This newsletter’s Table of Contents is as follows:
- 3 Lessons for the board from the Weinstein Scandal
- The Current State of ERM Thinking by Boards Isn’t Good Enough Anymore
- CEO talent: A dime a dozen, or worth its weight in gold?
- The Director’s Dilemma: Hiring a director from its board
- Corporate Governance Update: Preparing for and Responding to Stakeholder Activism in 2017
- Focus on the long term
- Shareholder engagement
- Board oversight of algorithmic risk
1. 3 Lessons For The Board From The Weinstein Scandal
Allegations of harassment, intimidation and serious forms of sexual misconduct have rocked the world’s most profitable entertainment industry for the past three weeks, with new victims continuing to speak out against Hollywood mogul Harvey Weinstein, co-founder and now former co-chairman of The Weinstein Company.
The TWC board has been accused of knowing for years about the accusations against Weinstein. The New York Times (NYT) reported Weinstein had reached eight previously undisclosed settlements with women who alleged he harassed them. Weinstein’s former lawyer claims the board knew of some of these settlements as early as 2015.
To avoid the risks and harm to employees of serious misconduct and harassment, boards must shape culture and put in place policies that protect staff, according to three senior directors who spoke about the lessons boards could learn from the Weinstein scandal.
- Avoid a culture of complicity
Providing a confidential outlet for whistleblowers like a phone number where employees can report misconduct anonymously is essential. Boards need to set the tone and ensure culture within the company is morally and ethically suitable in all dealings.
They need to assess culture, find ways to monitor culture and executive teams are responsible for driving the culture. Culture is not something that can be devolved to a board committee or discussed only when problems arise. The internal culture guides decisions made across the company.
- Swift and effective investigations, even if the matter is ‘settled’
A better approach should have had a robust discussion with each other and their CEO about the values of the company and whether the payments indicated behavior which contravened those values. They should have started an investigation using an independent provider with a report due in a timely manner.
After the misconduct is determined to a reasonable degree of certainty, the board must act – swiftly – even if the alleged perpetrator is a highly-valued asset for the company. Misconduct devalues even the best assets and also the company, as research has shown. Three days after the announcement of sexual indiscretion by a CEO, companies experience an average drop in value of US$226 million, according to a Mississippi State University study.
Non-disclosure agreements and the silence they compel does not void board responsibility or mean the issue is finalized, with some TWC staffers reportedly now seeking to be released or simply breaching those agreements.
“From the board perspective, it is important to understand what they knew and approved in terms of the content of settlements and non-disclosure agreements with victims. At the very least there seems to an ignorance or refusal to investigate company culture and internal ethics.
- No organization is immune
This matter will not be limited to TWC and the impact on other companies has already started. The risk also extend to Disney who bought the Weinstein brothers’ previous company. There will be corporate governance questions for Disney about whether any of these allegations relate to this time and what was known internally during and after their acquisition of the company. Interestingly, this industry-wide knowledge about Weinstein offered an important avenue for directors to keep appraised of potential allegations by attending industry networking events. Nearly everyone in the US film and television industry knew about it and therefore it was most likely discussed at such events, albeit discretely given Weinstein’s prominence. It would have been fairly easy for a savvy director to get wind of problems in their organization if they were in those environments regularly.
Source: Australian Institute of Company Directors
2. The Current State of ERM Thinking by Boards Isn't Good Enough Anymore
The speed of change is the fastest it has ever been. And therefore the process of evaluating management’s strategic plan in one sense is a risk management decision.
If the current risk management program objective is to meet a compliance expectation, your executives do not yet have the tools needed to develop that strategic response. The question becomes: how does your organization evolve from where you are to where you need to be?
What You Need to Know
The board is responsible for risk governance to demonstrate your organization’s safety and soundness. You and the rest of your board must therefore have in place the resources needed to make strategic decisions that can strengthen both your risk management program and your organization’s safety and soundness. You need to build the risk culture from the top, and better understand how a well-supported Enterprise Risk Management program supports the strategic initiatives you have in place within your organization.
You can get this through thorough reporting on the basics: how to measure inherent risks, how inherent risk is affected when introducing mitigating controls, the continuous lifecycle of risk management, and how each of these 3 Lines of Defense function together.
Lastly, you need to understand how knowing this allows you to think more critically about the information your CRO will report to you. Knowing our current risk profile is basic; projecting the future direction and rate of change is insightful. Your CRO can help you gain this understanding by providing reporting on the following data specific to your organization:
• Low, Moderate, and High inherent risk results for technologies, vendors, processes, and procedures throughout your organization
• Controls currently in place, and the impact those controls have on your residual risk calculations
• Analysis of the monitoring activities being performed to ensure they are allocated for best cost effectiveness and return on investment
• Cost overlays for each risk area, to help determine the appropriate allocation of resources and any necessary needs or changes
• Clear descriptions of each line of defense, and the expectations of how each role fits into one of those categories
• Developed processes for each phase of the risk management lifecycle
Source: adapted from Directors Digest (Western Independent Bankers
3. CEO Talent: A Dime a Dozen, or Worth Its Weight In Gold?
Source: Stanford Closer Look Series
4. The Director’s Dilemma: Hiring a Director From It's Board
Boards need to consider the benefits as well as the potential problems with allowing a board member to become a candidate for a staff position. The first question a board should ask is whether there is a real or perceived conflict of interest. There may, for example, be a perception that a board member has inside knowledge and, therefore, an unfair advantage in any job competition, which may potentially damage your organization’s reputation with stakeholders.
