Focus on These Four Internal Audit Areas

Jim DeLoach

Jim DeLoach

As my firm reflected on directors’ expectations that have emerged while working with boards, four areas of emphasis that internal auditors should address rise above the rest. We refer to these as the four Cs: culture, competitiveness, compliance, and cybersecurity. These four areas offer suggestions to directors regarding what they should expect from a risk-focused audit plan.

Here’s a closer look.

Culture

A breakdown in risk management, internal control, or compliance is almost always due to a dysfunctional culture. The risks spawned by cultural dysfunction often require a lengthy incubation period before noticeable symptoms appear—and lead to consequences that could result in a reputation-damaging event. Examples include an environment that isolates senior leaders from business realities, allows cost and schedule concerns to override legitimate public safety priorities, empowers falsification of emission reports, or drives unacceptable risk-taking through inappropriate performance incentives. Once a culture of dysfunction inculcates a flawed business environment, it may take a long time for the consequences to emerge—and emerge they will if the dysfunction is left unaddressed.

Given that an organization’s culture is the mix of shared values, attitudes, and patterns of behavior that comprise its particular character, how does a board get its arms around it? An opportunity we see is for directors to look to the chief audit executive as the independent “eyes and ears” of the organization’s culture. Specifically, internal audit can be asked to perform the following functions:

  • understand the overall working environment;
  • identify the unwritten norms and rules governing employee interactions and workplace practices;
  • highlight possible barriers to an effective internal environment and communication flow;
  • report unacceptable behaviors, decisions and attitudes toward taking and managing risk; and
  • make recommendations to address identified problems.

Internal audit can also post warning signs to directors that further investigation into cultural concerns is warranted, and can assist in assessing whether the tone in the middle and at the bottom match the leaders’ perception of the tone at the top. This contrast can be quite revealing. It can serve as a powerful reality check to a management team that really wants to listen.

Competitiveness

Competitiveness is a priority of every business and poses a significant opportunity for the internal audit function. If, for instance, the company’s practices are inferior relative to best-of-class performers due to underperforming business processes, the internal audit function can improve operating efficiency. In essence, the board should expect internal audit to look beyond traditional compliance areas and financial reporting to help the organization to continuously improve its operations.

Most organizations use some form of a balanced scorecard when monitoring whether they are successfully establishing and sustaining competitive advantage in the marketplace. Key performance indicators address critical areas such as quality, time, cost, and innovation performance. They often include indicators of customer and employee satisfaction. Internal audit can assist with assessing the reliability of these metrics for decision-making. In addition, internal audit can benchmark selected metrics against competitors and best-in-class performers to identify performance gaps that must be corrected in a timely manner.

Compliance

Traditionally, the internal audit plan ensures that the organization’s compliance with laws, regulations, and internal policies are under control. As the third line of defense in the compliance chain of command, internal audit should ascertain whether:

  1. Front-line operators and functional leaders whose activities have significant compliance implications own the responsibility for identifying and managing compliance risk. These front-line operators are responsible for having effective controls in place to reduce the risk of noncompliance to an acceptable level.
  2. The scope of the independent compliance function, or the second line of defense, is commensurate with the significance of the company’s compliance issues and results in reliable and timely insights to management and primary risk owners.

Internal audit should determine whether a cost-effective monitoring process is in place to address the top compliance risks, and that can assess the overall implementation of the compliance program in light of changes in applicable laws and regulations.

Cybersecurity

In a recent survey, cybersecurity was cited as the third most critical uncertainty companies are facing as they look forward into 2017. What can internal audit do to alleviate this concern?

  • Assess whether the company’s processes give adequate attention to high-value information and information systems. Rather than costly, system-wise protection measures resulting in lack of attention to the most important assets, internal audit can assess whether the information technology organization and business leaders agree on what constitutes the company’s crown jewels.
  • Assist the board and senior management with understanding the threat landscape. The organization’s cybersecurity risks should be assessed based on the company’s crown jewels, the nature of its industry and operations, and its visibility as a potential target. For example: Who are the likely adversaries, and how might they attack? Where are our biggest vulnerabilities? How effective are our current internal controls? Do we conduct penetration testing? If so, what are the results?
  • Review the organization’s response readiness to a cyber incident. Effective incident response processes are critical to a company’s preparedness to reduce an attack’s impact and proliferation.

By focusing more broadly on the implications of audit findings and thinking beyond the expressed or implied boundaries set by the audit plan, internal audit is better positioned to deliver stronger, more practical and harder-hitting recommendations aligned with what directors are seeking.


Jim DeLoach is managing director of Protiviti. 

Best Practices for Overseeing Talent and Tone

A company’s human capital can be a complicated area of oversight for any board, especially when attentions must be turned to the top spot in the C-suite. Here, directors must ensure that the company is attracting and retaining the next generation of leading talent that will realize the company’s future success while setting a tone that promotes integrity throughout the organization.

A daunting task, yes, but one that’s not insurmountable.

The National Association of Corporate Directors (NACD) invited Blair Jones, a managing director at Semler Brossy Consulting Group, and Craig Woodfield, a partner at Grant Thornton and leader of the firm’s audit services practice, to offer their insights on these issues as part of a larger panel discussion at the Leading Minds of Governance–Southwest event.

Highlights from their conversation with NACD Directorship Publisher Christopher Y. Clark follow.


What is the compensation committee’s role in succession planning and talent development?

