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On the board's agenda
Top of mind topics for board members
The Center for Board Effectiveness is pleased to present On the board’s agenda, a bi-monthly publication focused on topics that are top of mind for board members.
- March 2019
- February 2019
- January 2019
- November 2018
- September 2018
- July 2018
- June 2018
- May 2018
- April 2018
- March 2018
- February 2018
- January 2018
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Outside the four walls: The board’s role in extended enterprise management
Companies, including their boards and managements, have long understood that they do not function in a vacuum and that their success depends, at least in part, upon customers, suppliers, employees, and other constituencies. However, there is a growing realization that in the 21st century, companies operate in a greatly expanded and more complex ecosystem with numerous components, many outside their control, that create opportunities and pose risks. As a result of the expansion of their ecosystems, companies increasingly need to think outside the four walls—to reset their front lines—to effectively manage and grow their businesses.
There are numerous examples of companies thinking—or having to think—outside the four walls, such as the global, rather than national, competitive landscape; the explosion of management and board engagement with investors; and pressure to serve society at large rather than just shareholders. Companies have also experienced or seen others experience problems resulting from services or products provided by third parties, which are often indistinguishable from those provided by the core business. Research indicates that from 2016 through 2019, 83 percent of organizations experienced third-party incidents and that nearly half of those organizations experienced some impact on customer service, financial position, reputation, or regulatory compliance. Moreover, in an era of social media, even a minor incident may “go viral” in minutes or even seconds, potentially causing serious damage to the organization before the facts are known.
Stepping in: The board's role in crisis management
There are actions boards can take now—and questions they can ask—to give themselves comfort that the organization is prepared to manage a crisis. When the stakes are high and scrutiny is intense, the board has a unique role.
Published by Deloitte’s Global Center for Corporate Governance.
Board oversight of corporate compliance: Is it time for a refresh?
Nearly 25 years have passed since a landmark decision of the Delaware Chancery Court involving the board’s role in compliance oversight. The case was based upon claims that the board in question had breached its fiduciary duty regarding compliance with legal requirements applicable to health care providers, leading to an extensive federal investigation, an indictment charging multiple federal felonies, and fines, penalties, and damages approximating $250 million. Among its other findings, the Chancery Court concluded that:
“a duty to attempt in good faith to assure that a corporate information and reporting system, which the board concludes is adequate, exists, and...failure to do so under some circumstances may...render a director liable for losses caused by non-compliance with applicable legal standards.”1
As a result of this decision and its progeny, it is now settled doctrine that a board of director’s fiduciary duties include establishing that management has an effective corporate compliance program in place, exercising oversight of that program, and taking regular steps to stay informed of the program’s content and operation. Aside from the many adverse consequences of an inadequate compliance program, a breach of these duties can result in shareholder derivative litigation, and may even subject board members to personal liability under some circumstances (though that did not happen in the case cited above). Of equal or greater importance, a compliance failure can lead to critical operational, reputational, and other business challenges that can haunt a company for years—or even destroy it.
The tech-savvy board — A director's perspective
With the ever-increasing focus on technology—as both a risk and a driver of success—the board’s role in technology oversight is one of the hottest topics in corporate governance today. Bob Lamm, independent senior advisor to Deloitte’s Center for Board Effectiveness, recently spoke with Sherry Smith, an experienced board member with a passion for technology, to get her take on this critical area.
Trends in executive compensation
The 2019 proxy season is largely over for calendar year-end companies, so it is a good time to reflect on a couple of key themes in executive compensation that emerged during the season:
- Achieving significant shareholder support for “Say on Pay” remains a top priority for issuers.
- Institutional investors want executive’s compensation packages to align with long-term value creation.
- Environmental, Social, and Governance (“ESG”) policy and disclosure are increasingly important to investors, including assessing whether such activities should be linked to executive evaluations and/or compensation.
This publication is a summary of how these themes impacted the 2019 proxy season and what management, compensation committees and boards should understand going into the 2020 proxy season.
