Home 2017 Corporate Governance in a Digital World

Corporate Governance in a Digital World

by Raj Gupta
Corporate Governance in a Digital World

Photograph by Olu Eletu

As the digital revolution transforms every aspect of our lives – from how we create and consume products and services, to how we communicate, entertain, and relate to one another, the implications for chief executives and boards of directors are almost immeasurable. This comes as public trust in “big business,” according to a 2016 Gallup Poll, is ranked near the bottom of all public institutions – well below even the news media, and just edging out Congress!  Given the lack of public trust due to the financial crisis and the way technology is shifting the employment environment, this is not too hard to understand. What is clear, is that corporate governance must evolve to reflect these rapid and profound economic and societal changes that are happening by the moment.

Through the years, I have had the privilege to serve both private and public companies from start-ups to mega.  I have worked with companies covering  a wide spectrum of industries, including information technology (HP, HPI, Agere, Affle and Unisys); financial services (The Vanguard Group); automotive (Delphi Automotive); specialty materials (Rohm and Haas Company, Arconic. and Avantor); electronic components (Technitrol); distribution (Airgas); cyber security (StrozFeidberg); market research (IRi); and a major conglomerate (Tyco).  Across this array, I have served as chairman and CEO while at Rohm and Haas and as chairman or lead director and chair of the Audit, Compensation or Nominating and Governance Committees at many others.  I have not only had a ringside seat to this rapidly changing corporate environment, I have also been actively engaged in almost every imaginable challenge a company could face. In some cases, the CEOs and boards navigated the difficult issues successfully, in large part due to thorough and thoughtful planning, strong and decisive governance, and deft decision making. At other times, however, the outcomes were not so optimal, due to poor planning, poor decision making, and subpar corporate governance structure.

In short, the vulnerabilities companies face are complex and expanding, the costs and benefits associated with navigating these risks are significant, and the landscape never stops evolving.

Every public company in every industry is grappling with the speed and complexity of operating within our connected society. Information is ubiquitous and moves so quickly that corporate reputations and market valuations can be destroyed in a matter of hours, even if the information proves to be false. Social media plays a significant role in the news cycle, and companies must be prepared to react to any news at any time of the day. Corporate information technology infrastructures are under constant attack from hostile sources from both within and from outside. Identifying new market trends and deciding where to place bets amidst the competitive pressures of this hard-charging economy is extremely important and challenging. In short, the vulnerabilities companies face are complex and expanding, the costs and benefits associated with navigating these risks are significant, and the landscape never stops evolving.

By necessity, the role of the board is evolving from one of “oversight” to a “partnership”.

Having described the landscape, there are some undeniable trends that I see affecting every global industry and company. These include the rapid changes in the business environment driven by technology; globalization of customers and competitors; increased regulatory and trade complexity; the concentration of shareholdings and rise of shareholder activism; and the global war for skilled talent. These trends are rapidly changing the role of corporate boards and their relationship with the CEO and management. By necessity, the role of the board is evolving from one of “oversight” to a “partnership”. This does not imply they are the CEO’s buddies. Board independence is at all times critical.  This shift requires a diverse set of directors, who possess the right skillsets, life and professional experiences, and who have the ability and willingness to invest significant time engaging in the business. It is absolutely essential for both the CEO and board members to be curious, courageous, and of impeccable character.  The litmus test for these traits is when the organization faces a crisis or a critical decision.

The time has long passed when directors could passively await the next semi-monthly board meeting to re-engage and learn what new issues the company may be facing. Rather, in today’s climate, board members must be directly and actively engaged in the many critical issues facing the company. Oversight, which is essentially compliance and execution, will remain an important part of a board’s responsibilities, but the true “value add” for effective boards will increasingly come from working in partnership with management.  This new model entails several components.

