Disability Inclusion: Is Your Board on Board?

The Israeli Defense Force (IDF) Special intelligence Unit
9900 is dedicated to everything related to geography, including mapping,
interpretation of aerial and satellite photographs, and space research. Within
this unit there is another, smaller unit of highly qualified soldiers who can
detect even the smallest details—the ones usually undetectable to most people.

These soldiers all have one thing in common; they are on the
autism spectrum. Their job is to take visual materials from satellite images
and sensors in the air. With the help of officers and decoding tools, they
analyze the images and find specific objects within the images that are
necessary to provide the best data to those planning missions. The IDF has also
found that soldiers with autism can focus for longer periods of time than their
neurotypical counterparts.

This story speaks to me personally. My son Trevor was diagnosed with autism at age five. The only thing I knew about autism at the time was Dustin Hoffman’s Rainman character. Raising a son on the spectrum drastically changed my point of view on disability inclusion, seeing strengths through the challenges, and cultivating those strengths while accommodating the challenges. He’s a grown man today, living on his own, working, paying his bills, saving money, and building relationships. His strengths outweigh his challenges.

The same reckoning with his strengths and challenges can
lead to success with overseeing how an organization thrives, but how do you begin
to ensure inclusion of disabled people’s strength in the workplace at scale
with at an organization level? It has to start at the board and C-suite

The Center for Disease Control and Prevention defines a disability as “any condition of the body or mind (impairment) that makes it more difficult for the person with the condition to do certain activities (activity limitation) and interact with the world around them (participation restrictions).” A disability can:

  • Be present at birth (i.e. down syndrome)
  • Become apparent during childhood (i.e. autism)
  • Be related to an injury (i.e. spinal cord
  • Be associated with a longstanding condition (i.e.
    diabetes), which can cause a disability (i.e. vision loss).

In 2018 Accenture published an outstanding research report entitled Getting to Equal: The Disability Inclusion Advantage. Some of the statistics in the report are eye-opening:

  • 29 percent of working-age Americans with
    disabilities participate in the workforce compared with 75 percent of Americans
    without a disability
  • There are 15.1 million Americans of working age
    living with a disability
  • If companies embraced disability inclusion, they
    would gain access to a new talent pool of 10.7 million people.

The Disability Equality Index (DEI) is a joint project
between the American Association of People with Disabilities and Disability:IN
(formerly known as the US Business Leadership Network). DEI’s primary goal is
to provide a benchmarking tool to help companies assess disability inclusion
policies and practices in six key areas:

  1. Culture and Leadership
  2. Enterprise-Wide Access
  3. Employment Practices
  4. Community Engagement
  5. Supplier Diversity
  6. Non-US Operations

Organizations complete a survey (DEI estimates between 30-40
hours to complete), send it into DEI, and receive an objective score on their
disability inclusion practices and opportunities for improvement. DEI puts
respondents achieving 80 percent or better on their website, with companies
like Accenture, Microsoft Corp., AT&T, The Walt Disney Co., Capital One
Financial Corp., and Boeing Co. achieving a score of 100 percent. DEI has an
advisory committee comprised of corporate and nonprofit executives and
advocates who advise on benchmarking topics and questions.

While it’s a commitment to complete the survey, it gives an
organization an honest and introspective lens into their culture, policies, and
practices on disability inclusion and is valuable to help identify areas where
an organization needs to improve.

This isn’t fluff stuff. The Accenture report notes several
tangible results of those organizations that embraced a disability inclusion

  • Companies that were DEI disability champions
    (score of 80% or better) were twice as likely to have higher total shareholder
    returns than peer companies.
  • Companies that weren’t disability champions but
    had improved their DEI scores over time were four times more likely to have
    higher total shareholder returns than peer companies.
  • Staff turnover is up to 30 percent lower when a
    well-run disability community outreach program is in place.

As a board, make it a priority to work with the senior
leadership team to understand your company’s disability inclusion position and
ensure disability inclusion is baked into the culture, not just an add-on
project. Here are three things you can do to get started:

  • Use the DEI Benchmark Survey to assess your culture as-is. Whether or not you submit your responses to DEI for scoring, at a minimum, download and complete the survey to understand your company’s strengths and weaknesses on disability inclusion. You’ll at least get an understanding of where your company need to focus on the disability inclusion journey.
  • Name a senior leadership disability inclusion champion. Identify and empower a member of your senior leadership team to be an internal and external-facing voice on disability inclusion for your organization. The executive should be known as a person with a disability or be a passionate supporter of people with disabilities. As with any other inclusion leader, passion is key. Don’t just give an exec the champion title if they’re not passionate about it.
  • Put a disability inclusion advocate on your board. Whether a person with a disability or a passionate supporter, ensure your board has someone who brings both needed subject matter expertise coupled with a willingness to be a courageous disability inclusion advocate in the boardroom.

Disability inclusion is not just a social responsibility
buzzword meant to enhance reputation. There’s tangible business value to be
had. As a board, your accountability is to ensure your organization is
promoting a culture where the business benefits can be realized.