Blair-Jones

Blair Jones

Blair Jones: While responsibility for succession planning ultimately rests with the full board, there are a number of things the compensation committee can do from a process perspective to support this objective.

First, the committee can look at leadership competencies and the overall leadership development process. The succession plan needs to be supported by a pipeline of talent throughout the organization. And the committee needs to know how that pipeline is developed—be it on-the-job mentoring, developmental role assignments, action learning programs, individual coaching, or relationships with business schools. Consider bringing in a leader who has been involved in these leadership development programs to speak about their experiences.

Second, the compensation committee can spend time with high potential candidates at board dinners and through individual meetings. When the committee is determining end-of-year pay decisions, the CEO typically reviews people. Having met some of these individuals, it’s easier to participate in a discussion of what’s being done to take them to the next level. The committee can also make sure that the pay decisions actually fit the directions coming out of the succession planning process.

Compensation committees should also consider following results from employee engagement surveys. Ask: What do these results say about our ability to motivate talent and to retain them in the organization? This will help you get a better feel for the tone and culture of the company.

Look at diversity and inclusion initiatives. Understand the statistics and how those are changing over time throughout the organization. Also, spend time with talent management and succession planning the next level down. The board primarily works with the senior level, but the company’s future leaders are going to come from another level in the organization and the compensation committee can help with succession planning by taking an initial look at the next generation.

What are the best practices for the board to make sure the company has the right tone at the top?

Craig-Woodfield

Craig Woodfield

Craig Woodfield: I look at this from an auditor’s perspective, which defaults to the financial reporting side. The appropriate tone at the top deals with every risk of significance that could face a company.

Directors who are in a public company environment are probably familiar with the Committee of Sponsoring Organization of the Treadway Commission’s framework for internal controls and I would encourage private and nonprofit company directors to familiarize themselves with it. The revised framework from 2013 really is the gold standard and it applies to every company and every board. There are seventeen principles listed in that framework and the first five all deal with tone at the top issues. If you look at them, none of them are focused specifically on financial reporting.

As directors, we need to take these criteria seriously to ensure that there are structures in place that create a tone that promotes ethical values. The chief executive is the key here. As an auditor, I have a lot of exposure to public companies, and while most of them have a good tone, there are exceptions. The commonality among those exceptions is a chief executive who doesn’t have the right approach combined with a board that doesn’t have the right level of oversight.

Here are a couple warning signs: a chief executive who has a very domineering personality, that doesn’t take feedback well, or doesn’t respect the board’s responsibility to protect him or her. On the other side, if you have a weak leader and there’s a power vacuum at the top where there is no system of checks and balances, that’s an even greater warning sign because the board becomes dependent on each individual leader of each group within the organization. That situation is much more difficult to control.

We all want strong leadership in the companies we serve. One of the things that boards can do is help educate the chief executive about the nature of that relationship. And the role of the board is to help control that. A warning sign that that balance isn’t there is if we as board members don’t have access to the direct reports. And you want to empower the CEO—you don’t want to undermine or go around them. From an audit standpoint, it’s a real warning sign when the CEO or CFO tries to get in the way of the auditor or audit partner’s direct relationship with the board.


Want more? A panel of Fortune 500 company directors and subject matter experts will offer their insights on issues ranging from cyber resilience to the latest regulatory trends at Leading Minds of Governance–Southeast. Join us on March 16 in New Orleans, LA. Space is limited—register today.

Next week, coverage of the Leading Minds of Governance–Southwest event continues with highlights from a discussion on cyber risk and the legal liabilities of international companies.

Proxy Season 2017: More Pressure on Social Issues, Focus on Value

This is the first in a series of blogs that will help your board prepare for Proxy Season 2017.

Proxy Season 2017 will give voice to the usual variety of governance issues we cover in our resource center on preparation for proxy season, but this year shareholder resolutions are highly likely to take a turn towards social issues.

Figure1Proxy

Click to enlarge Figure 1 in a new window.

With an expected regulatory downshift under the incoming Trump Administration, standard-setting for business conduct may move from the government to the corporate sector, with shareholders and socially conscious directors driving the trend in myriad areas, from industry-specific concerns such as animal welfare to broader issues such as climate change. To be sure, we will continue to see proxy resolutions in the dozen general categories that have become hallmarks for activists, but the rise in attention to social issues by activists seems inevitable (See Figure 1).

Dialogue

Corporate leaders and major shareholders alike are recognizing the role that social issues can  play in corporate value. In 2016, corporate leaders and prominent investors issued “Commonsense Principles of Corporate Governance,” a collaborative document containing a key message: “Our future depends on…companies being managed effectively for long-term prosperity, which is why the governance of American companies is so important to every American.” Among their recommendations was the suggestion that boards pay attention to “material corporate responsibility matters” and “shareholder proposals and key shareholder concerns.”

As revealed in the NACD Resource Center on Board-Shareholder Engagement, proxy resolutions can play a role in raising board awareness of key issues. Although shareholder resolutions rarely win by a majority, and even then are only “precatory” (non-mandatory), they do raise boards’ awareness of issues and can spark change over time. Many of today’s governance practices began as failing proxy resolutions but ended up as majority practices, with or without proxy votes.

Take for example proxy bylaw amendments, which have only been fair game for proxy votes since spring 2012 (thanks to a new rule that removed director nominations from the list of topics disallowed for shareholder resolutions). That season saw only three proxy access resolutions at the largest 250 companies, and only one got a majority vote. Fast forward to spring 2016 when 28 companies had such votes, and nearly half succeeded in getting a majority vote. By December 2016, proxy access had been adopted by a majority of Fortune 500 companies, as Sidley Austin reports. Those early proxy access resolutions lost their early battles, but in the end, they won the larger war. The same could happen over time to social resolutions over the next four years.

