Putting resilience on the board agenda

Author: Catherine Bromilow

The shareholder-board relationship has evolved enormously since I began researching and writing on corporate governance in 1998. In recent years, boards have had to help management teams tackle many critical issues, including responding to continuing economic challenges and addressing the opportunities created by new technologies. Boards have become more active than ever, and we often witness meaningful and sometimes difficult discussions being held behind the boardroom doors. We see that boards take their fiduciary responsibilities seriously.

The pressure from customers, employees, civil society and other stakeholders to operate more sustainably is also becoming an increasingly important part of a company’s ‘licence to operate’ and ability to create value over the long term. Just as resilient organisations are paying more attention to sustainability, so should the board.

But how much do stakeholders know about what drives boardroom decisions? In the absence of knowledge to the contrary, they may assume boards are rubber stamping management’s plans and recommendations — including compensation requests. Shareholders in many countries are also gaining new ways — through ‘say-on-pay’ votes, for example — to indicate whether they are satisfied with a board’s decisions in areas such as executive compensation. In some countries, there are moves to make those votes binding. So boards are now subject to different pressures, and we expect this trend to continue.

Similarly, the public outcry following an environmental lapse, safety scare or other such scandal now stands alongside market shocks and natural disasters as one of the key crises that tests resilience. The advent of social media means that news spreads, and the impact of such crises can escalate far quicker than many companies’ ability to respond. Over the longer term, the ways companies use resources and engage with customers are going to become key markers for sustainable value generation.

How are boards responding to the evolving environment? And, more importantly, how should they respond?

We know that turnover on the boards of large US companies is down. Indeed, Spencer Stuart’s 2012 Board Index reported the fewest number of new directors on S&P500 boards in over a decade. The corollary is that the average age of directors has also been increasing. To observers, it may appear that many boards lack the new people and new ways of thinking that would enable them to keep pace with change.

New blood

So what does this mean for board resilience? Perhaps it’s time to consider adding new directors — especially if your board hasn’t seen any change in composition in a number of years.

Adding new directors can bring a number of benefits. First, you will get fresh perspectives and questioning of long-held assumptions that may no longer be relevant. Second, your board will be better able to reform itself in line with shifting company strategies, so directors’ collective skills and experiences allow them to provide better advice to management. Third, you increase your ability to add younger directors who may have greater appreciation of the changing role technology is playing — from social media to mobile computing — in companies’ success. Fourth, it gives you the opportunity to increase the gender and/or racial diversity on your board. Shareholders and some regulators are focusing on diversity, and many stakeholders are frustrated by a lack of progress in moving the needle meaningfully on diversity — especially among the boards of the largest companies.

It’s not unusual for sitting directors to acknowledge the need to evolve the composition of their boards. Of course, the tricky question is which of them will volunteer to resign to make way for new directors. There also needs to be the necessary succession planning and targeting of potential board members to ensure the right flow of people move quickly to fill vacancies and sustain institutional knowledge. In short, changing the composition and outlook of corporate boards tends to be easier said than done.

Companies’ resilience

Company resilience is also a topic for the board agenda. One of the most common questions I get from companies is what their boards should do to oversee risk. The spectre of unknown or unforeseen risk is a subject that is of particular concern to directors. They would love to be able to see around corners.

We know that companies are always going to be challenged by risks that executives hadn’t anticipated. The best companies ensure they are resilient to such developments in a few key ways. One is by establishing communication lines so that bad news about unexpected events gets reported quickly to the centre so that executives can assess the situation and respond swiftly and decisively. Another is by ensuring there’s a robust crisis management plan to deal with both the known and unknown risks.

That’s where we believe boards come into play. Boards should periodically discuss the appropriateness of the company’s crisis response plans. In PwC’s 2012 Annual Corporate Directors Survey, two-thirds of directors indicated their board had discussed management’s plans to respond to a major crisis in the preceding 12 months. That’s down from 82% who indicated their boards had held such discussions during the previous year. Perhaps that’s one reason why 37% of directors indicated that they would like to increase their time spent on crisis management in the future. Yet those discussions may not be as robust as they should be, especially in light of the fundamental changes that social media is bringing. Fewer than half (43%) of directors said they understand their company’s social media communications response plan in the event of a crisis.

Resilience is also about anticipating and adapting to change. For example, some companies and even whole sectors have been slow to recognise the transformational impact of new technologies on their marketplace — the use of smartphones as the primary means of photography and its impact on camera makers is a case in point. It’s therefore vital to look at what’s coming across the radar screen and make sure the business responds quickly rather than being blindsided by change. Social media can play a key part in supporting sustainability by helping companies engage more closely with consumers, understand their changing expectations and be seen to be responding. Many CEOs are actively engaging in this dialogue.

Clearly these are board-level strategic issues. How to most effectively build resilience into the overall strategic discussions within the boardroom is going to be a key priority in today’s constantly shifting business landscape. Are long-held assumptions still relevant and sufficiently open to debate? Is the makeup and breadth of perspectives within the board sufficiently diverse? Is the board taking a sufficiently active role in assessing and dealing with emerging threats, opportunities and changes in stakeholder expectations? Can the business respond and recover quickly from crises?