NACD member Lonnie Pacelli is an author of books on leadership development, project management, and autism awareness. See more at www.lonniepacelli.com. All thoughts expressed here are his own.

Think You Know Sustainability? Think Again.

It’s no secret to engaged corporate boards that the
mainstream investor community is increasingly attuned to environmental, social,
and governance (ESG) matters. What may be less obvious is what that means, exactly.

Many directors are likely to think, “We already have a
corporate social responsibility program in place, so we’re covered.” If that
sounds like your board’s approach, everything you think you know about ESG
could be wrong.

Whereas corporate social responsibility (CSR) traditionally
involves a company’s foundation, its charitable work, employee volunteer and
recycling efforts and the like, ESG narrows the focus on business-critical
sustainability issues.

It may sound like splitting hairs, but consider the
difference between, say, a beverage company that donates time and money to
alleviate poverty in its local community and one that invests in water
efficiency initiatives at its facilities located in drought-prone regions. The first
company’s intentions may certainly be noble, and its actions may enhance its reputation.
But the second company’s investment in water efficiency is fundamentally linked
to its value-creation strategy, and thus is likely to have direct and indirect impacts
on the firm’s financial statements and market valuation.

The key to making this distinction is the lens of financial
materiality, which helps identify the subset of sustainability factors most
likely to have meaningful impacts on a company’s financial condition or
operating performance.

Indeed, research shows this focus is associated with significant outperformance in terms of sales, sales growth, return on assets, and return on equity, as well as risk-adjusted shareholder returns. These findings, in turn, explain why a large and growing number of investors—including 73 percent of analysts and portfolio managers—integrate ESG considerations into their work.

What does this mean for boards of directors? Quite simply, because financially material ESG matters constitute legitimate strategic and risk considerations, they have significant fiduciary implications. In other words, the shift from CSR to ESG has raised the bar for board oversight of how these issues are managed and reported. For example, if your company is like 85 percent of the S&P 500, you’re already putting ESG information out into the marketplace. How can you ensure this data is both relevant and reliable—the twin hallmarks of decision-useful information

Relevance: Narrowing
the Focus

For investors—and, by extension, for directors—not all
sustainability issues are created equal. So, it’s important that companies assess
ESG factors through the lens of financial materiality, which can help
streamline their sustainability efforts to measure, manage, and report the
issues that matter most to shareholders.

With its lens focused on materiality, a firm can more effectively integrate the resulting handful of key issues into its core business operations using standard approaches to strategic planning (such as balanced scorecards and strategy maps), enterprise risk management (or ERM, such as the COSO framework), and performance management (such as internal dashboards for monitoring progress). Such integration not only ensures crucial ESG factors are effectively managed, it enhances the ability of the board and its committees to administer appropriate oversight.

Of course, relevance is arguably in the eye of the beholder, and directors should also consider engaging with key investors to better understand which ESG risks and opportunities they care about most. These issues don’t always arise—or, more likely, get lost in translation—during earnings calls or discussions with buy-side analysts. To meaningfully explore and fully understand investor needs through engagement, a board may want to add or develop ESG-related expertise.

Boards of directors may find the following questions helpful
in facilitating sustainability reporting that is relevant to investors:

  • Is the company’s approach to sustainability well aligned with its strategy?
  • Is the risk committee satisfied that management’s approach to ERM incorporates strategically aligned ESG matters in the context of the organization’s risk appetite?
  • Have members of the board engaged with investors to better understand their ESG-related areas of concern and information needs?
  • Does the company’s disclosure committee apply a financially focused materiality assessment to key ESG performance data?
  • Does the board’s composition include sufficient fluency in the financially material ESG issues that face the company?

Supporting Decision-Makers

Of course, even relevant information may be of limited use if it lacks reliability, including timeliness and accuracy. Although some ESG data—such as utility bills and invoices—may already reside in a company’s enterprise resource planning system, much of it has traditionally been collected and managed in ad hoc spreadsheets—outside the rigor of the financial reporting process—which can result in information of less than desirable precision and limited verifiability. Companies can overcome this deficiency by designing, implementing, and maintaining a system of governance around financially material sustainability information that is substantially similar to what they use for financial reporting.

Such a system is likely to include an effective internal control environment and additional disclosure controls and procedures, as appropriate. In this context, internal audit can play a critical role in enhancing management’s and the board’s comfort over sustainability information. Some companies may also choose to engage an independent third party to provide assurance over key ESG data, which sends a signal of reliability to the investor community. Controls and assurance can thus strengthen the confidence of decision makers both inside and outside the firm while dramatically reducing the likelihood of restatements.

Directors can ask themselves the following questions to
assess the reliability of their company’s sustainability reporting:

  • Does the board or its key committees have
    regular access to sustainability performance indicators?
  • How can technology facilitate more reliable (and
    verifiable) ESG data?
  • How might the audit committee gain visibility
    into the effectiveness of ESG-related internal controls—particularly where
    significant deficiencies or material weaknesses have been identified?
  • Has the company’s disclosure committee
    established appropriate disclosure controls and procedures to ensure
    financially material ESG information is effectively recorded, processed,
    summarized, and reported?