Hiring a board member may also damage an organization’s culture. Nevertheless, directors agree that there are situations where the move from the boardroom to the payroll can be beneficial, providing that the move is handled in the right manner. To begin with, a board may want to develop a policy that outlines a process for board members seeking employment within the organization. Many boards, for example, will require a director to resign from the board before applying for a staff position and may require a cooling-off period of several months to a year before any application may be made. The policy may also include a statement that the position will be awarded to the best candidate.
While there are certainly pitfalls for any board member pursuing a staff role, in some cases there may be significant benefits to the move, especially at the most senior ranks. The placement of a board member into the CEO role can be beneficial to an organization as long as the director-applicant remains independent of the hiring process. A board member may be able to “hit the ground running,” bring significant institutional knowledge and, as a known quantity, may present less of a hiring risk for the organization.
Key questions to consider before hiring from the board
- How will the board manage any real or perceived conflicts of interest?
- What happens if the board member/job candidate is unsuccessful?
- Does the board need a policy, and should it include a call for the director’s resignation and a cooling-off period?
- Do the benefits of appointing the board member applicant outweigh any potential downside?
- Will the appointment of a board member have an impact on the organization’s reputation with stakeholders?
We would love to hear your views and direct experiences with this issue.
What are the benefits or drawbacks to be considered in allowing board
Members to accept staff positions?
Source: ICD Director Journal
5. Corporate Governance Update: Preparing for and Responding to Stakeholder Activism in 2017
Preparation is an ongoing process. Corporate leadership can anticipate an activist approach by evaluating the business through the eyes of a stakeholder and understanding how that perspective may differ from the company’s Applying an activist’s mindset can be extremely useful for the board and management team, with the caveat that understanding that mindset does not mean the company should necessarily adopt and implement it.
The core strategy of activists is to drive a wedge between the between management and the board. By embarrassing management or the directors, by suggesting that management has not capitalized on available opportunities, or by undermining board confidence in management, the activist creates exploitable weakness in the leadership of the target. Management therefore should keep the board fully informed of their ongoing analysis of likely activist approach tactics. Management should also focus on building and maintaining credibility with key stakeholders.
It is essential that the company speak with one voice: that of the chief executive, backed by a unified board. The CEO, in consultation with the chairman or lead director, should coordinate the company’s response to all activist approaches, overtures, and conversations. Whether or not an activist should be given direct access to the CEO is a tactical decision that should be considered in light of the particular circumstances. While activists may seek to contact board members directly, directors should understand that engaging personally means that their involvement may be publicized, and they should be accordingly circumspect. Utilizing advisors well-schooled in activist situations is important. If at all possible, a company should attempt to keep its discussions with activists private. Once a situation becomes public, the target company’s options narrow dramatically.
Fundamentally, the company must not allow activists to gain the “moral high ground” of corporate governance or shareholder rights. While an activist situation can seem urgent and fraught, a board does have time and flexibility in responding. The risk of legal liability is low, as long as the board acts in a deliberative manner, on an informed basis. A well-prepared and unified board and management represent a strong bulwark against activist attacks.
Source: adapted from Harvard Law School Reform on Corporate Governance
6. Focus On The Long Term
So what did they learn?
- Most investors remain focused on whether the right mix of directors, with a depth of diverse skills and backgrounds, are in place to oversee long-term strategies and risk management.
- For an increasing number of investors, how a company manages — and how the board oversees — the company’s environmental and social impacts is integral to whether the company is being run well for the long term.
- Particularly given the surge in stock buybacks and continued hedge fund activism, many investors are focusing on whether companies are investing capital and operating for the long term.
- Many investors are closely watching how companies implement proxy access; companies restricting shareholders’ ability to use proxy access may damage relationships with investors.
- Companies should strive to make engagement focused and tailored to the investors with whom they are engaging.
Source: EY
7. Shareholder Engagement
Proactive shareholder engagement can be a win-win. Boards can help.
There has been a Shareholders are exerting more influence than ever on how boards and management teams operate. We have seen a trend to an “investor-centric” model in which institutional investors and shareholder activists demand greater transparency, including more engagement with independent directors.
Shareholders are eager for shift in the corporate governance world relating to shareholder engagement.
More personal interactions with directors where they can discuss topics like board composition, executive compensation, and management performance and even how companies choose to allocate their capital. The majority of directors have become more comfortable with direct board-shareholder communications around corporate governance issues and have made significant strides in establishing protocols and practices to structure their communications with investors. For these reasons, it’s important that boards use a thoughtful and proactive approach when considering shareholder engagement.
Source: PWC
8. Board Oversight of Algorithmic Risk
- Where and how are algorithms used in our organization?
- What are the potential impacts if the algorithms go wrong?
- Are we aware of any algorithms that have functioned improperly? Have we received any complaints about them from any of our constituencies—customers, suppliers, employees, communities, etc.?
- If so, what kinds of problems have those improper functions created, and how have they been addressed or resolved?
- What monitoring systems are in place to give us indications of problems with our algorithms?
- Who oversees our use of algorithms and related risks?
- What processes do we have in place to monitor and test our algorithms, including data inputs, workings, and outputs?
- Are our algorithms independently reviewed? By whom? How often?
- How secure are our key algorithms from cyber-theft or hacking?
- Has management developed an inventory of tested and “risk-rated” algorithms so that we can rely upon them and focus on other algorithms that may pose greater risks?
Source: Deloitte
