This newsletter’s Table of Contents is as follows:
1.Unlock performance and value through culture
2.What digital transformation means for boards
3.California could be the first state to mandate female directors in the boardroom
4.WARNING: “Mindful Capitalism” is coming. A new world for directors.
5.The New York City Comptroller’s Office Continues Focus on Board Matrices and Enhanced Disclosures on Board Recruitment and Board Evaluations
6.Whistleblowers continue to win BIG!!
7.Doing the Right Thing: NEW Questions to ask potential directors
8.Cybersecurity Insurance 101: Focus on What’s Excluded
1. Unlock performance and value through culture
A lax approach to culture oversight can lead to unintended reinforcement of the wrong behaviors and serious risk issue—from employee misconduct to compliance failures—that can chip away at hard-earned reputations. Clearly, more can be done, and boards are central to supporting and maintaining a strong and ethical culture.
According to Deloitte’s global human capital report, 82 percent of more than 7,000 surveyed executives said that culture is a potential competitive advantage, but only 12 percent believed they had the right culture in place at their organizations.
A holistic culture risk framework can help identify gaps in cultural messaging and awareness while establishing an enterprise-wide monitoring program to gain insights into culture in times of changing leadership, staffing, and business models. A holistic culture risk framework should consider:
Assessing organizational culture. Diagnostic survey tools can create a benchmark that gives a window into the current state of culture, including areas of strength and weakness.
Measuring employee engagement. Employee surveys and analytics can provide insight into feelings and understandings about culture at enterprise and local levels.
Monitoring employee behaviors. Behavioral analytics can help monitor key risk indicators and identify individual behaviors as well as patterns of conduct that can create risk situations for the organization and its critical assets.
Identifying market signals. Risk-sensing and external assessments can show how stakeholders outside of an organization regard its brand and reputation.
The role of directors can be especially important in understanding how an organization’s culture can promote strategic priorities, optimize strategy, support achievement of performance objectives, and manage risk.
For example, compensation and talent are two prime areas for promoting strategy through culture. Boards can ask management: “To what extent is executive and employee compensation used to promote a strong culture? Are the CEO and others compensated in part by improvements made in positive culture metrics? What is management doing to ensure that the organization’s reputation and culture help attract and retain top talent, and assure that employees’ behaviors align with the organization’s culture?”
Source: adapted from Deloitte
2. What digital transformation means for boards
Digital transformation is one of the most important priorities for boards today – with good reason. In this era of continual technological disruption, boards are constantly confronted with new inventions, new competitors, new business models and new expectations from customers.In such a context, it is understandable that boards want to explore the possibilities associated with powerful emerging technologies such as artificial intelligence (AI), robotic process automation (RPA) and virtual reality. In fact, almost half (46%) of the global executives who responded to EY’s 18th Global Capital Confidence Barometer1 said that they were already using AI and RPA.
So how can boards achieve sufficient competency in digitalization to seize the opportunities associated with digital transformation while managing the risks and asking the right questions of management at board meetings?
a. Boards need to close their digital knowledge gap
Significantly, given the business-critical nature of digital transformation, our research highlighted that there is a notable gap between the importance of digitalization on the board agenda and the chair’s skills in this area. The chair’s level of experience of digitalization was ranked 15% lower than the importance of digitalization on the board agenda overall.
The chair’s digital expertise is not the only knowledge gap that boards need to close. Just 24% of boards have a non-executive director specifically dedicated to digitalization, while at least 38% have an executive director who specializes in the area. Notably, when digitalization is assigned to C-level executives, it’s mostly (56%) within the responsibility of the CEO.
b. Appoint a C-level executive to execute digital strategy
Every board should have an executive director who takes personal responsibility for digitalization. If the director delegates that responsibility to someone else, he or she exposes the organization to significant strategic risks. These include being overtaken by a competitor that has an executive director who is leading on digitalization from the front.
c. Make optimum use of technology in board meetings and beyond
While technology is already widely used to facilitate the board’s communication and information processes, there is scope to apply it more widely – for example, by making use of electronic voting and video conferencing.
Source: EY
3. California could be the first state to mandate female directors in the boardroom
California Senate Bill 826, aimed at boosting female representation on company boards headquartered in the state of California, won State Senate approval with only Democratic votes and has until the end of August to clear the Assembly. The bill would require public companies headquartered in California to have at least one female director on the board by the end of 2019. It would further require that by 2021, public companies with five board members have at least two female directors, and companies with six board members have at least three women on the board. Companies that do not comply would incur a fine.
Currently, one quarter of the state’s 445 public companies do not have a single woman on their board of directors. Critics of the bill say that it discriminates against men wanting to serve on boards, and that the bill conflicts with corporate law, since a company’s state of incorporation should govern these internal matters. While countries such as Norway and Germany have passed laws requiring that a certain percentage of board seats be held by women, California would be the first US state to pass such a requirement.
Sources: PWC
4. WARNING: “Mindful Capitalism” is coming. A new world for directors.
An increasing number of jurisdictions are implementing or proposing changes that would require corporations to account for their impact on the society in which they operate.
Australia is proposing corporate governance rule changes, which included obligating public issuers to hold a “social license to operate”. These guidelines were met with fierce opposition from many market participants who argued they constituted a move towards a “corporate nanny state”. The Australian Securities Exchange, believing the guidelines would help lift governance standards, nonetheless backed-off some of the more unpopular measures.