2019 Proxy Review
In recent years, the role of the audit committee—and, in particular, its oversight of the independent auditor—has been subject to increased scrutiny from regulators, investors, and other stakeholders. The independent auditor is critical to maintaining confidence in the reliability of financial information and, ultimately, in the proper functioning of the capital markets. Increasingly, investors also look to the independent auditor to provide insights that support sound, well-informed financial decisions. With changes to the auditor’s reporting model that went into effect this year and the imminent requirement to identify critical audit matters (CAMs), transparency around the audit committee’s interactions with the independent auditor is even more essential.
Now in its fifth year, Deloitte’s observations and analysis of trends in audit committee disclosures in the proxy statements of S&P 100 companies reflect moderate increases in disclosure in certain areas of frequent focus by regulators and investors.
CEO pay ratio: Leading indicator of broader human resource matters?
Now that the CEO pay ratio disclosure requirement has been in place for two proxy seasons, it has demonstrated to be less impactful than some proponents and others may have expected. However, pay ratio disclosure may just be the opening salvo in an employee, shareholder, media, and regulators’ demands for additional employee and compensation data. For example, some major investors have asked companies to disclose additional details about the median employee, including the employee’s geographic location and whether he/she is a salaried or hourly employee, in addition to more general information about the composition of the workforce, including geographic distribution, proportion of salaried and hourly employees, and the percentage of the total workforce comprised of contract workers.
Developments suggest that compensation disclosure is converging with broader concerns about issues such as gender, race and ethnicity pay equity, culture, diversity and inclusion, and employee engagement. As a result, more time is likely to be spent on human resource policies at both the board and compensation committee levels, and compensation committees may be thinking about broadening their charters to become human capital committees.
Business Chemistry®: A path to a more effective board composition
The average board member spends about 245 hours on board matters over the course of a year, according to the 2018–2019 NACD Public Company Governance Survey. However, less than one-third of this time, 74 hours, consists of board member interactions, such as telephonic and in-person board and committee meetings and a handful of board dinners.
Given these limited interactions, how well do board members actually know one another? Do they appreciate why some like to listen to the facts before commenting or why some comment before facts have been shared? Do they know why some board members lean in more heavily on details, while others seem to be exclusively focused on big picture matters? Do they understand why some members of management just do not click with the board, or why some directors don’t seem to get along?
Business Chemistry may help to answer the above questions and many others, and can play a fundamental role in understanding how the board works—or does not work—both internally and in its interactions with management.
What to expect from auditor reporting of critical audit matters
Audit reports for large accelerated filers will include a new section addressing CAMs beginning for audits of fiscal years ending on or after June 30, 2019, and for other public companies in 2020. This will be a dramatic change in auditor reporting and is expected to generate significant media attention, particularly in the first year of adoption. What is the board’s role with respect to CAMs? How are CAMs identified? What is being done to prepare for CAMs and what might boards expect? This edition discusses these questions and highlights considerations for boards in advance of the first auditor reporting of CAMs this summer.
Crisis resilience and the board—Taking risk oversight to the next level
Companies seek to anticipate and avoid or proactively mitigate crises that pose risk to their business. As part of their oversight responsibility, boards seek to assist management in carrying out these responsibilities. However, no matter how prepared a company is, and regardless of the levels of management attentiveness and board oversight, crises will happen; they are a matter of
Social media and the board
No one should be surprised that companies are extensive users of social media. A quick look at nearly any company website, marketing literature, or email signature reveals a group of icons showing the social media platforms on which the company has a presence. Members of those companies’ boards of directors have likely noticed those icons many times, but it is not clear whether those directors fully comprehend the pervasive, enormous influence of social media, how it is used by their companies and their stakeholders, and the benefits and risks associated with use of social media by both groups—and how to best exercise their oversight role with respect to social media.
The 2019 boardroom agenda: Something old, something new?
