Experts to Directors: Innovation, Culture Change Starts With You

There is a buzz in the air about renovating corporate culture in the name of innovation. Directors hear the changing desires of their stakeholders, and are developing a greater understanding of their business’s role for society at large. That buzz guided a recent roundtable discussion in Miami at NACD’s Leading Minds of Governance event.

A panel of governance experts and directors discussed recent trends in corporate governance with a full room of directors (fuller remarks from the panel will follow in the March/April 2018 issue of NACD Directorship magazine). Panelists included:

  • John Borneman, managing director, Semler Brossy Consulting Group LLC
  • Stuart R. Levine, nominating and governance committee chair and audit committee member, Broadridge Financial Solutions
  • Kathleen Misunas, director, Boingo Wireless and Tech Data Corp.; principal, Essential Ideas
  • Michael Stevenson, partner, BDO USA LLP
  • Peter P. Tomczak, partner, Baker McKenzie LLP

Highlights from their answers to select questions from directors in the audience follow. Comments have been edited for length.

To Build an Innovative Culture, Start with Hiring

I work in a heavily regulated industry. We’re in a very steady environment, but our industry is changing rapidly in all directions. Helping shift that culture is essential, so I’d love to hear your differing perspectives.

Misunas: I think it starts with the people you hire—and you need the buy-in from your senior staff. The people that are hired help you move in the right direction.

Levine: One of the criteria for hiring should be intellectual curiosity. If you’re hiring people at any level, including on the board, if those people do not express intellectual curiosity, I think you’ve got a problem on your hands. In the boardroom, consider sharing content that stimulates discussions around technology or governance trends.  By discussing strategic material, it encourages excellent outcomes.

Misunas: Right. This absolutely should cascade down through the organization. The C-suite alone shouldn’t be concerned with curiosity. The next level should be doing the same thing with their staff, and so on.

Tomczak: When you consider innovation strategy, what does innovation mean to your board? Do you mean bringing in new ideas from outside your industry? If you’re hiring the same 20-year industry veterans, you’re probably going to get the same 20-year-old strategy. I’ve also found that tying individual economic incentives to strategy outcomes is useful, and it’s hard. There’s no right answer to the compensation question and innovation.

Borneman: I’ll add that innovation should be on the CEO’s scorecard. Is it one of the top priorities that you want to hold her accountable to for the organization? You can say it’s important, but if it’s not on the scorecard, you’re merely talking about innovation. There’s no accountability. It doesn’t have to be tied to compensation—to put dollars on it gets tough. But we can find innovation measures in some kind of meaningful, quantifiable way.

Stevenson: I think that when some boards assess themselves, when they probe their expertise, they find that because of the complexity of transactions (for example, in financial instruments and other changes associated with this current business environment), audit committees are finding themselves ill-equipped to handle changes happening in their organizations. As you take a fresh look at your board, understand the other situations that they have been involved with will arm them for change. That’s a critical point to know about members of this committee. Boards that are refreshing [their composition] with this understanding are also the easiest to work with from an audit perspective.

Don’t Miss the ESG Bus

How do we translate ESG into something with real business meaning that management can be held accountable for to deliver results?

Levine: Approaching the governance standpoint, regardless of the business you’re in, we’re all trying to anticipate client and customer needs. If you don’t have people of diverse backgrounds on your board, you risk not understanding the people who are buying your products and services. If you’re looking to deploy capital, and you look around and don’t have representatives on your board of the populations you’re serving, I don’t know how you develop the right strategy.

Misunas: I don’t walk into a business anymore where this is not a topic of conversation. Boards and executives are peeling back the onion to see where their companies stand, and where they should be, on environmental issues. ESG is top of mind for millennials. They speak up about real environmental issues. As a result, companies can look at their distribution lines, for instance. What are our transportation means? What are those contracted companies doing to protect the environment? Could we switch out business partners for a company that is more responsive to these issues?

If there’s no penalty for not doing anything, you’re omitting ESG from culture. I’m not saying you should give an extra reward for doing something, but should there not be some penalty other than getting left off the bus?

Borneman: The penalty is the impact on your business, your employee population, and getting kicked off the bus. It’s not about your bonus. It’s not about compensation. It’s about a longer perspective on business.

Looking to read more expert insights? Read the current issue of NACD Directorship magazine.

Dan Haneman Nominated for HR Consultant of the Year

Career Partners International Congratulates Dan Haneman on His Nomination as HR Consultant of the Year

Human Resources is a Profession that has layers and layers of satisfaction resulting from assisting people with their career aspirations.

