What Directors Think 2018

directorsThere’s a lot on the minds of corporate directors these days: BlackRock’s latest attempt to convince companies to adopt more sustainable and socially conscious strategies; the rise of activist investors and the potentially bumpy proxy season ahead; concern over renewed volatility in the markets; and the increasing spotlight that regulators are casting on boards of directors. And then there’s a barrage of new economic policies, unabated geopolitical risks and the ongoing need to build better, more diverse boards, on top of traditional strategic oversight duties. Directors clearly have a full plate in front of them.

But in our annual survey of America’s boardrooms, Corporate Board Member found that one thing is on the minds of directors more than anything else these days: technology—particularly keeping pace with the unprecedented rate of disruptive change brought about by the digital revolution.

“Our biggest risk might be failing to keep pace with the rapidly changing business environment,” says Donna Sorensen, chair of the nom/gov committee and member of the executive committee at QCR Holdings, a commercial and consumer banking and trust and asset management services company based in Illinois. “[The concern is the possibility that] we’re not paying close enough attention to the risks we incur by not thinking through how evolving technologies might impact our business model.”

Julie Hembrock Daum, who leads the North American board practice at Spencer Stuart, a global executive search and leadership consulting firm and co-sponsor of this survey, says when it comes to technology, boards are indeed having to evolve. “With an eye to the disruptive forces facing their businesses, boards are adding directors with fresh perspectives and knowledge in emerging areas of importance, including technology, digital and marketing expertise,” she adds. “And we continue to see growing interest in digital experts.”

However, despite efforts in recent years to onboard directors with IT experience, boards’ main strengths continue to center around strategy and finance, the latter of which is also in increasingly high demand, according to the 2017 Spencer Stuart U.S. Board Index. “Demand for financial backgrounds has been growing in recent years, and 29 percent of new S&P 500 directors are active or retired executives with banking, finance, investment or accounting credentials, compared with 19 percent in 2007,” says Daum.

Only 12 percent of directors in our study listed IT as one of the skills they bring to their boardroom. However, nearly two-thirds (63 percent) of directors surveyed by Corporate Board Member said their board has at least one member with the technical skills to engage in a meaningful discussion with senior information security executives on matters of a highly technical nature, such as the NIST Cybersecurity Framework, penetration tests and IP safeguard measures. Still, cybersecurity and disruptive innovations remain the two main issues directors told us would be on the agenda if they could bring a panel of experts to their boardroom to provide insights.

Calling on experts for cyber counsel is nothing new; 67 percent of directors reported sometimes using that strategy to help master contentious cyber issues, and 20 percent of those who have not yet done so are considering employing that tactic in the near future. Directors who opened their boardrooms to outside cybersecurity experts say they found the experience helpful in their oversight, ranking its value 7.4 out of 10.

“Cybersecurity is a business risk for the entire enterprise, and [it] should be addressed as such,” commented the director of a large company, adding that the board receives quarterly cybersecurity reports and has engaged advisers as necessary to ensure directors ask the right questions of management.

It is clear from talking with directors that cybersecurity risk remains a top concern, and one that may be intensifying. In our 2017 survey, 78 percent of directors told us they felt additional regulation would have little effect in curbing cyberattacks and would overburden companies and their boards. This year, 20 percent say that high-profile breaches, especially those that occurred at Equifax, the SEC and Uber, have convinced them to change their stance in favor of more cyber regulation, enough to have tipped the scale in support of increased regulation in that area.

Yet, even with the challenges cybersecurity poses to public boards everywhere, 82 percent of directors we polled still don’t see the need for distinct cyber risk committees, in line with last year’s findings. “While cybersecurity is a major risk for most companies,” says Taylor Simonton, chair of the audit committee and member of both compensation and nom/gov committees at Advanced Emissions Solutions, an energy company located in Colorado, “other significant risks will continue to arise, and they must be addressed at the board level, not necessarily by a separate committee each time one appears.”

But a problem persists: At many companies, the audit committee has been overburdened for some time now. With an increasing number of issues falling within the audit committee’s purview, perhaps the solution lies in shifting risk oversight out of its scope of responsibility, as proposed by one of our respondents, either by creating a pure risk committee, making risk a full-board responsibility or periodically rotating committee chairs and members.

According to Daum, S&P 500 boards have already begun reshaping their committee structures. “New committees are emerging, and several have become more prevalent in the past 10 years, including risk; science and technology; and environment, health and safety committees. In 2007, for example, 5 percent of boards had a science and technology committee, compared with 10 percent today.”

Innodata’s audit chair and member of both the compensation and nom/gov committees, Louise Forlenza, agrees with the new trend toward creating more focused committees. “The audit committee should not carry the full burden of cybersecurity,” she says. “Cybersecurity and IT have become such an important part of any company….The audit committee should work with the IT committee—which I believe is a necessary committee on all boards—so both committees can be aware of each other’s work, processes, concerns and overall strategies. So, if and when an incident occurs, they already have  familiarity with each other’s work.”