The end of an old year may cause some to heave a sigh of relief—another year is in the rearview mirror. However, board members and those who work with boards may be looking toward the horizon and wondering what challenges may arise in the coming year. Some challenges never seem to go away, and new ones seem to pop up all the time. Even challenges presumed to be over and done with can return, sometimes in a different guise or with a new twist. And, regardless of whether a challenge is new or old, the board will be expected to deal with it—even if it is something beyond the board’s control or outside the scope of its responsibility—because investors, the media and others will ask “where was the board?”
A conversation on blowing up best practices
Detonate: Why—And How—Corporations Must Blow Up Best Practices (And Bring A Beginner’s Mind) To Survive, was published in 2018 (Wiley). Bob Lamm, an independent senior advisor to Deloitte’s Center for Board Effectiveness, recently sat down with one of its authors, Geoff Tuff, a Deloitte Consulting LLP principal and senior leader in the Innovation and Applied Design Practice, to address key concepts and practical approaches outlined in the book.
Not if, but how: Evaluating the soundness of your digital transformation strategy
Often for businesses to survive in today’s world, the question is no longer whether to consider a digital transformation strategy. Rather, as board members oversee management’s strategy, a more appropriate question may be how: How can our unique organization evolve and work differently to meet the demands of an ever-evolving marketplace?
Audit committee disclosure in proxy statements—2018 trends
Deloitte’s analysis of the 2018 S&P 100 proxies helps to provide transparency into audit committee oversight activities and performance provide a better understanding for investors. Investors and other stakeholders continue to push for greater proxy statement disclosure of both new and existing topics.
The board’s role in corporate social purpose
The integration of digital and physical technologies is accelerating, enhancing companies’ ability to increase operational excellence and grow in ways that may not have been possible just a couple of years ago. This phenomenon, known as Industry 4.0, suggests a new revolution that enables smart, connected technologies to transform organizations, operations, and the workforce by increasing information flow, creating new insights, and revolutionizing business models.
Sustainability and the board: What do directors need to know in 2018?
Sustainability, which encompasses environmental, social, and governance (ESG) concerns, is increasingly positioned at the top of board agendas, and is now central to corporate competitiveness and a company’s continued ability to operate. Sustainability affects all sectors and challenges even the most progressive companies and the most thoughtful directors. There are a number of steps boards can consider and questions they can ask to gain a better command of emerging sustainability risks and changing stakeholder expectations.
Published by Deloitte's Global Center for Corporate Governance.
Corporate culture risk and the board
Recent corporate scandals linked to problematic company cultures have resulted in questions such as "where was the board?" and "shouldn’t the board have known?" In some cases, board members themselves may have wondered why they were not informed of cultural problems and asked, "should we have conducted more due diligence?" These and similar questions, and the responsibility to protect both their companies’ and their own reputations, are leading directors to look for ways to better monitor corporate culture and to understand potential cultural risks and address problems before they get out of control.
Is it time to review your board of director compensation program?
Board compensation is on investors' radar. Unlike compensation for executives, non-employee director compensation is not subject to independent review. While shareholders must approve equity plans in which non-employee directors may participate, and while those plans frequently include limitations on individual equity grants or aggregate pay levels, shareholders are not required to approve the director compensation program as a whole. As a result, non-employee director compensation programs that result in high levels of pay can be a lightning rod for proxy advisory firm criticism, shareholder litigation, negative media attention, and more.
Cyber risk in the boardroom—Accelerating from acceptance to action
Cyber risk is a top-level business risk that boards may find challenging to oversee and difficult to address. By using a maturity mode for board stewardship of cyber risk and understanding the actions available at each level of maturity, boards can accelerate their transition from awareness to meaningful oversight.
The 2018 boardroom agenda—Dealing with challenges old and new
Regardless of size, industry and other characteristics, companies frequently face a constant stream of challenges. These can include perennial challenges that require ongoing or periodic attention, as well as new challenges that seem to arise regularly. Developments in 2017 demonstrate the range and depth of the challenges faced by boards. Perennial challenges include strategy, risk, compensation, shareholder engagement, and regulatory uncertainty; evolving challenges include board composition, social responsibility, technology risk, culture risk, and the combination of innovation and disruption. It is likely that some, if not all, of these items could be on the board’s agenda in 2018.