As Vice President, Client Relations, Dan is principally responsible for building and managing business relationships with clients throughout PA, DE and NJ.  Since joining CCI Consulting, a Career Partners International firm (CPI), in 1994, Dan has developed a strong reputation with his clients for delivering high quality programs and services and is widely recognized as a prominent member of the HR and business community in the tri-state region.

Nomination for the prestigious award is in recognition of outstanding achievement within the local human resources community.  Each year awards are given in the following categories:

  • HR Person of the Year (small, medium & large organizations)
  • HR Consultant of the Year
  • HR Rising Star of the Year

“Dan personifies the Career Partners International mantra of providing extraordinary consultative service and support, and he does so in multiple HR disciplines for clients throughout the world,” stated Sharon Imperiale, Chairperson Emeritus of CPI’s Board of Directors and President of CCI Consulting, “As a valued and trusted partner to so many throughout his career, he consistently delivers “best-in-class” strategy and insight.”

Career Partners International is also proud of Haneman’s commitment to working with students as they graduate from college and are faced with their next stage of life. Facilitating career workshops, critiquing “elevator pitches,” and extending his talents as an experienced and knowledgeable coach is what makes students gravitate in Haneman’s direction. There are also nonprofit organizations with whom Haneman has made a great impact, organizations such as the Greater Valley Forge Human Resource Association, which has invited Haneman to facilitate roundtable discussions impacting policy and other initiatives.

This recognition is well deserved and Career Partners International is so pleased that he is a distinquished member of our global organization.

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Anthony Davadoss: The Rise of the Wise

Career Partners International’s (CPI) Anthony Devadoss, in The Rise of the Wise, develops several statistically relevant, and persuasive points about the senior workforce, primarily in the Asia-Pacific region, and also in the United States, Australia and Europe. Devadoss is a member of the Board of Managers at CPI and is also Managing Director & Regional Business Head of PERSOLKELLY Consulting, a Career Partners International firm in Kuala Lumpur, Malaysia.

“The global population is projected to increase 3.7 times from 1950 to 2050. The number of people over the age of 60 will by a factor of nearly 10 and those over the age of 80 by a factor of 26. The skills and knowledge that older people have acquired through their careers are going to waste as they leave the workplace….To maintain high productivity, businesses will need to make their workplaces ‘age friendly,’” as stated by Devadoss.

These are points to be well taken. Research shows that cognitive functioning slows as people age, however consider that older people have much more information stored in their brains than younger ones, so retrieving information may naturally take longer. The information that seniors have stored is also more developed from layers upon layers of complex experiences, hence, they are valuable resources.

Doug Matthews, Career Partners International’s CEO, explains “The ageing crisis is forcing organizations to address their talent supply chains to retain retiring workers and prevent a potentially huge loss of knowledge from the workplace. This has led to a whole range of government policies and innovative retention strategies.”

In addition to outlining senior workforce challenges, Devadoss also provides several potential solutions – “win-wins” for companies and their valued senior resources. The Devadoss white paper, “The Rise of the Wise” can be found by clicking on the following link: The Rise of the Wise

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Three Tools for Overseeing Corporate Culture

Andrea Bonime-Blanc

Now is the time for boards to take culture risk seriously and begin to find ways to understand it in advance of a toxic culture truly damaging an organization. The recent examples of bankruptcy at The Weinstein Company and the rapid loss of $2 billion in market cap at Wynn Resorts only serve to underscore the close connection between leadership and culture and toxic leadership and toxic culture with reverberations and repercussions not only on shareholders but stakeholders of all types.

In this second part of this blog series addressing culture oversight, I suggest three practical tools for boards to exercise proactive oversight on culture issues to enhance discussions that may already be in process. Embedded in these tools are the top ten questions the board should ask management about culture, as well as some of the key dashboard metrics a board should consider getting.

Tool One: Arming the Board With the Right Information From the Right Members of the Management Team

Your chief ethics and compliance officer (CECO) and another executive (perhaps the chief learning, human resources or talent officer) are all good resources to report to the board from time to time and regularly on issues of culture. Indeed, an empowered CECO may be the best bet as she should be reporting to the board (or a committee thereof) on a quarterly basis anyway. His or her dashboard of ethics and compliance metrics should also include some of the key culture metrics described in tool two, below.

Moreover, the board or appropriate committee (audit, risk, compliance, regulatory affairs) should have regular executive sessions with the CECO and perhaps develop more informal methods of regular communication such as a phone call check-in between the CECO and the chair of the audit committee, for example, something I have done in my executive career and to great benefit of the organization.