Directors Want More Dialogue on Social Issues

Interestingly, directors seem to be intuiting that they will need to step up on social issues this year. The 2016-2017 NACD Public Company Governance Survey, which features responses from 631 directors surveyed in 2016, reveals a significant finding in this regard.  When asked to judge the ideal amount of time to be spent on various boardroom topics, directors ranked five topics as highest in terms of needing more discussion time:

  • director education;
  • executive leadership;
  • cybersecurity;
  • director succession; and
  • corporate social responsibility.

One in three respondents said they would like more time devoted to discussing the “social responsibility” topic. For all issues other than these five, fewer than a third of respondents said that the topics merited more board attention. While this is a relatively new question, NACD has asked similar questions in the past, and this is the first time our respondents have ever ranked social issues so highly as a “need to know” topic. 

A Gravitational Pull to Social Issues With a Strategic Slant

So what lies ahead for the next proxy season in the social domain? Aristotle is attributed with coining the phrase  “nature abhors a vacuum,” a theorem in physics aptly applied to the likely vacuum in new corporate rule-making in 2017. USA-first trade rules aside, we believe that shareholder activists may try to fill the break in Dodd-Frank rule making with their own social agendas.

As we go to press, attorney Scott Pruitt is slated to head his institutional nemesis, the Environmental Protection Agency, while Governor Rick Perry, former leader of oil-rich Texas, is in line to direct the Department of Energy. Neither man is likely to crack down on carbon-based fuels, so if shareholders want carbon reduction, they will need to redouble their own efforts—and indeed that seems to be the plan.

According to the environmental group Ceres, quoted in an overview by Alliance Advisors, LLC, U.S. public companies will face some 200 resolutions on climate change in 2017, up from a total 174 such resolutions during 2016. This prediction may be conservative. According to Proxy Monitor, in 2016 the 250 largest companies alone saw 58 environmental proposals—meaning that nearly one out of every four large companies faced one.

In other developments, As You Sow, a community of socially engaged investors, has already announced 46 of its own proxy resolutions, including three on executive pay. All the rest are on social issues, including climate change (11), coal (10), consumer packaging (5), and smaller numbers of resolutions in a variety of other social issues, including antibiotics and factory farms, genetically modified organisms, greenhouse gas, hydraulic fracturing, methane, nanomaterials, and pharmaceutical waste. The gist of many of these resolutions is to ask for more disclosure, including more information on the impact of current trends on the company’s strategy and reputation. For example, the “climate change” resolution in the Exxon Mobile proxy statement asks Exxon to issue a report “summarizing strategic options or scenarios for aligning its business operations with a low carbon economy.”

Similarly, the Interfaith Center on Corporate Responsibility has already announced the filing of five shareholder resolutions for the 2017 proxy of its longtime target Tyson Foods on a variety of issues, including one on the strategic implications of plant-based eating. Sponsored by Green Century Capital Management, the resolution seeks to learn what steps the company will take to address “risks to the business” from the “increased prevalence of plant-based eating.”

In the same vein, at Post Holdings, which holds its shareholder meeting January 28, a shareholder resolution from Calvert Investment Management asks for disclosure of “major potential risks and impacts, including those regarding brand reputation, customer relations, infrastructure and equipment, animal well-being, and regulatory compliance.” Note that animal welfare is only one factor here; Calvert is making a business case for the social change.

Visit our Preparation for Proxy Season Board Resource Center for more publications to equip your board for the season ahead. 

13 Questions Directors Should Ask in Post-Election America

Kimberly Simpson

Kimberly Simpson

What questions should board members ask the leadership of their companies in the weeks to come? Political experts Terry Baxter, who served in three presidential administrations and is the former CEO of the National Transportation Safety Board (NTSB), and Alex Castellanos, co-founder of public affairs firm Purple Strategies and current member of CNN’s political analysis team, opined on considerations for the business community in this time of political and societal uncertainty.

Castellanos shared that President-Elect Donald J. Trump is highly aware that his administration will be under pressure to enact policies that produce economic growth. Both panelists agreed that the success of the new administration will also hinge on delivering on regulatory and tax reform, as well as changes to healthcare policy. Ever present in the incoming administration’s actions will be the populist sentiment that propelled the success of the Trump campaign. Castellanos suggested that companies that expect to succeed in this environment should be prepared to tell their story about how they are contributing to American renewal, including domestic job growth.

Attendees took away from the program several key questions that directors should be asking of management—and of each other—in post-election America:

Questions for Management

  1. Information gathering: How are we informing ourselves about the new administration’s proposed policies, the implementation of those policies, and what those changes might mean for our company?
  2. Outreach: What is our outreach and engagement plan for advancing our positions on important issues with the new administration?
  3. New trends: How is our company identifying current trends, disruptors, and business impact issues? How are we identifying key actions that have longer-term or permanent implications?
  4. Tax policy: What are we doing to prepare for shifts in the tax policy?
  5. Spending: How are we positioning the company to benefit from proposed spending on infrastructure?
  6. Growth: What core assumptions about our business’s growth should be reconsidered in light of the changes in government? What possible, emerging growth opportunities are on the horizon that we should be anticipating? Do we have a capture plan in place for these growth opportunities?
  7. Exposure: What is our exposure to trade policy changes and the fluctuation of the U.S. dollar?
  8. Supply chain: Do we know which of our critical suppliers could be impacted by a shift to a nationalist trade policy?
  9. Strategic planning: How are we integrating political risk analysis and assessments into our strategy and risks processes?
  10. Scenario planning: How robust and effective are our current scenario-planning processes, and how prepared are we to act quickly if needed?
  11. Technology: What impacts will the new administration have on the growth of technology?

