January 7, 2021

EY's Six Priorities for Boards in 2021

Many will agree with this assertion: "Following a year of global upheaval, organizations are re-evaluating every aspect of their business." Produced by the EY Center for Board Matters, the report, which lists six priorities corporate boards of directors in 2021, further says "companies and boards will face an acceleration of existing challenges" in the coming year "and be compelled to address how they are building resilience and creating sustainable value in a rapidly changing business environment."

I have published posts about EY's recommended priorities for boards for previous years. Whether serving on a board of a company that is publicly-traded or privately-held, I appreciate that this year's report recommends that when evaluating a company's existing business model, the "strategy should be inclusive of investments in strategic competencies to meet material stakeholder needs and future expectations, including those related to environmental, social and governance (ESG) matters."

Not only did the business disruption caused by the coronavirus pandemic remind corporate leaders of the important role ESG has on a company's culture and relations with its investors and customers, but the events of past year serve as a reminder that a company's most valuable asset is its workforce. The report encouragingly notes: "Boards have an opportunity to help guide workforce strategy to create competitive advantage and long-term value, and this requires the right information. This involves making the chief human resources officer (CHRO) a central board resource, regularly reviewing well-defined and robust metrics for human capital and culture intelligence, and finding opportunities to bring the employee perspective into the boardroom."

Therefore, "With increased investor scrutiny and stakeholder considerations, boards will be well served to focus on the following priorities in 2021."

1. Overseeing strategy to create long-term value

"In today's stakeholder-focused business environment, it is imperative that companies define both financial and nonfinancial value drivers and include them in strategy-setting as they consider the needs of investors, employees, consumers, society and other key stakeholders," explains the report. "Longer-term assumptions within the strategy should be developed using internal and external sources of information on megatrends, investment flows by venture capital and private equity entities, along with monitoring merger and acquisition, alliance and joint venture activity. Traditional sector and adjacent construct analyses along with external risk intelligence can provide early indicators of emerging opportunities and risks."

In addition, "Management should integrate strategy and culture with the company's enterprise risk management process and provide the board with timely updates related to strategic opportunities and risks."

The report importantly proposes that "the board and management should collectively challenge whether they have the appropriate governance processes to enable the timely review and implementation of a robust strategy across the short-mid-, and long-term time horizons. A long-term value dashboard that includes metrics to gauge financial, human, consumer and societal value should be reviewed regularly by the board and monitored by management to ensure metric credibility. Board time should also be evaluated along with the potential use of a committee or an ad hoc committee given the need to continuously review strategic assumptions over a longer term."

Key actions for directors to take in 2021:
    • Balance the board's oversight of strategy and investments over the short, medium and longer terms to sustain long-term value.
    • Obtain an appropriate mix of internal and external data and information to validate key assumptions and determine strategic pivots.
    • Integrate ESG opportunities and risks into strategy frameworks and decisions.
    • As strategy shifts, evaluate that the culture has been redefined to incorporate new behaviors required to drive the strategy over the long term.
    • Create a long-term value dashboard with regular briefings to the board to ensure shareholder value improvement manifests from a balanced focus on financial, human, consumer and societal value drivers.

    2. Promoting enterprise resiliency in the face of uncertainty

    "Board members are playing a pivotal role in helping management adapt their organizations to the world beyond the pandemic and overseeing how resiliency is built into all aspects of the business."

    Key actions for directors to take in 2021:
      • Set aside more time on board agendas to challenge assumptions, review contingency plans and verify that management is incorporating low-risk/high-impact scenarios into its ERM frameworks and strategy.
      • Analyze megatrends and identify key management and external advisors to regularly report to the board on material business environment developments and data points to continuously improve oversight of strategy and risk.
      • Turn emerging risks into strategic value by taking a balanced approach to risk management across the three dimensions of risk: downside, upside and outside, with a greater focus on upside and outside risks.
      • Review key performance indicators developed by management to measure key risks and opportunities and assess the value of material intangible assets — such as human capital and culture.
      • Re-evaluate risk oversight practices and related structures to assess whether board or committee oversight changes would enhance oversight.
      • Review management's conclusions and effectiveness following postmortems regarding corporate responses to the pandemic, social justice movements and other material economic and business impacts in 2020.