When a company of a certain size, maturity, and complexity does not have an executive of the appropriate stature taking care of culture issues, it may indicate that the CEO doesn’t think culture is that important. Moreover, if there is an executive who should be thinking about culture issues proactively but is not or is not allowed the ability and resources to do this (for example, budget for a culture survey), that presents another potentially serious culture red flag. Last, other red flags may emerge when senior executives are not able to provide the arguably correct answers to the top ten culture questions the board should ask (listed below).

The Top Ten Culture Questions the Board Should Ask:

  1. For the CEO: What does culture mean to you, and what is the importance of culture to you personally as the leader of the company? How would you, as the CEO, characterize the culture of the organization? Is it healthy, improving, ailing, or under serious stress?
  2. Does the company have an explicit culture program in place and, if so, what does it consist of? Is it intertwined and integrated with the company’s mission, vision, values, and strategy?
  3. If there is no current culture program in place, what is management’s plan to deploy one? What is the plan’s timing, budget, leadership, and details?
  4. How do you measure culture at the company?
  5. How do you keep management at the highest and middle levels accountable on culture issues?
  6. Is there a member of senior management or the c-suite with an explicit remit to manage corporate culture?
  7. Does the company’s performance management program and incentive structure incorporate cultural considerations and metrics? If so, how? If not, what is the plan to incorporate such considerations?
  8. What are the top culture issues at the company today (good, bad, or ugly)?
  9. When there are difficult culture issues (the bad and ugly kind), how does management handle them?
  10. Is management aware of investor, employee, customer, and other stakeholder concerns or perspectives regarding corporate culture? Has there been any stakeholder reach-out on this issue?

Tool Two: The Customized Culture Dashboard

The company’s board should be reviewing a customized dashboard that is updated regularly. Such a dashboard should be unique to each organization but should include many of the following qualitative and quantitative considerations and metrics.

  • Ethics and Compliance (E&C) Metrics
    • E&C risk assessments – key data, key topics
    • Helpline or hotline trends and key issues
    • Training and communications trends and topics
    • Pulse surveys on ethics and compliance program
    • Investigations – type, process, and outcome
    • Periodic internal and external evaluations of the effectiveness of the E&C program
  • Employee and Culture Survey Metrics
    • Culture climate metrics geared at workplace issues including supervisory relationships
    • E&C program benchmarking against peers
  • Human Resources Data
    • Intake interviews
    • Exit interviews
    • Performance management results (with financial and non-financial metrics, as well as environmental, social, and governance metrics, included)
    • 360 leadership assessments or the like

Tool Three: Benchmark Your Company’s Culture and be Prepared to Intervene

Understand where your organization fits in the spectrum of workplace culture. An example of useful benchmarking may involve using the Ethics Research Center’s Global Business Ethics Survey. Get a culture survey done. Slice and dice it, and work to understand its results. Ask management about the culture climate, the temperature and how it is reflected at different divisions, business units, and more. Do your company’s culture surveys have consequences or are they merely window dressing? If the latter, why do them? If the former, what are the actual concrete consequences? Do “golden boys/girls” who are abusive get counseled, disciplined, or terminated when infractions occur? Or are they ignored or merely slapped on the wrist for things that get others fired?

If and when a culture issue threatens to suffuse the wellbeing of an organization and its leadership, the board must be prepared to intervene in a crisis—before or after it unfolds. The board’s keeping its finger on the cultural pulse and temperature of the company is vitally important to the long-term viability and sustainable profitability of a company.

With Gloom Also Comes the Promise of Light

With all the doom and gloom that toxic workplace culture issues raise, I would also underscore a hopeful note to boards and executives struggling to deal with the organizational cultural issues so clearly brought to the fore in 2017. Unlike the regulatory responses to the excesses of 2002 (Sarbanes Oxley) and 2008 (Dodd-Frank), I would suggest that the appropriate response to cultural issues that are emerging is not new regulation but self-regulation, a voluntary upping of the corporate cultural ante by elevating the importance of ethics, compliance, and risk management within organizations, powered and driven by a strong culture of accountability and “walk the talk” from the top. This entails a voluntary, value-creation mindset at the executive and governance levels of an organization that aligns a strong and resilient culture with sustainable profitability and that likewise recognizes that a toxic culture will in the short and long run lead to value and reputational erosion and possibly destruction.

Thankfully, there are positive tales to be inspired by. A case in point: Microsoft Corp. Under its relatively new CEO, Satya Nadella, who recently wrote a book on the company’s culture, has instigated culture change there that by all accounts has had dramatic and beneficial impacts on all stakeholders, internally (employees) and externally (customers) alike. Nadella’s moves have also benefitted shareholders. When he became CEO in 2014, the share price was around $35; today, Microsoft’s share price is at $92.