Questions for Fellow Directors

  1. Compensation: What objectives are our compensation plans setting out for key executives and business units? Are we rewarding the right activities and the right behaviors?
  2. Board composition: Does our board have the right combination of skills, diversity, and experience to provide effective guidance and oversight to management?

The audience also left with an important piece of advice. Castellanos cautioned that, in a world where we get our news from each other and the President-Elect has an affinity for social media, it is more critical than ever for companies to have a well thought-out corporate social media strategy.

Note: The views and opinions expressed in this blog are those of the speakers at this event and do not necessarily reflect the views or opinions of the National Association of Corporate Directors (NACD) or the NACD Capital Area Chapter.


Kimberly Simpson is NACD regional director for the Southeast, providing strategic support to NACD chapters in the Capital Area, Atlanta, Florida, the Carolinas, and the Research Triangle. Simpson, a former general counsel, was a U.S. Marshall Memorial Fellow to Europe in 2005.

What Happened in Vegas: Highlights from CES

As part of the National Association of Corporate Directors’ continuing mission to help directors understand disruptive technologies and trends, I joined more than 175,000 attendees at the 2017 Consumer Electronics Show (CES) in Las Vegas, Nevada.

After three days of experiencing more than 3,800 vendors, you start to see past the shine of the latest gadgets and understand how the technology that underpins them is poised to change the world. How those technologies are leveraged is key to understanding the future of disruption, and as we discussed at last year’s Global Board Leaders’ Summit, convergence is the order of the day.

I’d like to share some of the technology trends to watch in 2017 and the governance implications that I learned at CES.

Voice and Motion-enabled Artificial Intelligence (AI) are Here to Stay

Whirlpool

A booth showcased one of many partnerships between Amazon and consumer products companies, including Whirlpool.

From controlling the radio volume with a wave of your hand, to voice-controlled appliances AI was everywhere. In fact, the most talked-about company at CES this year didn’t even have a booth. The Amazon logo appeared on products produced by Whirlpool to those debuting from smaller start-ups.

Why? Alexa, Amazon’s AI assistant, was ubiquitous on the show floor.

Alexa is leading the way in enhancing consumer products that implement voice-enabled technology. It is anticipated that Alexa will soon be leveraged not just to power, but interact with, everything from your toaster to your Toyota.

It became apparent at CES that the future of voice-enabled AI is a person’s ability to speak naturally and rely on the computer to accurately transcribe information. This has significant impact for everyone from office workers to doctors who could reliably dictate notes to medical records.

John Hotta, a director in the health care space and NACD Board Leadership Fellow, was also on hand at CES. “Innovations in voice-activated technology also have huge implications for products, services, and the nature of work, as smart speakerphones or personal assistants such as Google Home or Amazon Dot replace direct user interface with a computer,” Hotta said.

Computer, You Can Drive My Car

CES exhibitors demonstrated the growing sophistication of autonomous vehicle technology. Last year Ford Motor Company CEO Mark Fields promised to turn the automaker from a car company to a mobility company. That strategy was on full display as Ford partnered with San Francisco-based start-up Chariot to show off one of their autonomous mini-buses, which Ford hopes will “reinvent mass transit for commuters, companies, and fun-seekers with reliable and affordable service.”

Cloud

A wealth of connected, autonomous vehicles were on display.

Autonomous vehicles also buzzed high above the heads of CES attendees. As drone technology continues to evolve for both commercial and industrial use, autonomous vehicle technology is being applied to those vehicles as well. In a convergence of these trends, Mercedes exhibited a fully autonomous delivery vehicle, equipped with two roof-mounted drones that facilitate package delivery from the van to the doorstep.

Another trend emerged at CES: the use of autonomous vehicles as a tool for vehicle safety. Thanks to the convergence of AI and the Internet of Things (IoT), vehicle to vehicle technology has enabled cars talk to their passengers and to other vehicles on the road. As attendees at the 2016 NACD Global Board Leaders’ Summit may remember, Chris Gerdes, head of innovation at the Department of the Transportation (DOT), discussed how DOT is piloting this technology in cities across the U.S. to slash traffic fatalities, and nearly every major automaker is now getting in on the act. Hyundai and Cisco announced a partnership to leverage IoT technology to improve safety and improve congestion by connecting vehicles to municipal infrastructure.

Governance Implications

Collaboration is Key

Logos

Consumer products and technology companies are forging essential partnerships.

As technology becomes more ubiquitous and innovation becomes decentralized, companies are realizing they can’t go it alone. Consumer products companies are linking up with leading technology companies to build resilience to innovation. In addition to the proliferation of Alexa-linked products, Honda Motor Co. has teamed up with VISA to enable vehicle-based mobile payment systems that allow passengers to conduct transactions without leaving their cars. Apparel companies like Tory Burch and Fossil—companies that seem more at home at New York Fashion Week than at CES—also had large booths touting their new lines of wearables. And finally, in-house labs at big brands like Whirlpool are partnering with crowd-funding platforms like IndieGogo to launch new products. Like the auto companies profiled above, this is another example of convergence that directors would be wise to anticipate.