      3. Focusing on workforce transformation and new ways of working

      "Historically, many boards limited their talent oversight responsibilities to C-suite succession planning and development. Today's leading boards recognize human capital as a key driver of long-term value."

      Key actions for directors to take in 2021:
        • Review the board's approach to overseeing strategic workforce issues, including how related committee responsibilities are allocated (e.g., succession planning, human capital initiatives).
        • Make the CHRO a central and strategic resource to the board by aligning their participation to strategy, business and disclosure discussions.
        • Regularly review a comprehensive set of workforce and culture-related metrics, understanding how they are being collected, measured and controlled.
        • Align decision-making related to the human capital strategy with the company’s purpose, culture and values.
        • Consider how the company's investments in reskilling workers or recruiting new employees are meeting current and future skills gaps and addressing innovation.
        • Assess the quality and consistency of the company’s human capital disclosures across various communication outlets and challenge how to optimize the impact on the company's brand and reputation, including with prospective employees and other key stakeholders.

        4. Leading on diversity, equity and inclusion

        "Making real progress on diversity, equity and inclusion (DEI) will be one of the hallmarks of 2021 as leaders implement significant changes to their recruitment and management processes and boards hold their management teams and themselves accountable."

        Key actions for directors to take in 2021:
        • Work with management to define and determine how DEI can help drive value for the company.
        • Challenge how DEI considerations are embedded in the company's human capital management programs throughout all steps in the employee life cycle.
        • Understand how the company’s human capital management programs enable equitable opportunity, advancement and compensation.
        • Consider how executive incentive pay could be more directly tied to the achievement of DEI goals.
        • Assess how the board’s composition and director nomination process reflect the company's commitments to DEI.
        • Include DEI metrics as part of the company's long-term value dashboard for credible reporting and updates to the board

        5. Guiding an ESG strategy that drives stakeholder engagement and value

        "A sustainable-investing surge is underway. Driven by many forces, such as investor demand and increasing recognition that ESG factors can be financially beneficial, record-setting inflows are going to companies deploying ESG investing strategies, and significant growth in ESG-branded funds points to continued momentum."

        Key actions for directors to take in 2021:
          • Capitalize on ESG investing and stewardship trends.
          • Understand the ESG ecosystem and developments impacting stakeholder expectations.
          • Guide ESG strategy development based on a materiality assessment and oversee the identification of ESG metrics and goal setting.
          • Support the integration of ESG with broader strategy and ERM.
          • Consider how the company tells its ESG story through various channels and confirm that messaging is consistent and data quality is validated.

          6. Challenging board composition and effectiveness

          "Throughout 2021, boards should continue to enhance their own effectiveness. Board competencies, practices and committee structure and responsibilities can be continually improved to meet ongoing and emerging challenges, including the impacts of COVID-19."

          Key actions for directors to take in 2021:
            • Confirm the board is receiving the information it needs from a variety of sources to keep pace with external developments and challenge status quo thinking.
            • Assess the board's expertise and diversity against rapidly evolving strategic opportunities and risks and stakeholder expectations. Develop individual and collective learning opportunities to enable directors to stay on top of current trends and leading practices.
            • Challenge whether board and committee meeting frequency, length, format and security remain fit for purpose in a continued virtual environment.
            • Contemplate using a third party to provide objectivity and facilitate or improve the board evaluation process and actionable outcomes.
            • Promote ongoing board evaluation beyond the formal annual process, such as making time for reflection on performance during board and committee meetings or quarterly executive sessions.
            • Enhance communications to stakeholders to build confidence in a time of uncertainty.

            While very few of us predicted that the world would experience anything like the coronavirus pandemic, which has gripped the global economy in 2020, the pandemic serves as one of many external risks that may impact a company's operations and financial performance. Crises like the current pandemic or the Great Recession that occurred between 2007 and 2009 provides an opportunity for boards to reevaluate how they run the companies they serve. I encourage directors to use EY's report as a tool to help boards serve their role prudently and effectively.

            Do you agree with the six board priorities?

            Aaron Rose is a board member, corporate advisor, and co-founder of great companies. He also serves as the editor of GT Perspectives, an online forum focused on turning perspective into opportunity.

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