With all the negative news, 2018 represents a rare opportunity for management and boards to understand, acknowledge, and tackle workplace cultural issues head on and in a more systematic and conscientious way. Culture is the fabric of an organization and that fabric can either be healthy and sustainable, able to contribute to the development of resilience and creation of value, or brittle, weak, and toxic, leading to financial and reputational vulnerability, value erosion, or even ruin. It is the direct responsibility of leaders—both management and board—to make the right choices on workplace culture.

Dr. Andrea Bonime-Blanc is founder and CEO of GEC Risk Advisory, a strategic governance, risk and ethics advisor, board member, and former senior executive at Bertelsmann, Verint, and PSEG. She is author of numerous books including The Reputation Risk Handbook (2014) and co-author of The Artificial Intelligence Imperative (April 2018). She serves as Independent Ethics Advisor to the Financial Oversight and Management Board for Puerto Rico, start-up mentor at Plug & Play Tech Center, life member at the Council on Foreign Relations and is faculty at the NACD, NYU, IEB and Glasgow Caledonian University. She tweets as @GlobalEthicist. All thoughts shared here are her own. This blog series borrows in part from her forthcoming book with Routledge/Greenleaf (2019), Gloom to Boom: How Leaders Transform Risk into Resilience and Value.

Why Your Board Needs to Prioritize Its Discussion of Technology Disruption

Erin Essenmacher

Our mission at the National Association of Corporate Directors (NACD) includes continuous learning for directors. In pursuit of that mission our staff also seek out the most exciting events across the country to learn more about the disruptions that will impact members’ boards. I caught up with Erin Essenmacher, NACD’s chief programming officer, after her appearance at SXSW to discuss takeaways from the conference and how corporate directors can continue the conversation on technology disruption.

Erin moderated a panel, in partnership with KITE, entitled “Innovation: the Board Director’s Cut,” featuring leadership representatives from Spredfast, OurOffice, and Capital Expert Services. The panel discussed the strategies directors should take in order to best manage technology disruptions at their companies. Highlights from our conversation follow.

Katie Swafford: What led your panel to discuss technology disruption? What do you see at NACD—or among NACD’s members—that surfaced this particular topic for the panel?

Erin Essenmacher: Across the spectrum of industries, companies are being disrupted because they are not focused on how new technologies, paired with shifting trends, are completely changing business models. My first major takeaway from the panel was the need to focus on disruption. I don’t even like to say technology disruption, because I think that makes the issue sound too small and prescribed, which it is not. While technology is a big driver of disruption, so are issues like social and demographic shifts and other market-shaping forces as they intersect with technology. Disruption is a huge challenge to navigate for boards at companies of all sizes. We are reaching the point where the swift changes are blurring the lines between industries, and directors should be raising questions with managers about what is on the horizon for their companies, and if their companies are thinking sufficiently about the big picture and the nature and impact of those changes.

In terms of the discussion here at SXSW, the panel was really focused a lot more on flipping the script. A lot of the folks in the audience were on the boards of early-stage companies, and the panel really looked at how boards can add value to companies of all sizes. The panelists brought many perspectives—some are involved on the inside of early-stage companies, some are making investments in start-ups, and they all serve as directors at companies of various sizes, so it was a really interesting discussion.

Swafford: Are there specific skills gaps that NACD has seen when it comes to handling technology disruption or innovation?

Essenmacher: I would say the biggest skill gap is very low tech, but critically important: a sense of curiosity and a willingness to be a continuous learner. When you get to the top of your career and you’re on a board, you’re extremely seasoned and experienced. You’re an expert in many things that relate to the company business model or to the industry you serve, and it’s easy for that expertise to make you complacent. When you have a business environment like ours where things are changing so quickly, I think the most successful boards are the ones that acknowledge that disruption is happening. Most importantly, they acknowledge that because the environment is new, they will not have all of the answers. They are willing to get serious about what’s happening, they are willing to get curious about the gaps in their own knowledge, and they are willing to challenge the management team to evaluate the existing assumptions and expectations of the company culture and business model.

Swafford: Is there an ideal board composition that’s best able to navigate disruption? Is there a leading practice when it comes to board composition?

Essenmacher: I wouldn’t say that there’s an ideal board composition, because every company is different. Composition is going to vary widely depending on industry, company size, and many other factors. An overarching leading practice is to continually consider the board’s composition compared to your long-term strategy as a company. It’s not just about bringing in people that have the latest and greatest technology expertise. There is a critical role on any board for business judgment and experience. We need all of that in our boards. Once you start to dig into how you can think differently about your business model in the face of disruption, you can start to think differently about your board composition. It’s also not just about defaulting to a former CEO or CFO. Boards need to think critically about how diversity of experience, perspective, and expertise can help elevate their strategic discussions to map to where consumers and the market are headed.

