January 27, 2021

Six Ways a Board of Directors Can Ensure Future-Readiness

In response to my blog post about a report published by the EY Center for Board Matters listing six key areas corporate boards of directors should prioritize in 2021, a reader recommended that I review Is Your Board Future-Ready? The Expertise You'll Need, a report that presents six ways a company's board of directors can ensure future-readiness.

Produced by Nasdaq Governance Solutions, a business of Nasdaq, Inc., a global technology company serving the capital markets and other industries, the report notes: "The competitive landscape in nearly every sector is changing rapidly. You are likely looking for ways to remain relevant and drive your company's mission while making changes to reflect shifts in society. A future-ready board adds value by augmenting opportunity identification and maintaining its duties to investors and stakeholders."

The report also asserts that a "future-ready board is diverse, socially responsible, and tech savvy, understands inclusion, and demonstrates keen awareness of how to balance profit expectations with long-term stakeholder values. A future-ready director embraces efficient technology. As the age of many directors and CEOs increases, future-ready also means understanding the needs of the company during board and CEO succession planning. Particularly, long-term investors are holding boards and CEOs accountable for taking action with regard to increasing impact on society. A future-ready board is prepared for the task ahead."

Below are the six ways boards can ensure future-readiness:
  1. Balance of Profit and Purpose: Whereas profit is essential, communicate how your company effectively engages key stakeholder goals.
  2. More Gender and Racial Diversity: Consider the gender, race, experience, and skillsets of minority candidates to bring diverse and unique backgrounds to your board.
  3. More Age Diversity: Add younger leaders who have a pulse on today's societal and economic shifts and offer new perspectives.
  4. Expertise in Technology, Risk, and Security: Assign technology and risk oversight responsibilities and activities to one board committee.
  5. Experience in ESG: Build ESG into your corporate strategy, given the focus of today’s investors and stakeholders on such issues.
  6. More Diverse Backgrounds: Encourage forward-looking, ongoing board member education, including an onboarding program that brings new directors up to speed quickly.
While I strongly support each one of the report's recommendations, I particularly agree how the report addresses the need for board to address gender and racial diversity. "Investors and stakeholders are holding companies accountable if they don't have a board of directors that reflects gender and racial diversity," the report says. "In order to acquire the depth of perspective that best represents the modern customer base, more diverse faces and voices need to be present."

Crucially, "However, it must be done in a way that's relevant to your company's strategy—and overall board goals. Don't ask directors to join your board solely to 'check the diversity box.' Now more than ever, the general public is more aware of tokenism and performative allyship and they will call out your business for such actions. Formalizing the 'Rooney Rule' for your corporate governance guidelines will help ensure that your board considers at least one woman or minority candidate and have meaningful interviews with these parties whenever there is a vacancy."

For those unfamiliar with the Rooney Rule, an article by Sports Illustrated provides a good explanation about the origin of the policy from the National Football League (NFL):
Adopted in 2003, the Rooney Rule is an NFL league policy that requires teams to interview ethnic-minority candidates for head coaching jobs. Since then, the Rooney Rule has been expanded to include general manager jobs. A similar rule requires that a woman be interviewed for every business front-office position that opens in the league.

The policy is named after former Steelers owner Dan Rooney, who was credited with spearheading the effort. In 2002, Rooney was approached by groups concerned with the lack of coaching and front-office opportunities in the NFL.

Variations of the rule are now in place in other industries, including in the city of Pittsburgh. Facebook and Xerox have similar company policies.
I also appreciate how the report addresses the value of age diversity for boards. While in my late 20s, I had the opportunity of meeting a mentor who encouraged corporate leaders within his professional network to consider me as a qualified candidate to serve on their firm's board of directors. Unfortunately, they did not understand how my age and perspectives would provide value to their firm as a board member. As the report explains, "The average board member age is 63, and directors aged 50 and under filled only 6% of S&P 500 board seats. Age diversity in the board is a point of contention for companies, largely because boards look for candidates who have significant experience in leadership roles. This experience takes time to accumulate."

"However," the reports suggests that "younger board members may bring expertise in cybersecurity and cutting-edge technologies, helping companies uncover new opportunities, partnerships, and business models. Additionally, because younger board members are still professionally active, they have their fingers on the pulse of best practices, employee challenges, and changing consumer expectations. These younger leaders may help you adapt your culture to societal and economic shifts and broaden the board's overall perspective of where the industry is heading."

With respect to technology, risk and security, the report says:
Many companies are comprised of a technology element today. Directors are expected to meet a minimum technology understanding threshold. For example, the global average cost of a data breach is $3.92 million—a 12% increase since 2014.

Today, data security is everyone’s responsibility. A director duped by a phishing scam puts your company at monetary and reputational risk. Unfortunately, fewer than 40% of directors say the board fully understands the cybersecurity risks facing their company, while only 36% say the board has sufficient expertise in cybersecurity.

The board should support embedding security and risk mitigation into all areas of the company and recognize that they need to invest in ongoing improvement, especially as new collaborative technologies and processes are implemented.

The board should also consider specifying who oversees technology and cyber risk. Most S&P 100 companies (88%) have already charged at least one board-level committee with cybersecurity oversight, typically the audit committee (64%) or risk committee. Consider combining cybersecurity and risk expertise into one committee.
As for the recommendation of recruiting prospective board members with more diverse backgrounds, I agree that boards should "consider taking a more comprehensive approach to director assessment, focusing on skills and areas of expertise." Furthermore, "Determine if there are redundancies in board member experiences and identify what type of candidate will help fill the gaps in the board’s overall readiness. Look for candidates—other than former C-level executives—who have the insights and skills needed.

"While an understanding of financials is generally appropriate, expanding your range of candidates to those who are well-versed in other areas of business is beneficial."

Lastly, "In order to build a future-ready board," the report concludes that "it's important to conduct annual evaluations that provide metrics and insights into composition, functioning, and performance. With these insights, the board can take the right steps forward."

Do you have additional recommendations for how a board of directors can ensure future-readiness?

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.

No comments:

Post a Comment