Private Eyes Are Watching You

The act of welcoming devices into our workplaces and homes that listen and watch our every move could revolutionize the way we live and work—and opens us to unprecedented privacy and security concerns. Coupled with a proliferation of smart products aimed specifically at tweens and children, smart devices present a whole host of liability issues that technology, legal, and regulatory experts are just starting to grapple with.

Amazon’s Alexa and Mattel have already made news for the unintended consequences of giving children access to this kind of technology. Additionally, U.S. courts are grappling with the legal implications of using recordings from these devices as evidence. One such case pits Amazon against prosecutors in who believe that data from an Amazon Echo might be key in solving a murder case.

In this rapidly evolving climate, directors should be asking questions about whether or not security is being integrated into product development now and in the future—from research and development, to plant upgrades, to policies that allow employees to use their own smart devices for work.

The Future of the Workforce

Ian Bremmer, president of Eurasia Group and 2016 NACD Global Board Leaders’ Conference speaker, recently said that “Technology will surely create jobs. But virtually none of the people displaced will have the training for them.” The changing nature of the global economy threatens to make some American jobs obsolete. If CES made one point clear, it’s that the current concern over the decline in manufacturing and coal jobs pales in comparison to the potential changes that will come with widespread automation of jobs.

Car

Volkswagen exhibits its electric, autonomous I.D. concept car.

Remember that self-driving delivery van with the automated drones that deliver packages? Think about that and then look at this interactive map of the top jobs by state. Last August, Uber Technologies acquired Otto, a self-driving truck company, further showing how 1.7 million middle-class jobs could disappear in short order. The American economy is facing a potential employment crisis the likes of which may be unprecedented.

It’s not just delivery drivers who are in danger. As Jane Fraser, CEO of Citigroup’s Latin America business said at the Fortune magazine’s Most Powerful Women Summit in October, “we are expecting 500 billion objects to become connected to the internet and this automation is going to hollow out middle and working class jobs.”

This shift has huge implications for the American economy and its ability to compete on a global scale. Consider, for instance, that automated delivery of packages is only helpful if your company has a customer base that can afford to spend money on products. A recent report by the President’s Council of Economic Advisers lays out the dual challenges of educating a workforce that is ready for the jobs of the future, and the uphill battle of transitioning to an AI-based economy. This report is great reading for directors as they consider the role of the corporation in society, and could help the board shape individual company strategy in critical areas like innovation, talent development, and long-term value creation.

You can see, hear, and learn more about these trends at the 2017 Global Board Leader’s Summit. Stay tuned for information of our new director-focused, curated tour of the 2018 CES show next January.

When Trump Comes Tweeting: A New Playbook for Boards

Richard_Levick1

Richard Levick

What would you recommend if you were on the board of Ford Motor Co., Boeing Co., or Lockheed Martin Corp., all of which have had tête-à-têtes with the incoming leader of the free world? Welcome to the age of the suddenly very bully pulpit. The most powerful thumbs in the world belong to Donald J. Trump, who will soon become the 45th President of the United States.

In mid-December, when Trump despaired that Lockheed Martin’s cost overruns on the F-35 joint strike fighter “were tremendous,” the company’s stock lost $4 billion in market capitalization in a matter of hours. Even though the company quickly recovered those losses when its stock price stabilized, Trump’s tweet triggered some discomfiting moments.

No one understands better how to wield the powers of Twitter, the 24/7 news cycle, and a cult of personality than Donald J. Trump quite like the man himself. To one extent or another, Lockheed Martin Corp., Toyota Motor Corp., Carrier, Mondelez International (parent of Nabisco), Ford Motor Co. , and Boeing Co., have all been caught in Trump’s Twitter maelstrom. Fiat Chrysler Automobiles, in a proactive move to get the target off its back before the opening salvo, wisely announced that it would invest $1 billion and create 2,000 U.S. jobs. A smart play, but as all newlyweds ask, “Will it last?”

We’re in unchartered waters here—and by “we,” I include C-suite executives, corporate directors, and communications counselors like me who advise corporations on how to enhance their brand equity, engage with decision makers, and weather inevitable storms that come with doing business. Social media, fake news, and a new president have changed the rules of engagement.

So what is the new rubric? For most publicly traded companies over the near term, the right response is the easy one: for your shareholders’ sake, meet Trump more than halfway if his demand isn’t too outrageous, and give him the early victory lap. But at some point, after Trump’s modus operandi on these matters inevitably hits some turbulence, that dynamic is likely to change. Watch this space closely, particularly the business-to-consumer tech companies who have millions of customers conditioned to social engagement.

In the meantime, how can a company prepare for presidential squalls or getting caught in the crosswinds of a Twitter-induced tsunami?

There are scores of precautions a publicly traded company should consider, but they can be boiled down to four imperatives.

Engage employees. Trump’s “Make America Great Again” mantra proved enormously popular in America’s industrial heartland. His administration’s public positioning will be devoted to job preservation, reinvigorating the manufacturing base, and sticking up for the little guy. In such a climate, relations with national and local union leaders and heads of employee groups will be doubly important. If a company is suddenly the subject of public scrutiny, its labor and management will want to present a united front. Politics, it is said, makes strange bedfellows. So does business in tough situations.