Swafford: Where do you foresee some of the topics that came up in the panel flowing over into the Global Board Leaders’ Summit? I would think diversity, board composition, and growth, among other topics, will really flow into the conversations you will be having at Summit.

Essenmacher: We need to challenge ourselves to learn about new trends from the ground-level up. Our panel here at SXSW discussed topics that are important for board members to engage in, so how can we extend this conversation? At the NACD 2018 Global Board Leaders’ Summit we will be hosting the third annual “Dancing with the Start-ups” pitch competition. This event allows us, as board members, to hear what the leaders of start-ups are creating from the ground level—how they are using technology, how they are leveraging or setting trends, and how their ingenuity is disrupting the industry of the company on whose board you might serve. Yes, it’s a fun format and very exciting, but there is also a lot of great content. I think of it as a “meet the disruptors” session. It’s really an opportunity for directors to see the earliest stages of the next iteration of products, services, and trends that are disrupting their industry.

Our Summit theme this year is transformation. The theme provides a wonderful opportunity to keep engaging in this conversation on disruption, but to also look at disruption through a proactive lens. How can we take what we know about the shifting business landscape and leverage it for strategic advantage? On the risk side, we will learn from people who are experts on the important issues of technology and privacy, enabling us to delve into what those issues mean for public trust. We will discuss how new regulations are shifting what disruption means, including the European Union’s General Data Protection Regulation (GDPR). I believe this shift in how companies market their products and how business models are changing is creating an opportunity for large and small companies to learn from each other.

There will be a lot of opportunity to discuss disruption at the 2018 Global Board Leaders’ Summit happening September 29 through October 2 in Washington, DC. Don’t miss out on our early bird pricing through March 31 to save on registration.

What Every Corporate Director Should Know About the New Tax Law-Part 2

George M. Gerachis

This article is the second half of the discussion of the sweeping ramifications of The Tax Cuts and Jobs Act of 2017 (“Tax Act”). Part one discussed the transition tax on deemed repatriation of foreign earnings, the reduction in the corporate tax rate from 35 percent to 21 percent, the changes in the taxation of the international operations of U.S. companies, and changes to interest and depreciation deductions.

In this article, we address provisions of the Tax Act that potentially accelerate tax liabilities, repeal the performance-based exception to the limits on compensation deductions for certain corporations, change the treatment of net operating losses, and cut back the favorable tax treatment of research and development expenses.

David C. Cole

1. Potential Acceleration of Tax Liabilities. Before the Tax Act became law, the requirements for the recognition of taxable income were independent from those for financial reporting—or so-called “book” purposes. In fact, certain types of income could be recognized for tax purposes later than the period in which they were recognized as revenue for book purposes.  The Tax Act narrows these taxable income deferral opportunities by accelerating the recognition of certain taxable income to more closely match financial reporting.

This new rule is of particular concern in light of the new accounting rules under the Financial Accounting Standards Board’s  Accounting Standards Codification (ASC) Topic 606.  Under those accounting rules, expected revenue must generally be recognized as goods or services are provided to customers. Thus, unbilled receivables for partially performed services might be recognized for book purposes—and now for tax purposes, too—ratably as the services are performed, rather than when the services are complete or when the taxpayer has the right to demand payment from the customer.  Similarly, items such as performance bonuses might be recognized for book purposes—and  now for tax purposes—over the life of the contract, rather than when the standards for receiving the bonus have actually been met.

David C. D’Alessandro

The new tax rules may also affect taxpayers whose contracts with customers contain multiple-element deliverables (e.g., software sales agreements that include a license, updates, and support services, or sales of goods that include a warranty), because the rules now require that the allocation of payments among these deliverables be the same for tax and financial reporting purposes.

What Directors Should Do.  This potential acceleration of the recognition of taxable income could have significant cash flow consequences for certain businesses. Directors, and in particular audit committee members, should ensure that the company’s treasury and tax departments have coordinated and evaluated the potential acceleration of tax liabilities as a result of the combined effect of the Tax Act changes and ASC 606.  Depending on the extent of any accelerated tax liabilities, it may be necessary for a company to consider potential liquidity sources to meet its 2018 tax obligations.

2. Repeal of Performance-Based Exception to Limits on Compensation Deductions. Public companies may not deduct compensation paid to certain executives in excess of $1 million.   Previously, there was an exception to this rule for performance-based compensation that met certain requirements. However, the Tax Act removed the performance-based exception effective for tax years beginning after December 31, 2017. As a result, a public company will generally not be able to deduct compensation in excess of $1 million paid to its chief executive officer, chief financial officer, or its three other most highly-compensated officers. The Tax Act provides some relief through a transition rule, which preserves the deduction for performance-based compensation that is paid pursuant to a written binding contract that was in effect on and not materially modified after November 2, 2017 (the “Transition Rule”).

