News and Views
December 21, 2017
Posted in: WATSON Views
2017 brought us enough stories to last a lifetime. We witnessed the first coast-to-coast eclipse in 99 years and devastating back-to-back-to-back hurricanes. Powers shifted on the political stage – the swearing in of the 45th American President, the Paris Climate Accord, and continued instability across the globe. We raised our voices, joined the Women’s March in January, took a knee on the field and tweeted #metoo. We saw toppled regimes, monuments and moguls.
The big issues – climate change, increasing polarization of societies, changing demographics, income disparity and universal rights for all – trended across our smartphones, dominated the water cooler talk and filtered into the boardroom. Conversations changed, and so too did board focus. Disruption and geopolitical instability crept into the boardroom forcing directors to turn their attention to cybersecurity, trade, business disruption and ethics, as they found themselves governing in an increasingly complex environment.
We watched boards take a good look at the world around them and reflect on the implications for their governance – from who is around the table to how they do their work. Four boardroom game changers – board composition, peer evaluations, CEO and chair succession planning, and culture oversight – resulted in WATSON declaring People Focus as the leading governance practice in 2017.
Game Changer #1 – Board Composition
It goes without saying that the quality of individual board members underpins the board’s ability to provide leadership and effective governance. High-contributing directors not only bring needed skills and experience, but also have the characteristics and behaviours that lead to productive dialogue and good decisions. Board composition held a prominent place on many board agendas in 2017. Shareholders continued to raise their concerns about board composition and pushed for more diversity, regular turnover and directors who are current on the evolving business context. Boards themselves focused on assembling the best team possible.
Yet, despite these efforts, there is still work to be done. In a recent US-based survey, almost half of directors said a fellow board member should be replaced, and 20% went so far as to say two should be replaced. In light of only 60% of directors reporting that they adequately question management’s assumptions, investors are seeking assurance that boards challenge management on strategy and results. And while the benefits of diversity are commonly acknowledged, recent reports indicate that not enough progress has been made in this area. Women only hold 14% of corporate board seats in Canada and other dimensions of diversity are still in their infancy.
Composition should remain at the forefront of boardroom conversations in 2018. Boards need to take a long hard look in the mirror at who they need to drive the organization forward to help achieve their strategic priorities. Economic turbulence, geopolitical instability, massive business disruption – what’s on your directors’ minds? What experience and voices do you need at the table?
Game Changing Tactics
- Review and update your skills matrix on an annual basis to reflect changing needs and circumstances. Pay attention to character and behaviour, not just skills
- Round out the team – balance directors who have broad skills and experience with others who possess deeper, more specialized knowledge
- Consider the ‘younger’ demographic who typically have less board experience but may bring with them valuable skill-sets and experience in technology and cybersecurity
- Hire a search firm to help get the right people around the table (AND to help identify what you need around the table)
Hey WATSON, where are we at with diversity?
Things have started to change since “comply or explain” was introduced, but not fast enough. We have seen pockets of advancements in the area of diversity, particularly gender, and are hearing boards talk about it, set their own targets, and create accountability by publishing targets. But boards still can and should do better.
Do you have a question about governance?
Game Changer #2 – Peer Evaluation
As composition changes, so too does the board’s appetite for evaluation. Institutional investors are demanding more regular director evaluation and boards are starting to respond. There is also an increasing willingness and interest amongst more progressive and senior boards towards providing candid feedback to directors. WATSON is seeing boards invest more than money when they engage in a peer evaluation process. They are investing time and a commitment to continuous improvement. Directors are taking their own evaluation seriously and appreciate the impact on both strengthened individual and board performance. To help create open, honest and transparent conversations with a goal of improved outcomes, more and more, we see organizations engaging a third party to help develop a culture of trust, objectivity and candor in director evaluations. We predict that 2018 will be the Year of the Peer in many boardrooms.
Game Changing Tactics
- Focus the conversation by drawing out themes from the feedback
- Partner with the chair to develop an action plan to improve performance
- Practice meaningful conversations on individual and board performance in camera. Make feedback part of every board meeting
- Seek feedback from management to round out director feedback
- Be bold – invite individual directors to share a specific behaviour for improvement with their peers. It can have a profound impact on board culture and contribution
Game Changer #3 – Succession Planning
Countless books and online search results illustrate the importance and impact of solid leadership on both organizations and boards. Boards have stepped up their approach to CEO and chair selection processes resulting in more robust recruitment practices. However, what some boards are still failing to realize is that succession planning is a continuous process. It doesn’t start with the first whisper of retirement nor end with the welcome party for the new CEO or chair. It is a board constant, where the means is equal to the ends. Every board needs a mechanism to ensure a solid stream of future leaders. And core to the process is the coupling of evaluation and succession planning. 2017 saw boards start to devote time and effort to building a sophisticated CEO and chair evaluation process integrated with long-term succession planning.
Game Changing Tactics
- Invest in chair succession. Take a page from CEO succession and apply similar processes and practices, including developing performance criteria for the chair
- Add “fosters a culture of feedback and learning” to your chair attributes when recruiting new chairs
- Switch up committee chairs to build a board leadership pipeline
- Lock succession planning into your forward calendar and agenda
- Focus on future leadership needs – it’s not about what is needed today but the leadership of tomorrow
Game Changer #4 – The Board and Organizational Culture
It has never been easy for boards to draw a clean line in the murky waters of culture oversight. 2017’s sexual harassment scandals, toxic tech firms and unscrupulous banking and sales tactics now make it impossible for boards to bury their heads in the culture sands. There has never been a better time for boards to dig into culture and define their role in oversight. Boards are tackling this soft issue with hard processes – clear board, committee and individual director responsibilities, policies, education and reporting. They are also setting very clear expectations of management – regular culture assessments and reporting, risk mitigation tactics, harassment policies, whistleblower avenues and recognition and reward systems that support desired company culture versus unintentionally undermining it.
Game Changing Tactics
- Draw the lines on oversight – assign committees to take responsibility for specific aspects of culture (for example task the Compensation Committee to monitor compensation and recognition systems)
- Elevate culture to the same status as strategy and risk. Monitor performance, develop policies, and recruit directors with organizational experience around culture
- Move culture up the list of CEO criteria in recruitment, succession planning and evaluation
- Go public with your shareholders and stakeholders by communicating how your board is addressing its role in cultural oversight
In a world of external complexity and disruption, it’s more important than ever to be thoughtful about who is inside the boardroom and how you carry out your board duties. Who is on the board, how boards evaluate individual performance, how they develop leadership for the future and how they define their role in cultural oversight are four forces creating a palpable shift in the boardroom. Board scrutiny was not new in 2017; stakeholders have been steadily raising expectations on board performance. However, in a world where anyone can weigh in on social media, boards need to be poised for a steady stream of citizen stakeholder questions (and, of course, comments).
As boards look ahead to 2018 and the need to provide leadership in an increasingly complex environment, we encourage you to think strategically on how best to meet this responsibility. While many important and new strategy and risk-related topics will be added to your agenda, we recommend first and foremost a continued focus on the essential role of people – ranging from ensuring the most qualified team on the board, to planning for leadership succession to gaining more meaningful insight into the organization’s culture.
So, as the year winds down, take the time to reflect on the advancements your board has made. And, as always, we encourage you to look to the future and be curious and open to new ideas. Celebrate the people around the table who together can make a difference in 2018.
From all of us at WATSON, we wish you and your board a wonderful 2018.