Enlist allies. Empowering third-party champions has always been an important part of any corporation’s public affairs and communications arsenal, but now it’s absolutely vital. The press and public in today’s environment are inherently suspicious of big corporations and paid spokespeople. In the clutch, customers, vendors, suppliers, community leaders, local environmental advocates, philanthropic heads, Chambers of Commerce, et al., will have far more credibility. The more social media-savvy—and more genuinely connected to grassroots movements—these champions are, the better allies they are for your company.

Prepare now. Companies should use “peacetime” wisely by distilling facts and messages into 140 characters; creating photos and videos for other social channels (e.g., Facebook, Snapchat, YouTube, etc.) that make emotionally appealing messages; track media socially in a sophisticated way that predicts trends; and build a social army now to articulate track records in U.S. job creation and economic growth.

Emphasize speed. Virtually every crisis communications plan in corporate America can be rendered obsolete by the proliferation of Donald J. Trump’s use of social media. If a company is being attacked via social media, it cannot rely on conventional communications to respond. Corporations need to put in place ultra-quick turnaround systems that tap leading-edge media. Build your arsenal of information, army of activists, and strengthen your reflexes now. Have the leader of the company’s digital media team report directly to the board. Integrate your silos so that legal, investor relations, government relations, public relations, digital, and brand practices all know and trust each other. Board members and senior teams need to be put through their paces via scenario drills and full-scale rehearsals.

The most effective way for a company to combat thumb power is through thumb power of its own.


Richard Levick, Esq., @richardlevick, is chair and CEO of Levick, a global communications and public affairs agency specializing in risk, crisis, and reputation management.

Global Hiring Trends, 2017: Positive, Competitive, and Evolving

As we move into 2017, global research indicates employer budgets and hiring trends remain broadly positive. With sources such as ERE Media reporting a tight labor market in the US, along with decreased employee tenure and an increased blended workforce of employees/freelancers, the methods for attracting and retaining top talent for brand differentiation and competitive advantage need to continue evolving.

According to LinkedIn Talent Solutions, estimated budgets and hiring projections by country are as follows:

  

While budgets for the year continue with traditional allocations, social referrals and online sources continue to build on their dominant positions. Roles such as Sales/Business Development, Operations, Engineering and Information Technology are most in demand, but our data-driven and security-conscious world will increase demand for roles such as Data Scientists and Cybersecurity specialists.

 

In 2017, we will see companies put a higher priority on finding more diverse candidates (37%), improving soft skill assessments (35%) and implementing innovative interviewing tools (34%). We also concur with the best practices for hiring and retention trends for 2017 from Forbes’ Dan Schwabel:

1.       Improved Candidate, Employee Experiences

2.       The Rise Of The Blended Workforce

3.       Reviews Evolve From Annual To Continuous

4.       Millennials Meet Gen Z

5.       Augmented, Virtual Reality Revolutionize Recruiting and Training

6.       The War For Talent Heats Up

7.       Performance Evolves From Individual To Team

8.       Workplace Wellness A Critical Benefit For Attracting Talent

9.       Employee Benefits/Perks Get Creative

10.    Workplace Attire, Culture Become More Casual

At Career Partners International, we will continue to bring you the best global trends and best practices in 2017, keeping you informed through our website blog, LinkedIn, Twitter and Facebook accounts and our RSS feed. Contact us today to discuss your needs at 1.800.686.5999 or through our website.

8 Risk Oversight Practices to Master in 2017

Boards and executive teams are challenged by a fast-changing, highly interdependent, and often ambiguous external environment that continually creates unforeseen opportunities and risks. Volatility is the new normal. Not surprisingly, according to the National Association of Corporate Directors’ (NACD) most recent public company governance survey, global economic uncertainty ranks as the top trend corporate directors believe will impact their company in 2017. In yet another NACD poll conducted during a recent webinar, 49 percent of directors did not feel that management was providing them with a reliable view of the future.

The recent election of Donald J. Trump as President of the United States is likely to contribute to this growing sense of uncertainty, with the corporate director community evenly divided about the potential impact, according to the NACD webinar poll. Forty-two percent of directors report that his administration will be good for business, while 42 percent are unsure about the impact, and still another 16 percent believe that a Trump presidency will not be good for business.

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In this complex, uncertain environment, what can boards do to gain more comfort from management that risks are accurately identified and well-controlled?

The International Standards Organization in ISO 31000 defines risk as “the effect of uncertainty on objectives,” which can be a negative or positive deviation from what is expected. More specific to business, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) is currently defining risk as “The possibility that events will occur and affect the achievement of strategy and business objectives.” Each of these definitions of risk exposes a company to potential loss—indeed, yet another definition of risk authored by insurance professionals highlights risk as the possibility of loss. Yet when viewed as part of an active business dynamic, risk, as daunting as its manifestations may be, is far more than the chance of loss. Rather, risk is a level of uncertainty that can create economic opportunity.

The recently released Director Essentials: Strengthening Risk Oversight identifies eight leading risk oversight actions that directors can take to seize opportunities and avoid the loss possibilities inherent to risk. A brief outline of each action and a key question boards should consider asking follows.

1.) Clarify the Roles of the Board, Committees, and Management. The board, all board committees, and all members of senior management need to know their unique roles in risk oversight. Without clarity on ownership of specific responsibilities, redundancies and lapses can occur.

The practice of role definition helps establish a clear mandate for risk oversight by the board and offers management a blueprint for the execution of risk management.

  • Is there a common understanding among management, the board, and board committees about their respective roles, responsibilities, and accountabilities on strategy?