What Directors Should Do. In light of the removal of the tax incentives for granting performance-based compensation to certain executives, companies may be interested in revising their performance-based compensation programs by, for example, shifting a greater percentage of a covered executive’s compensation to guaranteed salary. However, the terms of some equity and cash incentive plans nevertheless require performance-based compensation to comply with the now-repealed requirements for deductibility, which would limit the changes that could be made to programs without amending the plans. As such, before changes are made to a company’s compensation programs, directors should ensure that the terms of the applicable plans are reviewed to determine if amendments to the plans are necessary to accommodate such changes to the compensation programs.

Additionally, some large institutional investors and proxy solicitation firms have indicated that they expect companies to continue with their existing compensation programs that condition awards on the achievement of rigorous, transparent, pre-established performance goals. Directors should also consider how changes to a company’s performance-based compensation programs will be viewed by the company’s shareholders.

Finally, it will be important for companies with outstanding long-term, performance-based awards to preserve the deductibility of those awards pursuant to the Transition Rule. As such, companies should determine whether performance-based compensation arrangements that were in effect on November 2, 2017 qualify as grandfathered under the Transition Rule and, if so, consider the implications of any potential modifications to such plans.

3. Changes to the Treatment of Net Operating Losses. The Tax Act makes significant changes to the utilization of net operating losses (“NOLs”). Previously, NOLs could generally be carried back to a taxpayer’s prior two tax years and carried forward for 20 years. Extended carryback periods applied to certain product liability-type losses and casualty and disaster losses. Also, under prior law, the corporate alternate minimum tax precluded corporations from completely eliminating their tax liability through NOL deductions. Instead, the alternative minimum tax (AMT) imposed an effective 2 percent tax rate on a corporation that otherwise would owe no tax because of NOLs.

Under the Tax Act, corporations (other than certain farmers and property and casualty insurers) cannot carry back NOLs arising in tax years beginning on or after January 1, 2018.  Those losses are no longer a means to generate cash refunds of previously paid taxes.  Also, a corporation may not eliminate more than 80 percent of its taxable income (determined without regard to the NOL deduction) for a given year. Thus, although the corporate AMT was repealed under the Tax Act, this limitation effectively results in a minimum tax of 4.2 percent on a corporation suffering losses (more than doubling the previous effective rate). On the positive side, NOLs now can be carried forward indefinitely instead of only 20 years.

What Directors Should Do. The changes to NOLs are particularly troublesome for early stage companies, corporations in cyclical businesses, and companies that suffer product liability-type and substantial casualty or disaster losses.  Losing the ability to carry back NOLs to generate tax refunds and the ability eliminate all taxable income with NOL deductions will negatively affect cash flow. Because of these changes, corporations should attempt to better match their income and deductions annually to reduce the extent of the NOLs they generate.

Directors of companies that incur NOLs should ensure that their tax departments are sensitive to this issue and are considering ways to better match income and deductions. For example, in years that appear likely to generate a net operating loss, opportunities to trigger or accelerate taxable income should be considered.  Also, the new 100 percent deduction for the acquisition of tangible assets (discussed in Part I of this article) is not mandatory. Accordingly, consideration should be given to electing out of that “immediate expensing” if doing so avoids creating NOLs.

4. Cutbacks to the Favorable Treatment of Research and Development (R&D) Expenses. The tax laws have long provided favorable treatment for certain R&D expenses in order to encourage U.S. companies to invest in research. These include a current deduction for such expenses and a tax credit based on specified increases in the level of certain R&D spending. Under the Tax Act, however, the favorable treatment of R&D expenses is scheduled to be reduced in future years.

First, beginning in 2022, corporations may no longer currently deduct R&D expenses. Instead, those expenses must be capitalized and amortized over 5 years (in the case of U.S. research) and 15 years (in the case of non-U.S. research). Also, the Tax Act created a new Base Erosion and Anti-Abuse Tax (BEAT) that applies to larger U.S. corporations that make certain payments to non-U.S. affiliates. Beginning in 2026, the amount of tax a U.S. corporation would owe under the BEAT will no longer reduced by its R&D credit—potentially resulting in a significant decrease in the value of such credit.

What Directors Should Do. Given the future effective date of the R&D changes, companies may wish to consider lobbying Congress to repeal the Tax Act changes before they become effective. In addition, the numerous changes to the taxation of international operations discussed in Part I of this article should be considered as part of any restructuring or expansion decisions. In the case of locating or expanding R&D centers, the pending changes reducing the tax benefits of U.S. R&D expenses should be included in that analysis.

