2017 was a year of action and acceleration in corporate governance. Board composition remained a key priority for activists and institutional investors, while major data breaches and reputational crises vaulted cybersecurity (and other forms of risk oversight) into the spotlight. Couple that with the wave of technological change that’s rippling across today’s companies, and boards have quite a cocktail for 2018.
On a recent episode, Host TK Kerstetter and Paula Loop, Leader of PwC’s Governance Insights Center, convened to reflect on 2017 and wage their predictions for the year ahead. What strategic and governance challenges will boards face in 2018?
We outline their forecast below with a few checklist items to focus board attention and drive action. We bet you’ll never guess the first topic of discussion…
1. The Year of Board Composition (Yes, Again)
At this time last year, we felt a bit like Paul Revere, riding through the streets to warn boards of the significant focus investors would place on board composition in 2017. Indeed, investors made good on their promise, and most boards have grasped the importance of linking the company’s long-term strategy to board composition and succession planning.
“Board composition is going to continue to get a whole bunch of attention this year, but probably in a broader, more holistic way,” said Loop. “It’s beyond just aligning skills to strategy.”
Last year, the focus was on drawing attention to board composition. This year, says Loop, boards must pay closer attention to the various elements: succession planning, onboarding, evaluations, disclosure.
There’s a real trend right now [towards recruiting] subject-matter experts to the board—maybe someone that’s focused on cyber. But you have to make sure you don’t just have a board of these experts; [you have to make sure] they can all really work together and deliver the things that the board needs to deliver.
[ ✓ ] Ensure discussions of board composition and succession planning are ongoing. The board should never feel complacent on this matter. Pay special attention to succession among committees and committee chairs.
[ ✓ ] Use a matrix to help the board visualize skills alignment and gaps (if you aren’t already). Skill matrices help the board to parse the company’s long-term strategy into tangible action items and skill sets. Not only will the matrix provide a foundation for your board’s succession planning discussion, but also a visual foundation for your proxy disclosure.
[ ✓ ] Examine your proxy disclosure around board composition. How are you demonstrating the link to long-term strategy? How are competitors or other industry leaders disclosing their process for composition and refreshment? This blog pulls specific examples from Donnelley Financial Solutions’ Guide to Effective Proxies.
[ ✓ ] Think more broadly about diversity. The best boards don’t approach diversity as a requirement or quota, but rather as an output; when you strive for diversity of thought, the demographic aspects of diversity (e.g., gender, race, age, geography, background) should fall more easily into place. Board evaluations are an excellent opportunity to examine the obstacles to diversity on your board and take conscious steps to correct.
[ ✓ ] Revisit your onboarding process. Perhaps you don’t have a formal onboarding process because you haven’t needed one in the past. In 2017, however, nearly half of all new S&P 500 directors joined their first public board (Spencer Stuart Board Index). Your board likely spent significant time and effort identifying and recruiting these new directors. Ensure they have the resources and training they need to get up to speed and begin contributing.
2. The Year of Investor Influence
The threats made by investors lately have been anything but empty. During 2017, both State Street Global Advisors and BlackRock voted against Nominating & Governance committee members for lack of diversity, while the NYC Pension Funds launched the Boardroom Accountability Project 2.0 aimed at diversity, independence, and climate competence.
[Investors] have developed a formula for influencing boards to see things their way…Maybe in 2018 this pendulum swings so far that it starts to hurt things a little bit…Companies in 2018 better be prepared for this growth in shareholder empowerment and the pressure that they’re going to be putting on boards.
Regardless, boards have to be good listeners, says Loop. They don’t have to accept every request that investors put forth, but they must understand the context of these investor suggestions.
[ ✓ ] Think like an activist investor to examine potential weaknesses. Is the average age and tenure of your board members higher than normal? Is your CEO pay at the top of the peer group? Explain why your board has deviated from the norm and how it ties into performance. For more information: 3 Steps Your Board Can Take to Avoid Activist Attention.
[ ✓ ] Continue to improve shareholder engagement. As directors become more comfortable engaging with investors, there are several steps they can take to improve the quality of those meetings. For further insights: 5 Investor Expectations for Shareholder Engagement.
[ ✓ ] Keep up with investor literature. If you haven’t read BlackRock’s 2017-2018 Engagement Priorities or if you’re unfamiliar with the Investor Stewardship Group (ISG)’s Corporate Governance Principles, then you might fail “Shareholder Engagement 101”. Major institutional investors have taken the time to outline their expectations, and it’s the board’s fiduciary duty to consider how these various elements (e.g., climate, cybersecurity, innovation, diversity) may impact the company.
3. The Year of Digital Transformation & Security
The term ‘digital transformation’ is often tossed around, but rarely defined. Whereas technology has long been implemented to support traditional methods of business, digital transformation describes a process where digital technology “inherently enables new types of innovation and creativity” in a particular industry or domain.
“Even if the company is [successfully employing new technologies], the board has to oversee it—so the board has to understand it,” said Loop. “And it changes so fast.”
As 2017 has demonstrated, every industry and every company is undergoing some type of disruption. How is this wave of technological change impacting your strategy? Board recruitment? Human capital management? Risk oversight?
[ ✓ ] Don’t silo discussions of technology and digital transformation. These should be inherent in nearly every aspect of strategy and board governance. Determine what your board must do to keep pace—whether that’s recruiting new skill sets, increasing the frequency of discussions with management, or establishing an advisory board.
[ ✓ ] Consider the cybersecurity implications of every move you make. Today’s technology landscape provides significant opportunities, which are accompanied by significant risks. If the company is transitioning to ecommerce, ensure that a comprehensive data security plan accompanies the new strategy. And don’t overlook the danger of third-party integrations or partnerships, which are too often the source of company data breaches.
For more information, don’t miss the full episode with Paula Loop. Stay tuned as we track these predictions throughout the year. We may know little for certain, but we do know that 2018 will be a whirlwind in corporate governance. Happy New Year!