Photograph by Benjamin Child

The first, and perhaps most critical, responsibility of a board is the selection of a CEO, as well as planning and assuring an orderly CEO succession.  The CEO succession process is a responsibility that lies uniquely with the board and should be supplemented with relevant input from the incumbent.  Another key area boards must be engaged in is talent acquisition and assessment below the CEO level. This includes regular reviews of succession planning, exposure to high-potential employees, evaluation of recruiting strategies, and external assessment of internal candidates.

The partnership model also includes active engagement with strategy development. In fulfilling this responsibility, a board’s diversity of talent and perspective can be indispensable to management.  While it is the responsibility of the CEO and management team to develop and articulate a coherent corporate strategy, they need to incorporate both internal and external input on the various options. The board must be afforded the opportunity to provide input to the strategy, ensuring that there are clear and measurable milestones. It must also be regularly updated on the progress of implementation, providing fine-tuning in response to an ever-changing external environment.

Another critical area for boards to concentrate on is identifying risks and developing mitigation plans. Public companies face an ever-increasing set of external threats. Cyber security, reputational threats, litigation, and political risks all demand that there is a robust defensive planning process and that all risk areas have response plans. This involves much more than having a crisis plan in a binder that can be pulled off the shelf at the eleventh hour. Rather, there must be regular reviews of risk conditions and the planning process to ensure the right advisors, decision makers, and information sources are in place to act swiftly and decisively in the event a risk turns into a crisis. In my many years of board experience, I have learned it is the initial responses in the very first phases of a crisis that will ultimately dictate the long-term outcomes – both good and bad.

Boards must think like an “activist” to identify and understand their own vulnerabilities, in conjunction with proactive outreach to directly hear investors’ perspectives on governance and strategy.

The next important part of the partnership model is shareholder outreach, which is one of the best ways boards can build confidence that they are looking after shareholders’ interests. Given that the top 25 investment institutions hold more than 50 percent of the shares of most public companies, engaging with investors and having strong governance is essential. Boards must think like an “activist” to identify and understand their own vulnerabilities, in conjunction with proactive outreach to directly hear investors’ perspectives on governance and strategy.  This has to be a well-managed activity with two or three board members who are well prepared to represent the board on the important issues at hand.  I would submit that a non-executive chair or lead director, the chair of the Compensation Committee, and the chair of the Nominating/Governance Committee make a good alliance for this purpose.  Done well, this process of self-reflection and engagement has the potential to serve as a powerful deterrent to activist shareholders, though ultimately only if these good governance practices translate into good performance.

Finally, there is true pay for performance, which is creating a compensation structure that encourages and rewards ethical behavior and acting in the interests of shareholders, with both a near- and a long-term point of view.  Establishing the right performance metrics with the right level of stretch is a key requirement in encouraging a high-performance ethical culture. This is not a system that rewards short-term thinking for maximizing returns in a short window of time. That is a formula for long-term value destruction due to unintended consequences and operational damage that can be inflicted by short-term thinking and bad practices.  Rather, true visionary leadership and strategy requires finding that delicate balance of near-term operational discipline coupled with long-term investment, resulting in sustainable, profitable growth to the benefit of all stakeholders.

Working together, effective boards with accountable and empowered management can create substantial and lasting value to the benefit of all, even in this highly dynamic digital age.

In conclusion, effective boards meet these increased demands by having a highly engaged independent executive or non-executive chair, or lead independent director. They set the board agenda in consultation with the CEO, lead executive sessions at the start and towards the end of each board meeting, set board priorities above and beyond oversight, and assure the ongoing proactive evolution of the board to include directors with the right skills and experiences, as well as diversity in terms of thought, race, gender, global experiences and other demographics. They also assure that assessments of board and individual director performance are objective and provide meaningful and appropriate feedback.

While board positions certainly offer an excellent opportunity to both contribute and learn, the rapidly changing nature of expectations in today’s global business climate requires one to conduct appropriate diligence on the company, its CEO, and board, prior to accepting a board position. The Board acting as a true partner in the business is the future of effective governance. Working together, effective boards with accountable and empowered management can create substantial and lasting value to the benefit of all, even in this highly dynamic digital age.

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