2.) Understand the Company’s Risk Profile. Especially in light of the new environment, all board members should be aware of the company’s key risk exposures, which collectively are referred to as the company’s risk profile. Oversight of any business requires understanding the major risks that it faces now and in the future, and making decisions accordingly. Although the universe of risks that a company faces may be almost limitless, a company’s risk profile is the composite (and analysis) of the most pressing risks that impact strategy and reputation.

  • What are the strategic assets we must protect at any cost? Are they at greater risk now?

3.) Define the Company’s Risk Appetite. Companies take risks in order to grow and compete in the marketplace, yet they need parameters for how much risk they are willing to accept. The board plays a critical role in defining the boundaries of risk for the company.

  • Given our risk profile, strategy, and the uncertainty surrounding the current business environment, what risk appetite should our company have? Have we clearly cascaded our risk appetite into decision-making processes at the level of operations?

4.) Integrate Strategy, Risk, and Performance Discussions. All too often, risk and business performance assessments are divorced from the strategy process in the organization. These silos increase the likelihood of poor, costly decisions.

  • When we discuss strategy in this evolving environment, how do we consider both risks to the strategy and the risks inherent in our chosen strategy?

5.) Ensure Transparent and Dynamic Risk Reporting. Risk reporting must reach the right people with the right information. Reports should not be limited to the metrics mandated by external disclosure rules—they should include all the information the board needs to assess the company’s risk exposure. Similarly, reporting should be dynamic, taking into consideration the velocity by which existing risks change or new risks emerge.

  • What is the threshold for risk-related reporting to the board (e.g., categories of risk, specific issues or incidents)? What situations may call for greater board engagement (e.g., perceived management failure to disclose or address a critical risk)? Do we have a protocol that defines these situations? 

6.) Reinforce Clear Accountability for Risk. The management of risk in today’s often-extended enterprise is complex, with executive teams typically transferring ownership of risks to specialist functions. But examination of recent risk disasters reveals that diffuse accountability for risk management is a major problem.

  • As we reward our executives, do we take into account their ability to anticipate and manage risk? Are accountability for and performance in managing risks effectively embedded in incentive structures at all levels of the organization? How far down the reporting chain do our incentives for risk management excellence go?

7.) Verify That Mitigation Reduces Risk Exposure. The success or failure of risk mitigation is often underreported, leaving boards with a limited understanding of whether or not risks are effectively minimized over time.

  • Do we clearly differentiate between risks that can and cannot be mitigated? Are our mitigation plans realistic? Do we understand that mitigation does not mean elimination? Have we clearly communicated our expectations for reporting on risk mitigation?

8.) Assess Risk Culture. Culture is often described as how work really gets done when no one is looking, and it is critical to ensuring a successful and sustainable strategy. More specifically, risk culture is a critical subset of overall corporate culture defined as the behavioral norms inside a company that drive both individual and collective risk decisions. A well-balanced risk culture can unleash innovation, and deter fraud and abuse.

  • Do we have a culture in which staff at all levels know what risks to take and what risks to avoid? How willing are employees to speak up about problems that can cause significant risk to the organization?

By adopting the above eight practices, directors can help their companies prepare for risks in 2017 and beyond.

For more NACD insight and support on board risk oversight, please visit our Risk Oversight Resource Center.

It’s Time for Companies to Improve Board Diversity Disclosure

The demographic and expertise-based makeup of public company boards has come under increasing scrutiny from investors as numerous studies continue to correlate elements of diversity with improved company performance.

The National Association of Corporate Directors’ Report of the NACD 2016 Blue Ribbon Commission on Building the Strategic-Asset Board emphasized the essential task of assembling and assessing a board best fit to tackle the challenges of the constantly-changing business environment. At its core, the successful strategic-asset board is a mix of directors with diverse backgrounds who are fit to the purpose of complex oversight. And the demand for diversity is not just about market-based performance—the evidence also shows that diverse boards engage in more robust debates, make decisions that are sounder than they would be otherwise, better understand their customers, and attract higher-performing employees.

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For smaller public companies in the U.S., underperformance in board diversity is even more pronounced. In November 2016, Equilar released a report revealing that small public companies lag behind S&P 500 companies when it comes to board diversity. For example, 23.3 percent of Russell 3000 companies in 2016 had all-male boards versus 1.4 percent of S&P 500 boards.

But does this study tell the whole story? Gender diversity on boards understandably receives the most attention because it’s one of the easiest metrics to quantify. However, measuring progress with the broad brush stroke of S&P 500 (or even Russell 3000) gender statistics does a disservice to the full story of diversity on a company’s board. Diversity in the boardroom best serves a corporation when it’s addressed in a holistic manner, taking into account age, experience, race, and skill sets along with gender. In fact, when the U.S. Securities and Exchange Commission (SEC) adopted diversity disclosure rules in 2009, it allowed companies to provide their own definition of diversity.

At Nasdaq, we’ve taken a detailed look at the board composition of listed companies, including those too small to be included in much-publicized diversity studies. In doing so, we found promising signs of progress. For example, 14 Nasdaq companies have reached or exceeded gender parity in the boardroom versus five companies in the S&P 500. In 2016, 75 women were elected to a Nasdaq-listed company board for the first time. Many of these women came from outside the C-suite, recruited from non-corporate professional disciplines such as university administration, government, medicine, public education, and journalism.

We also discovered that many Nasdaq companies have compelling stories to tell with respect to board composition and their own diversity of age, gender, race, and skill sets. Unfortunately, their efforts go largely unnoticed for the simple reason that they aren’t sharing their story. Only a handful of companies highlight board composition in their proxies using charts and graphs to summarize their board profile metrics. Yet these metrics offer stakeholders valuable insights into the board’s ability to oversee and support management and its strategic plan.

