We’ve gathered insights from numerous sources to share Boardspan’s Top Ten List: topics that will prompt vigilant boards to be especially active this year. To keep it simple in these complex times, we’ve organized the 2019 boardroom watch-outs into three categories: Oversight, Risk Management and Strategy.
1. Oversight: Keep A Close Watch, And Know You’re Being Watched Too
CEO Succession Plan: Don’t Get Caught Without One
The rate of CEO turnover is higher than ever thanks to everything from #MeToo dismissals to unforeseen health issues, demanding activist investors to the lightning pace of industry disruptions. Research shows that hiring a CEO from outside the company is costlier than promoting from within (and more likely to result in higher CEO turnover), so it behooves boards to find a non-threatening way to ensure that the current CEO is grooming heirs and filling the pipeline with capable prospects.
Board Diversity: This Train Has Left the Station
Whether motivated by the benefits or public pressure, boards are finding it hard to ignore the call to diversify. California’s new law, requiring at least one woman on every company board takes effect this year, while BlackRock, State Street, ISS and others vow to make life tough for boards that fail to include women. Savvy boards will take advantage of membership changes to add new relevant skills and experiences needed to meet the company’s evolving nature. Those that have already done so report significant benefits from this broader set of perspectives.
Company Culture: Model Your Best Values
From anti-harassment policies to equitable pay to privacy safeguards, companies are increasingly expected (by legislators and public perception) to prioritize the well-being of all their constituents: staff, customers, partners, neighbors, etc. When they don’t, employees and consumers quickly promote questionable actions into public view. Every board should acknowledge the importance of modeling ethical behavior, principled decision-making and concern for ESG issues because it’s the right thing to do – and because reputational risk is real.
Environmental Concerns: How You Treat the Planet and How It Treats You
Climate risk disclosure has moved from the wish-list of environmentalists to the recommendations of industry groups to the US Senate, where legislators contemplate requiring public companies to report exposure to climate-related risks. With events like hurricanes, flooding, fires, mudslides, and “bomb cyclone” snow storms causing disruption and damage to entire regions, business leaders need to address climate issues from two perspectives: (i) how to minimize actions that have adverse environmental impact and (ii) how to prepare for material climate events that could affect their business? Boards can lead the way by ensuring these serious conversations take place.
2. Risk Management: Anticipation Is the Catalyst to Prevention
Data Security & Privacy: Protection Is Paramount
Bad actors and cyber thieves in every pocket of the globe grow ever more sophisticated, while the public outcry about privacy abuses intensifies. The result? Greater pressure on all companies to ensure security, privacy and anonymity. Expect industries to enact their own compelling standards for safeguarding customer information or find themselves submitting to government regulation, even as outsiders look for better answers to the question: Who owns a customer’s personal data and who has the right to decide when and with whom it may be shared? Boards will want to ensure their organizations stay current on regulations and err on the side of protecting data and privacy.
Economic Uncertainty: Pondering a Recession, Interest Rates, Debt Levels?
Is the economy still growing, slowing or towing (the line)? What are the implications of any of the above, when might the Fed act, and what are the bellwether data points? These are among the questions that will be on board members’ minds. How will economic ambiguity affect the business, customers’ demand and suppliers’ reliability? Translating hypothetical situations into real monetary policy – for federal regulators much less for board members – can be riddled with riddles. Mapping out a few different “what-if” scenarios with management may be the best thing a board can do for its company.
Vocal Investors: Stay A Step Ahead of Demands
Activism is on the rise – hedge funds spent some $74 billion dollars last year to take sizable positions at companies they deemed underperformers and then remade boards, fired chief executives, revised strategic plans and more. Plus, those who used to be passive – large institutional holders, private investment firms and others that directors rarely heard from – now rattle sabers seeking greater access to the board or threaten legal recourse to bend companies to their will. Don’t wait for activist investors to set their sites on your company – instead, imagine what might pique their interest and proactively address those issues head on.
3. Strategy…Meet Uncertainty: Volatility Is the New Normal
Politics: Are You Fluent in Tea Leaves?
In our interconnected global economy, politics can quickly reshape the business landscape, creating or undermining opportunities and sometimes overturning well-established relationships seemingly overnight. While boards may not be able to influence tariffs, trade wars, egregious actions by foreign authorities or the shifting allegiances of any government, directors should be looking for signs of change that could impact international customers, suppliers, investors and the like. As power dynamics in Washington continue to evolve, directors who are good at reading tea leaves will be essential to advising CEOs on strategy.
Innovation & Transformation: Disrupt or Be Disrupted
New technologies from AI and blockchain to increasingly-savvy data analytics will continue to upend industries creating market opportunities, competitive challenges and business confusion. Remember, innovation is not just a digital concept as modern approaches to food, clothing, chemicals, pharmaceuticals and more are constantly being innovated. Whether a business is the change-maker or staying in lockstep with those that are, boards are talking about innovation and transformation now more than ever. Ignoring the topic is probably the biggest concern.
Markets: As Unreliable as Ever
Each year the capital markets seem to deliver less dependability as a source of funding, liquidity strategy, or exit plan for investors and management. If the intention is to use equity or debt to facilitate an M&A plan or let the markets establish a value for other purposes, boards may have another think coming. Given the stock market volatility of late and seemingly rising interest rate environment, companies seeking funding or the opportunity to create liquidity for their shareholders will be considering their Plan B’s, and maybe even Plan C’s. Cash will continue to be a strategic asset and having it already in the bank – or near certain access to it – will provide enviable flexibility as the markets and valuations continue to rise and fall.
We hope this hit list of boardroom watch-outs helps you get off to a strong governance start and makes for interesting planning conversations around your board table. And if you have more to discuss, give us a call!
--Big thanks to experienced board members Ellen Carnahan, Alison Davis, Kris Manos, Pat Pineda, Pete Stavros, Barry Lawson Williams, and Janet Wong for their insights on the hot governance topics for 2019.