This newsletter’s Table of Contents is as follows:
- Boards Of Directors: “Stakeholder Capitalism” Needs You, ….or “they” will “make your organization pay”.
- Strengthening the “Pro” in Professional Director
- Questions to ask before forming a new board committee
- Your Board’s “Diversity Challenge” is Coming from the Regulators: Be ready and be ahead of the curve!
1. Boards Of Directors: “Stakeholder Capitalism” Needs You, ….or “they” will “make your organization pay”.
The business world today is standing in that spotlight. And that light is revealing how the model for success we have been following for decades is setting us up for catastrophic failure. It is time to choose. Our choice today is not whether we need to abandon capitalism, but rather about what kind of capitalism. Over the past 40 years, America became the developed world’s leader in income inequality.
Shareholder primacy has led to long-term decreases in productivity, innovation, basic research, as well as investment in R&D and capital expansion. Of course, there are exceptions. But, here is where you, as a director of a public company at this crucial moment, must help promote a better form of capitalism. As board members, you are the ultimate deciders.
Here is how one of America’s legal giants, Martin Lipton, summarized the purpose of a capitalist enterprise:
“The objective and purpose of a corporation . . . requires consideration of, and regular engagement with, all the stakeholders . . . critical to the success (shareholders, employees, customers, suppliers, communities and society at large) as determined by the corporation and its Board of Directors.”
Unfortunately, for example, today’s workers are generally seen as a cost base, to be squeezed. As a result, more than half of today’s workers are psychologically disconnected from their companies. And some 14% (that’s 1 in 7 of your workers!!) are so alienated, they will deliberately work against the interests of their companies, when given the chance.
In one company after another, the adoption of multi-stakeholder governance sparks continuous innovation and productivity. Today, companies like Microsoft, Delta, Costco, Mastercard, Home Depot and hundreds of others are practicing stakeholder capitalism and their results offer proof that it works. Just Capital, the not-for-profit organization advocating justice in business, find these companies and others produce superior financial results while also conducted their business in a fair and just way.
Boards of directors must take charge and actively, wisely do their jobs by pushing for these principles in the companies they guide. The time to do that, good people, is now. There is lots of money to be made by taking this approach.
2. Questions to ask before forming a new board committee
It’s clear that corporate boards have a lot on their plate. From climate change to cybercrime, there is no shortage of emerging risks that demand directors’ attention. How can boards best oversee these matters while balancing existing obligations? Could a new committee be the solution?
Currently, 71% of S&P 500 companies have four or more standing committees. Audit, compensation, and nominating/governance are ubiquitous. Executive, risk (mandatory for some financial services companies), and finance committees are the most common beyond those three.
Recently, there has been an increase in talk about whether boards should add new committees focused on emerging risks. In one notable example, Gartner forecasted earlier this year that two in five boards will have a dedicated cybersecurity committee by 2025. Lately, many board conversations are driven by questions about forming new committees focused on environmental, social, and governance (ESG) matters.
Questions to ask
Before forming a new committee to handle an area in need of greater oversight, there are some questions boards should ask themselves. REMEMBER: New committees create focus. Many committees create administrative/governance coordination problems. Before you decide to create a new committee, consider these 5 questions.
- Do our current committees have the capacity to handle this without creating a distraction from their current mandate?
- Could we reimagine one of our existing committees? One example: As boards take on greater oversight of talent and human capital issues beyond the C-suite, they may wish to consider refocusing their nominating and governance committee as a “people committee,” according to an article published by the Harvard Business Review.
- Do we have the bandwidth? Boards should consider whether their directors have the capacity, interest, and skills to take the lead on overseeing the emerging issue—on top of their other responsibilities, of course. Another piece of the puzzle: is the board big enough to fill a new committee’s seats?
- Do we want—or need—to send a message? When key stakeholders are very focused on an issue and looking for action, forming a new committee can help communicate that the board hears those concerns and takes them seriously.
- Can we avoid siloes? If an issue is so significant that a new board committee is on the table, it likely has broad implications for company strategy. Creating a separate committee to oversee it may risk leaving it disconnected from other important board responsibilities.
3. Your Board’s “Diversity Challenge” is Coming from the Regulators: Be ready and be ahead of the curve!
Recently, the Securities and Exchange Commission (SEC) approved Nasdaq’s proposed diversity rules. While the new rules do not include a mandate/rule to include diverse members on Nasdaq-listed company boards, they will require companies to disclose information regarding the diversity of their boards, including the reasons why a listed company’s board composition has not met Nasdaq’s diversity objectives.
The “comply or disclose” approach is one that the SEC, Nasdaq and the NYSE have adopted for other rules, such as those requiring an audit committee financial expert and code of conduct, with the expectation that a potentially awkward disclosure requirement will encourage companies to comply.
In a break from customary practice, Nasdaq will also impose these requirements on foreign private issuers, rather than giving them exemption as is the case with most Nasdaq board governance requirements.
The new rules will also provide companies with access to a complimentary board recruiting service to provide access to diverse board candidates.
EDITOR’S NOTE: Need Board members who are CERTIFIED (CDir, Audit or Risk or Human Resources committee certified, contact CGTI for assistance in your search.
4. Strengthening the “Pro” in Professional Director
Lord Boothby, a former Tory member of Parliament, described his experience as a corporate director to TIME magazine in 1962: “No effort of any kind is called for. You go to a meeting once a month, in a car supplied by the company. You look grave and sage. If you have five of them, it is total heaven, like having a permanent hot bath.”
Perhaps the stereotype today is someone like former Secretary of Defense Frank Carlucci who averaged a board meeting a day, attending one by phone from his doctor’s office. Fortunately, the days of the 10-company director ended following the Enron and financial meltdown era reforms.
Best practice these days for a “professional director” without any full-time outside commitment is to sit on no more than three boards, five at the most, according to experts including a Diligent Insights report.
For those who support the idea of having a “professional director”, they argue that these board members have the time to devote to their service, without the distractions of a full-time job, plus fewer conflicts of interest due to business connections.
However, critics will reply that so-called professional directors are not sufficiently involved in the day-to-day developments of the business world and that having no other income makes them reluctant to challenge management and risk losing their lucrative board seat for being known as a troublemaker.
Both are right. SO, what to do?
As is the case with all generalizations about boards of directors, you do not get very far with prescriptive structural standards on things such as “number of boards” and “current employment status”
What needs to change is the definition of “professional directors” if we want them to be credible. First, they have to be more directly accountable – through published board/committee/director evaluations – to shareholders, regulators and other “stakeholders”, and that also means giving investors more of a role in their individual selection.
To professionalize corporate governance, many countries have or are exploring certification programs for directors. This continuing education could guard against a professional director losing touch with current corporate issues.
Finally, D&O liability insurers should reduce premiums for boards that meet certification and continuing education standards. Ideally, the term “professional director” would no longer refer to those who make boards their profession but to those who meet the highest standards of independence and expertise.