At Nasdaq, we see ourselves not just as a public company, but also as a model for our nearly 3,000 listed issuers. One example of this is our 2016 Proxy Statement in which we enhanced board transparency through graphics and statistics on a variety of metrics. This data illustrates not only the gender diversity of our board, but also the diversity of skills and experience present. We believe this information is valuable for shareholders and the market and we will continue to share it.

As the head of the SEC, an agency focused on disclosure to investors, Chair Mary Jo White observed in a recent speech that “A growing number of company proxy statements have recently begun to voluntarily provide an analysis of data, accompanied by pie charts and bar graphs, to describe the state of the board’s gender, race and ethnic diversity composition, sometimes in addition to other categories… This more specific information is clearly more useful to investors.” In fact, we found a number of Nasdaq-listed companies (both small and large) that shared diversity metrics around board composition in their proxy statements in 2016. These companies include:

As companies continue to prepare for the upcoming proxy season, we encourage your board to consider simple report enhancements that increase the transparency around the diversity of boards, including disclosing not only a board member’s gender and age, but also their ethnicity, skills, and experience. Until such transparency of board composition metrics becomes the norm, the full story of corporate board diversity and the valuable insights it provides to investors will remain obscured.


Lisa Roberts is a vice president in Nasdaq’s Legal and Regulatory Group, where she co-leads the Listing Qualifications department and advises on governance matters for our issuer community. She also manages our Governance Clearinghouse website, which includes original articles on a variety of topics relevant to public companies, such as market structure, corporate sustainability, boardroom diversity, legislative advocacy, cybersecurity, and risk management. This site is available to all public companies and their advisors free of charge.  

This communication and the content found by following any link herein are being provided to you by Nasdaq, Inc. for informational purposes only. The views and opinions expressed herein are the views and opinions of the author at the time of publication and may not be updated. They do not necessarily reflect those of Nasdaq, Inc. The content does not attempt to examine all the facts and circumstances which may be relevant to any particular situation and nothing contained herein should be construed as legal advice.   

Top 10 Most-Read Publications in 2016

Building the Strategic-Asset BoardThe National Association of Corporate Directors (NACD) counts nearly 17,000 directors and governance professionals among its members, and we’re proud to say that they are engaging in constant and committed learning in the spirit of doing the best for their companies.

We hear these questions over and over again from our directors: “What do my peers care about right now?” “What’s the next big issue for directors?” I think that you can tell a lot about what someone values by what they read, so it’s always fascinating to take a look at the reading trends of our membership. Their choices in 2016 reflect commitment to evergreen topics (director compensation, governance benchmarking, and finding a new board seat) and investment in understanding ever-evolving, of-the-moment risks and board-specific concerns (cybersecurity, ethics and compliance oversight, M&A, and strategy).

Below are the top 10 most-read NACD reports, surveys, and papers from 2016. If you haven’t picked up these resources yet, now is the time.

  1. 2015-2016 Director Compensation Report – NACD and compensation consultancy Pearl Meyer’s perennially popular survey on director pay helps boards benchmark their pay by analyzing how the subtleties of committee participation and the changing governance landscape impact pay structures.
  1. Executive Summary of the Report of the NACD Blue Ribbon Commission on Building the Strategic-Asset Board – We released in September our latest Blue Ribbon Commission Report, our marquee publication on next practices for boards. This complimentary executive summary gives a quick look at some of the key findings in the broader, member-exclusive report (see list item 8).
  1. Director FAQ: Finding Your Next Board Seat – It’s all in the title—this piece provides some action steps for success if you’re looking to land a new board seat.
  1. Executive Summary of the Director Essentials: Strengthening Oversight of M&A – Our off-the-charts popular Director Essentials series offers step-by-step guidance to new directors on key issues that they encounter in the boardroom. This executive summary of our piece on M&A oversight is open both to members and visiting guests to our website.
  1. Director Essentials: Strengthening Compliance and Ethics Oversight – This was the first Director Essentials report we released, and an especially timely one given the situations that emerged in 2016 at Volkswagen AG, Wells Fargo & Co., and others.
  1. Executive Summary of the 2016-2017 Public Company Governance Survey – NACD releases a survey yearly of public company directors, and this complimentary executive summary spotlights a few of the top-level findings, including the most pressing issues on directors’ minds for 2017.
  1. Cyber-Risk Oversight Handbook – According to our annual survey of public company directors (mentioned above), 29 percent of directors believe that cybersecurity expertise needs to be strengthened on their boards to conduct sound oversight. Our handbook has never been more relevant, and bonus: it has a stamp of approval from the Department of Homeland Security.
  1. Report of the NACD Blue Ribbon Commission on Building the Strategic-Asset Board – The world in which boards operate is facing unprecedented change. This year’s commission offered some best practices for succession planning, recruitment, and continuous improvement that will empower boards to meet that change head on.
  1. Director Essentials: Preparing the Board for Shareholder Activism – Year-round shareholder activism is the new norm. This guide aims to help directors prepare a response plan and evaluate their vulnerabilities to activist challenges.
  1. Governance Challenges 2016: M&A Oversight – There was a clear member focus on M&A this year, and this piece united the perspectives of several of our content partners to offer the most recent thinking on director oversight of that topic.

Looking for more publications to strengthen your board’s work this year? Visit our topic-specific board resource centers