BOARD COMPOSITION: THE MORE THINGS CHANGE…

Another way to overcome the challenges highlighted by the emergence of new risks is to ensure that the board comprises directors with a diverse array of skills and that it is constantly being evaluated and refreshed to keep up with changing times.

Simonton says whether or not a company will survive the speed of change comes down to those who sit at the table. “Adoption of new technologies by companies, whether cryptocurrencies, the Internet of Things, cybersecurity, social media platforms or whatever next is around the corner, is rapidly accelerating.

Boards of directors must ensure that they have members who are experienced and knowledgeable about fast-changing technologies that affect their companies’ competitiveness.”

Several of our past studies have addressed the importance of renewing a board as a way to sustain performance, which, contrary to popular belief, doesn’t necessarily mean letting directors go. Rather, renewing a board may simply entail refreshing the skill sets and committee structures to adapt to the changing environment, and, in the end, that’s what most shareholders want to see.

“Investors say they want boards to go beyond policies such as mandatory retirement to refresh composition,” says Daum.

“They view peer and/or self-assessments as best practice for providing feedback to directors on their performance, identifying gaps in boardroom skills and perspectives and facilitating boardroom succession.”

The concept of age or term limits is gradually becoming moot. Although just under three-quarters of S&P 500 boards report a mandatory retirement age, the overwhelming majority of directors polled by Corporate Board Member—a lopsided 74 percent this year—remain opposed to mandatory term limits, which is somewhat understandable considering 45 percent of respondents have been directors for more than a decade.

Nevertheless, most agree that, on average, a director’s seat should be reassessed—but not necessarily vacated—after 10 to 15 years.

“Robust peer review and assessments are needed,” commented the board chair of a large REIT who believes that although objective evaluations may be difficult to achieve in a collegial environment, third parties can help boards assess their current skills versus those desired. “[Objective evaluations] should drive selection of new directors, not political correctness.”

Directors have been arguing against mandatory term limits for years now, insisting that turnover for the sake of turnover is counterproductive, especially if it means letting go of a high-performing, heavily-invested member. As one director noted, refreshment is a positive factor but not at the expense of knowledge and experience. The focus of board composition, many say, should remain on finding the best person for the job.

But if that’s the case, boards need to agree to be held accountable for not letting directors go when they no longer perform as expected. And now, with institutional investors such as BlackRock officially mandating boards to include a diverse mix of genders, ethnicities, career experiences and ways of thinking as a way to avoid succumbing to groupthink or missing new threats to a company’s business model, directors may have their work cut out for them.

Yet, nearly three-quarters (73 percent) told us they believe institutional investors’ increased pressure on board tenure and composition is a good thing, and 78 percent reported that enhancing diversity is on their agenda, particularly with respect to onboarding women.

CORPORATE SOCIAL RESPONSIBILITY: STILL NOT SOLD

After focusing intensely on the composition of boards, institutional investors have now begun to shift their focus to the social involvement of corporations. But they’re not the only ones clamoring for more corporate social responsibility.

Increasingly, the public is demanding it as well, fueled by the rise of social media, a move toward deregulation, demands for greater disclosure and rising customer interest. Our survey, which concluded two days prior to BlackRock’s January 16 letter to CEOs, found that this push for increased social awareness may also have been on directors’ radar, as the majority of our respondents said their board had already taken action in the area of social responsibility. Half said their company had a CSR policy in place, with an additional 10 percent saying they have one in the works.

When it comes to the rationale for implementing such policies, board members see real value in making the change. Fifty-seven percent of directors we surveyed said an enhanced brand image and reputation and 56 percent said a greater ability to attract and retain employees are the biggest benefits for the company. That echoes a 2016 Harris poll, which found 48 percent of consumers are somewhat or strongly influenced by CSR when making decisions on what to buy or who to do business with.

“Sustainability and corporate social responsibility have become hotter topics in the boardroom,” says Daum. “Boards are hearing from investors and other company stakeholders more often on environmental, social and governance issues, and they’re aware that the next generation of employees and leaders want to work for organizations that take social and environmental health considerations seriously.”

Yet, directors have ranked ESG initiatives and sustainability at the bottom of their list of concerns this year, despite the mounting pressure from shareholders and the perceived value of a CSR on brand image and employee retention. That disconnect raises a question as to whether those CEOs who said they would continue to operate with the Paris Agreement’s goals in mind, regardless of the U.S. intent to leave, will keep their promise willingly or whether institutional investors will have their work cut out for them in proving the financial merits of ESG on the bottom line.

One thing is for certain: We are in a period of rapid change, and boards that capture the moment as an opportunity to grow will far outperform those who cling on as we churn through stormy waters.

Melanie C. Nolen
Melanie is research editor for Corporate Board Member and Chief Executive. She has more than ten years of experience writing for the corporate and financial industry across Canada and the United States. She is based in Nashville, Tennessee.