Recently, US Senator Elizabeth Warren received widespread attention for her proposed Accountable Capitalism Act. Based on the model of the “benefit corporation”, which is currently used in 34 states (similar statutes exist in British Columbia and Nova Scotia), the Act would require boards of directors and officers to consider the impact of their decisions not only on shareholders, but also on other stakeholders, like workers, customers, communities, suppliers and the environment.
Supporters of the legislation point to Germany’s stakeholder model, which aims, in part, to hold back the forces of short-termism that have dominated the strategic and operational directions of American corporations for the past three decades. Those opposed believe that diminishing the influence of investors creates opportunities for mismanagement and inefficiency and that shareholders should maintain their primacy[1].
Whatever one’s perspective on stakeholder engagement or social license, it’s undeniable that the notion that corporations should be more accountable to the world around them is now part of the broader – and mainstream – governance conversation. More and more, influential stakeholders expect businesses to contribute to the greater good of society.
The most vocal among these stakeholders also tend to be the ones to gain the least from the current capital model. They are not shareholders, yet they represent a large portion of the consumer population. Social media platforms have allowed them to connect with each other and amplify their voices, garnering the attention of media, government and ultimately, the corporations to whom they are speaking. Directors may feel pressured to consider their perspectives as important inputs to decisions, with or without government telling them to do so.
Source: adapted from the ICD
5. The New York City Comptroller’s Office Continues Focus on Board Matrices and Enhanced Disclosures on Board Recruitment and Board Evaluations
The Office of the New York City Comptroller Scott M. Stringer (NYC Comptroller), as part of the Boardroom Accountability Project 2.0 initiative, has published examples of “best practices” in board matrices. The matrices include companies that have disclosed, in chart form, individual director qualifications and either (a) individual self-identification of director gender and race/ethnicity or (b) aggregate board self-identification of director gender and race/ethnicity.
These matrices were the outcome of letters sent in September 2017 to more than 150 companies that are part of the “focus list.” NYC Comptroller sought to have companies provide, in a snapshot, not only the skills and attributes of each director, but also information about the board’s gender and racial/ethnic diversity, so that investors would not have to “make assumptions about how their directors self-identify based on photographs or the spelling of their names.” 80% of companies responded.
The communication from The NYC Comptroller also included examples of several companies that have disclosed a willingness to have a “hard conversation” if a board member may no longer have the availability or otherwise to contribute effectively to the board.
Source: Davis Polk
6. Whistleblowers continue to win BIG!
The SEC awarded $39 million to one whistleblower and $15 million to another whose critical information and continued assistance helped the agency bring an important enforcement action. The $39 million award is the second-largest in the history of the agency’s whistleblower program. The SEC has awarded more than $320 million to 57 individuals since issuing its first award in 2012.
‘Whistleblowers serve as invaluable sources of information, and can propel an investigation forward by helping us overcome obstacles and delays in investigation,’ said Jane Norberg, chief of the SEC’s office of the whistleblower. ‘These substantial awards send a strong message about the SEC’s commitment to whistleblowers and the value they bring to the agency’s mission.’
Source: Corporate Secretary
7. .Doing the Right Thing: NEW Questions to ask potential directors
Nominating and corporate governance committees are entrusted with the job of identifying and interviewing candidates to serve as directors and then recommending the best candidates for nomination. Apart from the usual questions that get asked about their interests and time availability, here are some important new questions to help make sure you find the right ones:• Have you ever had to defend a decision you made as a director or otherwise in your career even though other influential people were opposed to your decision?• There are times when members of management, shareholders, or proxy advisors may try to exert pressure on directors for a certain outcome. Have you encountered such a situation? How did you react?• Have you ever served on a board where certain board members were not, in your opinion, doing what was in the best interests of the corporation as a whole? What did you do?• Tell me about a time when you strongly disagreed with someone and how it resolved.• How would you handle a situation where there is pressure to achieve short-term quarterly results at the risk of jeopardizing long-term performance? Have you come across this situation before?• Have you ever introduced a new idea or policy to the boards you serve on? Did you meet any resistance when trying to implement the new idea or policy? How did you cope with it?• People make mistakes and sometimes do things that turn out differently than hoped for. Has this happened to you? What happened?• While serving on boards, what steps do you go through to ensure that your decisions are in the best interests of the corporation?• What types of decisions do you find the most difficult to make as a director and why?• When have you gone above and beyond to get a job done?• Have you ever found yourself in an ethical dilemma as a board member or otherwise in your career? What did you do?
Source: Journal of Applied Corporate Finance
8. Cyber security 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. Since many smaller companies lack the balance sheet strength to absorb the costs associated with cyber breaches, cyber insurance penetration in this segment will likely grow dramatically in years to come.
The first inclination of many boards is to assume that other existing insurance policies such as director and officer (D&O) or commercial general liability (CGL) will cover typical first-party claims (i.e., direct costs incurred by a company due to a data breach like forensic investigation, data loss, business interruption, data remediation, public relations, notifications, etc.) and third-party claims (i.e., liability arising out of the failure to maintain/store private information, etc.). Counsel’s advice should be sought long before a breach is discovered, inasmuch as D&O and CGL policies are often not designed to cover these (or other) first- and third-party claims arising out of cyber breaches.
Many major carriers are also conflicted: they would like to participate in a potentially lucrative segment, but they are cautious about underwriting risk that’s still not well understood. What does this mean for boards?
Companies should pursue policies that are only underwritten after extensive, informed security assessments.
And start with the “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.
Purchasing cyber insurance can be a material part of any small cap company’s risk mitigation efforts, but no matter how efficacious the policy or prominent the insurer, 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.
Source: CGI