George M. Gerachis serves as head of Vinson & Elkins’ Tax and Executive Compensation and Benefits (ECB) department. He represents corporate and individual clients in a wide range of tax planning and tax controversy matters. David C. Cole is a tax partner at Vinson & Elkins and represents corporations, partnerships, and high net worth individuals in a wide range of domestic and international tax matters. David C. D’Alessandro is an executive compensation and benefits partner at Vinson & Elkins and advises employers and executives in the structuring of employment agreements and executive compensation arrangements.

Lynne Hardman Promotes: Embedding a Coaching Culture

Today’s world of work is constantly changing. Operating within an environment of continuous and rapid change is the ‘norm’ for many organisations in 2018. Alongside this, more is being demanded of individual employees and flatter or continuously evolving structures are making career development opportunities more diverse and sometimes difficult to identify. To ensure success, leaders must ensure that their people are fully engaged and feel aligned to the business strategy.

Many companies invest in coaching programmes to develop leaders but the most forward thinking organisations recognise the value in offering coaching support more broadly throughout the workforce and in a range of situations. A strong culture of support for personal development, engendered by high quality coaching, helps to attract, engage and retain business critical talent.

Ensuring that organisational strategic priorities are understood at all levels of a workforce, and that behaviour and attitudes are aligned to ensure achievement of these goals, requires effective communication and collaboration between employer and employee. Leaders with well-developed coaching skills are most likely to achieve the required outcomes and those employees who have themselves benefitted from coaching are more likely to demonstrate the behaviours required for success. Although it can take time to invest in, build and embed this coaching culture, the increase in trust and commercial benefits to the organisation can be dramatic and long-lasting

Viewing coaching as an essential skill, required from all people managers across the organisation, is a good place to start. The ability to deliver tangible results from teams via effective coaching skills is something that can be measured and recognised. Developing these skills in people managers begins the process of embedding skills in the next generation.

However, the recent report ‘Good Work: The Taylor Review of Modern Working Practices’ found that only half of employees feel that their manager is good at seeking their views, something that a competent coaching style can avoid.

In our view, there are two common attributes of successful organisations. Firstly, business objectives and individual goals are closely aligned. Secondly, teams work together successfully to achieve common goals with these goals being well communicated, easily understood and embedded throughout the organisation at all levels.

However, for most organisations, achieving high levels of engagement needs focus. There is a wealth of evidence that suggests that, with the right coaching support, individuals can overcome many barriers – whether cognitive, behavioural, performance, attitudinal or career-goal related. This ensures that people both engage and align with their organisation’s objectives, as well as achieve their business and individual goals as part of an effective team.

To retain talent and maintain a competitive edge, companies should focus attention on building engagement, loyalty and job satisfaction. Organisations whose managers are effective coaches are the role models that create a coaching culture which ultimately creates a positive and productive environment for the entire workforce. A study conducted by Harvard Business School aligns with the Taylor Report and shows that the main motivator of employees is NOT reward and recognition, but progress. This sense of progress and development can be significantly enhanced by regular career coaching conversations between employee and employer within a companywide supportive coaching culture.

This article was featured on HR Grapevine Magazine.

This article was found on HR Grapevine.

The post Lynne Hardman Promotes: Embedding a Coaching Culture appeared first on CPIWorld.

Cyber Insecurity: Why We Keep Learning

Peter Gleason

Peter R. Gleason

Late last month, the US Securities and Exchange Commission (SEC) approved nonbinding guidance urging public companies to “inform investors about material cybersecurity risks and incidents in a timely fashion.” The guidance, which gives greater urgency to current cybersecurity risks, builds on an earlier document issued in 2011. In the SEC’s words, “Cybersecurity risks pose grave threats to investors, our capital markets, and our country.” A recent report from the Office of the Director of National Intelligence predicts that the world faces “imminent disruption” from cyber threats—potentially on a massive scale with “lethal” consequences.

Meanwhile, not surprisingly, Congress continues to take action on cyber risk, proposing 191 bills so far on the topic.

The imperative for boardrooms to conduct sound cyber-risk oversight is here to stay—in the boardroom and in the halls of legislation. Luckily, resources abound for corporate directors to get up to speed on what their companies need to know and disclose while awaiting regulations and rulemaking about cyber-risk oversight.

