March 10, 2018

EY's Report on Top Priorities for US Boards in 2018

This website provides a good definition for the board of directors as "the group of individuals who are charged with running the corporation." Importantly, "The primary duty of the board members is to care for the finances and legal requirements of the corporation. In addition, they must set the mission and vision of the corporation, and set policy for corporate officers and employees to follow. Board members do not participate in day-to-day operations of the company."

At the time of writing this blog post, I serve on the board of directors of four companies. I take my responsibilities as a director seriously (as all directors should) and encourage my fellow board members to take the time to understand the purpose of the board and their responsibilities to shareholders and management, respectively. I regularly seek resources to help me improve my skills as a corporate director.

A report published by EY, a consultancy, says, "In this time of uncertainty, disruption and economic growth, companies are challenged to achieve short-term objectives while taking steps to survive and thrive in the long term. Accordingly, boards of directors are expected to understand and provide oversight of new risks and strategic opportunities." Top priorities for US boards in 2018 further says, "Investors, employees and customers are calling on companies to demonstrate their values and explain their positions on an array of issues. These forces and topics — such as emerging technologies, capital and talent allocation, shareholder engagement and board composition — are complicating and expanding the board's agenda."

Listed below are a list of priorities anticipated by the EY Center for Board Matters that will be top-of-mind for board members in 2018 (the report also presents questions the board should consider for each priority):

1. Understanding technology's impact on strategy, business models and cybersecurity
  • How is the board staying current on new and evolving technologies and their potential impact on the company’s industry, strategy and business model?
  • Is the board overseeing strategy to continually reimagine the future of the company’s business model and considering ways to see the upside of disruption?
  • Does the board engage in tabletop exercises to simulate a response to a cyber incident or a natural or man-made disaster?
2. Anticipating and planning for geopolitical and regulatory changes
  • How is the company monitoring the evolving geopolitical landscape and pending regulatory proposals? How is this information collected and communicated to the board?
  • How do you convert geopolitical intelligence to actionable business initiatives?
  • How has the company modeled and considered the effects of US tax and other regulatory reform proposals from a financial reporting, treasury, supply chain, human resource and investor perspective?
3. Aligning risk management with strategy and operating performance
  • Is the company's enterprise risk management (ERM) framework aligned with strategy to improve performance and more clearly inform decision-making?
  • Has management clearly articulated the risks to achieving its strategic goals and properly applied the company's risk tolerance levels to determine risk-management priorities?
  • Do the company's ERM practices incorporate forward-looking insights and data analytics to determine trends and predictive indicators?
4. Balancing short- and long-term capital allocation pressures from shareholders
  • How confident is the board that the capital allocated for innovation, digital transformation, acquisition and other growth initiatives is sufficient for achieving the company's strategic priorities, particularly relative to peer companies and potential new entrants?
  • How does the board balance the need to invest in the company for the long term with pressures to return capital to shareholders through buybacks and dividends?
  • Given the growing attention of institutional investors on capital allocation decisions, is the board validating that the company is clearly communicating the rationale for allocation decisions and the alignment with long-term strategy?
5. Overseeing culture and talent in a time of innovation and transformation
  • Does the company have a compelling purpose, and do the board, management and employees understand what the organization is working toward and why?
  • To what extent is the board engaged on the company’s talent strategy and embracing the new global digital leadership competencies to drive innovation, growth and competitiveness in the digital age?
  • How can the company optimize its workforce assets (traditional, virtual, contingent and digital robotic technologies) to attract and retain the best talent, achieve its short- and long-term strategies, and mitigate risks?
6. Engaging with stakeholders on long-term governance and environmental and social issues
  • Does the company have a long-term strategy that incorporates sustainability concepts? Does the company make public disclosure on these topics in a way that is responsive to investor and stakeholder concerns?
  • Does the board understand the views of key investors and stakeholders regarding their priorities, and positions on governance and environmental and social matters?
  • Are the independent leaders of the board and key committees prepared to engage with the company's key investors and stakeholders, if requested to do so?
  • Does the company have processes in place to review and consider alignment of its publicly stated positions on environmental and social matters and its actions?
7. Accelerating board effectiveness through composition, structure and assessments
  • How does the board view its current structure? Is workload effectively allocated between the board and its committees? Should any work be reallocated or any structures changed to optimize oversight?
  • Are individual board members positively contributing to the board's oversight responsibilities? Does each board member take the time and collaborate to understand the issues he or she is charged with addressing?
  • Does the board assessment process result in the identification of concrete action items to enhance board composition, structure and effectiveness?
  • Do the disclosures concerning the assessment process build trust, secure support and address concerns of investors and governance stakeholders?
With respect to understanding technology's impact on strategy, business models and cybersecurity, I agree that "boards must provide the necessary support for management to invest in longer-term strategic priorities." Moreover, on the topic of anticipating and planning for geopolitical and regulatory changes, the report accurately notes that "given the potential implications of geopolitical and regulatory issues, it is important for boards and management to work together to take a proactive approach."

I also support "the need to balance near-term opportunity with long-term value creation is one of the more difficult objectives for management and the board." Furthermore, the report correctly notes: "The potential for shareholder activism related to short-term results remains high and will continue to be an issue. The ability of management to convey and execute a long-term strategy, backed by an investment strategy mixed between asset replenishment, reskilling of staff, innovative R&D (research and development), and strategic M&A and JVs (joint ventures), should compel investors to stay the course for the long run."

As for accelerating board effectiveness through composition, structure and assessments, I concur that in order "to enhance board effectiveness, boards should conduct annual assessments of the board, its committees and each of its members. Detailed action plans should be prepared from the results of the assessments to ensure renewal and continuous improvement. High-level insights into the assessment process, along with resulting actions, should also be disclosed, given the growing interest of shareholders in such process. Such disclosures highlight how board members are the best qualified to guide the company and why they represent a critical advantage to the company as it continues to navigate toward long-term growth."

Lastly, the report concludes that "boards and management must work together to balance short-term objectives with long-term sustainability and growth. The considerations in that balancing act are complex, numerous and interconnected. From the impact of technology on strategy to risk management and from workforce talent to board effectiveness, investors and other stakeholders are paying close attention to how companies govern for the future.

What actions should boards take "to help management successfully navigate risks and capitalize on opportunities while living up to stakeholder pressures"?

Aaron Rose is a board member, corporate advisor, and co-founder of great companies. He also serves as the editor of Solutions for a Sustainable World.

1 comment:

  1. Received a comment via email that asks: "What do I need to know, do, learn to qualify to be a board director?"

    Here is my response: Being a qualified individual to serve on a company's board really comes down to one simple notion: making informed decisions. This notion is crucial when accessing a corporation's opportunities to grow, while at the same time identifying the risks (and creating mitigation strategies) that will prevent the maximum achievement of those opportunities.