of a fundamental reshaping of finance.”
Fink starts by stating that climate change has become a “defining factor in companies’ long-term prospects.” He supports this statement with studies which reveal the physical and global impact of climate change. This evidence is causing investors to “reassess core assumptions about modern finance.” According to Fink, investors are asking questions like: “What will happen to the 30-year mortgage—a key building block of finance—if lenders can’t estimate the impact of climate risk over such a long timeline, and if there is no viable market for flood or fire insurance in impacted areas?” Fink emphasizes that a growing number of investors see climate risk as an investment risk, causing them to reassess that risk and asset values. And because, as Fink writes, “capital markets pull future risk forward,” this will likely cause investors to reallocate capital. He goes on to state that because climate risk is an investment risk, sustainable investing is the best path forward for investment portfolios.
The letter closes by stating that BlackRock will vote against management and directors “when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them.” Concurrent with Fink’s letter, BlackRock issued a letter to clients titled “Sustainability as BlackRock’s New Standard for Investing.” The letter focuses heavily on how sustainability will be used in investing and how this type of investing will be made more accessible to clients.
Source: PWC
5. Boardroom Buzz: 5 Topics for the Board’s Agenda this Quartera.
- Is our company disclosing relevant ESG-related metrics? Does our company have the right procedures in place to validate those disclosures?
- Are we providing an appropriate level of oversight for our company’s compliance with data privacy regulations? What are the other compliance issues that we need to focus more on as a board?
- Are we adequately prepared to face a potential short-seller attack? What steps should we be taking to be prepared?
- Should our board adopt the “Rooney Rule”* in connection with our board refreshment efforts? Are there other approaches we should be considering to having greater diversity on our board?
- Should we exercise any oversight of our executives’ social media presence?
- Editor’s Note: The Rooney Rule is a National Football League policy that requires league teams to interview ethnic-minority candidates for head coaching and senior football operation jobs. It is an example of affirmative action, even though there is no hiring quota or hiring preference given to minorities, only an interviewing quota.
Source: Sullivan and Cromwell
6.Glass Lewis Announces new “PEER GROUP” methodology for Say-on-Pay
Glass Lewis is currently accepting ‘peer group submissions’ from companies on its website. Glass Lewis currently utilizes its Pay-for-Performance Model with its A-F grading system (the “P4P Methodology”) to assess the degree to which a company’s executive compensation aligns with the company’s performance. In turn, these assessments inform the quantitative input for Glass Lewis’ Say-on-Pay voting recommendations. Glass Lewis advises that its new proprietary peer group methodology now drives the P4P Methodology and is critical to its Say-on-Pay recommendations. At a market-wide level, Glass Lewis does not expect a material change in the distribution of grades awarded or the number of against recommendations. For some companies, though, the new peer group methodology may influence Glass Lewis’ Say-on-Pay recommendation.
Source: David Polk
7. “Mission Critical” Risks Become Mission Critical for Directors
- take a fresh look at identifying their company’s “mission critical” risks;
- ensure the company’s reporting system elevates information about these risks not only to management but also to the board itself in a timely, actionable way;
- document how the board pays attention to these risks; and
- respond appropriately as a board when the reporting system raises red flags.
Source: Weil
8.Cybersecurity Insurance 101: Focus on What’s Excluded
Despite the inexorable rise in small-cap data breaches, 80 percent to 90 percent of companies with revenues below $1 billion have no cyber insurance, according to the insurance data firm Advisen. Here are some issues that small-cap boards should keep in mind as their companies consider purchasing cyber insurance.
Garbage in, garbage out. Cyber insurance is a quickly evolving industry. Unlike many other areas of commercial insurance, there is a comparative paucity of cyber breach actuarial data.
Companies should pursue policies that are only underwritten after extensive, informed security assessments.
Start with exclusions. Savvy insurance veterans analyze policies principally with respect to what’s excluded as opposed to what’s covered. Many cyber insurance policies, for example, exclude “acts of war,” “terrorism,” and “state-sponsored acts.” In other words, there are ample opportunities for some insurers to deny precisely the type of coverage that companies most desire. Focus on and fully understand what is excluded.
Administration is integral. As with other insurance products, what happens when there is a cyber-breach claim is a principal differentiator between carriers. An otherwise great cyber insurance policy can be rendered almost moot by onerous or confusing claims procedures. Try to discern whether a prospective carrier is an active risk mitigation partner to its insureds, or if it is more in the business of selling policies and moving on. Check references.
Nevertheless, boards need to be mindful that nothing can replace comprehensive information technology and physical security controls, training, and post-breach resiliency planning. Ultimately, what’s at stake with cyber breaches is your company’s brand, and no amount of insurance can repair that.