Ubiquity of Cyber Risk

The ubiquity of cyber risk poses a fundamental operating problem for all enterprises. Most businesses today depend on digital technologies to operate, which leaves sensitive data and other assets vulnerable to cyber risk. The new Berkshire Hathaway 2017 annual report puts it well. After listing cyber threats in great detail, the report notes that “These are risks we share with all businesses.” Hacking, phishing, malware, viruses—you name it, it’s happening for all of us. Such events can present a material, existential threat to corporations, and possibly could even physically harm the people who work for them or that they serve. That is why Berkshire’s founder and leader Warren E. Buffett has stated famously that cyberattacks are the “number one problem with mankind.”

Directors on Alert

Corporate directors by and large are keenly aware of their companies’ responsibilities around cyber-risk oversight. NACD’s 2017 survey of 660 US public company boards’ members indicated that only 37 percent of directors feel “confident” or “very confident” that their company is properly secured against a cyberattack. This result, which demonstrated lower confidence in a company’s preparation for a cybersecurity incident than in 15 other risk areas, is down from 49 percent the previous year.

Does this mean that companies are less prepared? I read things differently. It means that directors are less complacent.

More directors may be realizing that cybersecurity incidents are inevitable. Directors also are learning more about the topic, with 85 percent of boards reporting at least some knowledge of the topic, up from 78 percent two years before. (In 2015, 22 percent of directors reported that their boards had no or very little knowledge of cyber risk. That dropped in 2017 to 15 percent.)

If you’re feeling either behind or a little foggy on your understanding of these risks, you might consider brushing up with these resources:

  • Hundreds of directors have enhanced their cybersecurity literacy through the NACD Cyber-Risk Oversight Program, offered in partnership with Ridge Global and Carnegie Mellon University’s CERT Division of the Software Engineering Institute. More than 175 corporate directors and senior executives have completed the course, the world’s first and only program of its type, while an additional 135 now enrolled in the program are progressing to complete the CERT Certificate in Cybersecurity Oversight.
  • NACD offers the Director’s Handbook on Cyber-Risk Oversight, published jointly with the Internet Security Alliance (ISA) and available to all regardless of NACD membership status. The handbook is the most downloaded publication in NACD history, and the only private-sector publication that has been endorsed by the Department of Homeland Security and the Department of Justice, as well as a wide variety of private-sector organizations such as the US Chamber of Commerce and the International Auditors Association.
  • ISA and NACD also jointly produce summits on cybersecurity exclusively for corporate boards, where recognized experts and seasoned directors share best practices. As an outgrowth of this initiative, NACD and ISA will cohost our first international dialogue, the Global Cyber Forum, in Geneva, Switzerland, in April 2018.
  • Cyber-risk oversight is one of the most popular subjects for directors and advisors writing for NACD’s Board Leaders’ Blog. As you visit this blog you will see I am not the only one writing on the topic. (See, for example, blogs by Corey Thomas, CEO of Rapid7, on the risks of innovation; and Jim DeLoach, managing director of Protiviti, reporting on what was discussed during a director dialogue about cyber-risk oversight.)
  • The NACD Resource Center on Cyber-Risk Oversight is a repository of tools and thought leadership that empowers the board to provide effective oversight.

Big Picture

In all these venues, NACD’s resources on cyber-risk oversight keep driving home several key challenges:

  • Cyber risk is a global challenge that now threatens to undermine governments, markets, and businesses around the globe. Most cyberattacks are cross-border.
  • Cyber risk is also systemic, given our reliance on digital networks and devices for commercial, government, and personal use.
  • For corporations, cyber risk is a strategic, enterprise-wide matter demanding active board engagement. Continuous learning is a must, even for specialists, given how quickly technology and threats are evolving.

Questions to Help You Learn About Your Company’s Security Posture

In closing, I’d like to share some applicable questions shared recently with our members in our Weekend Reader e-newsletter. For your next board meeting, consider asking some of these pointed questions to begin establishing a deeper understanding of cybersecurity across the enterprise.

  • Which cyber risks are communicated to our company’s shareholders, and in what format?
  • Has our management team determined what constitutes a material cybersecurity breach?
  • How effective is our internal escalation process when incidents are discovered?
  • Have we set clear thresholds for when senior management and the board should be notified?
  • How is our company’s cyber-risk assessment process integrated into the overall risk-management process?
  • Can material risks be mitigated by insurance, and does the corporation have sufficient coverage?
  • Does our company’s cyberbreach response plan include an investor communications strategy?
  • Under what circumstances is it necessary to inform law enforcement, customers, and other relevant stakeholders?

While corporate directors have some catching up to do, we’re a community of curious, dedicated professionals. Let’s commit to continuous learning and applying that knowledge to sound cyber-risk oversight. We owe it to our shareholders, our customers, and to the security of our economy.