Leveraging Practical

A company may not always be able to maximize both the
relevance and reliability of its financially material sustainability
information. In this sense, it is no different from traditional financial data,
which involves its own inherent trade-offs (e.g., historical costs are more
reliable but less relevant than fair values). However, as the evolution from
CSR to ESG continues, effective board oversight can help ensure a company achieves
its sustainability reporting objectives in a way that creates value for both
the enterprise and its investors.

Along with the questions presented here, the 77 industry-specific standards recently codified by the Sustainability Accounting Standards Board (SASB) can provide a useful starting point for boards to kick-start their ESG oversight. In large part, this is because the SASB standards are designed to achieve both relevance and reliability.

First, by observing the threshold of financial materiality,
the standards zero in on the subset of ESG factors that matters most to
investors (an average of six per industry). Second, by providing detailed
technical protocols, they ensure ESG data is prepared, compiled, and presented
in accordance with rigorous definitions, scope, and accounting guidance—which
can also serve as the basis for “suitable criteria” in an assurance engagement.

As the competitive landscape has evolved, so has our
understanding of sustainability and its impacts on business outcomes. Having
faced economic headwinds, technological disruption, and regulatory uncertainty
in recent years, boards of directors are well-versed in change management and
practiced at the art of adapting to new circumstances. These skills will remain
invaluable as sustainability and finance continue to converge.

Robert B. Hirth Jr. is
Senior Managing Director at Protiviti,
Chairman Emeritus of the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and Co-Vice Chair of the SASB Standards Board.

ESG Oversight Lessons from the PG&E Bankruptcy Filing

The recent
news that California utility PG&E Corp. filed bankruptcy should cause pause
in every corporate boardroom. On Monday January 14,2019, The Wall Street Journal (WSJ) reported
that analysts had pegged PG&E’s wildfire liability exposure to be as high
as $30 billion—roughly triple the company’s market value of $9.12 billion. By
Friday that week, WSJ called this “the first major corporate casualty of
climate change.” One week later, California investigators said
PG&E did not cause the major 2017 fire (Tubbs Fire), but although that
announcement caused a bump in stock price, it did not change the $30 billion
tab, which the company itself has estimated. The company filed for bankruptcy
on January 29, 2019.

judging its external environmental, social, and governance (ESG) ratings,
PG&E was doing fine. Clearly, this situation shines a spotlight on the
serious limitations of external ESG ratings. It also highlights the need for
companies across virtually all industry sectors to build robust ESG governance

by the praise voiced by external ESG ratings organizations, PG&E seemingly had
its ESG house in order. Sustainalytics, a leading provider of ESG and corporate governance research, ratings,
and analysis, named PG&E an “outperformer” (in 88th
percentile on environment and 82nd percentile on governance).
PG&E rated number one among utilities and twenty-second overall in Corporate Responsibility Magazine’s 100
Best Corporate Citizens. Newsweek
Green Rankings listed the company the best among electric and gas utilities and
fourth overall. And, PG&E was named to the Dow Jones Sustainability North
America Index for the eighth time. Certainly there were apparently good reasons
for high ratings.

  • The company’s recently-published 187-page 2018 Corporate Responsibility and Sustainability Report seems to “check all the boxes.” Sustainability is explicitly called out in the company’s mission, vision, and values. Board committees are in place, ESG materiality assessment has been done, ESG is incorporated in the company’s financial incentive plan, and the organization has a dedicated chief sustainability officer, along with an outside advisory group. PG&E has a long history of ESG disclosure, bold goals to cut greenhouse gas emissions, and a record of early delivery on rigid California compliance standards (three years ahead of schedule). The list goes on.
  • PG&E has $34.5 billion worth of renewable energy contracts.
  • The company has discussed the California wildfires, noting actions PG&E is taking to address the “new normal.”

So we have a situation of high external ratings and a company apparently in compliance. Yet a $30 billion environmental liability exposure happened anyway. Clearly, there is a disconnect somewhere. I noted in my earlier NACD blog “Scorecard Data Suggests Many Companies Are Not Future-Ready that “without getting governance right, it’s hard to get anything else right.” That is precisely the lesson companies can learn from the PG&E situation.

Were the ESG raters wrong?

PG&E has a long track record of important accomplishments in the areas of
environmental stewardship and social responsibility. But what can outsiders
know about the company’s internal governance processes? Did something go amiss

How can
other companies learn from this situation? It starts by avoiding two fatal

  • It’s often not about compliance. U.S. companies have a 50-year history of looking at environmental, safety, and societal issues as compliance. They often view ESG oversight and management through a compliance lens. That’s yesterday’s view. Managing the mega risks today (climate change, water shortages, etc.) is often not about compliance. You might comply with your water intake permit requirements, but what happens when the well runs dry, or when, like in Flint, Michigan, the water is contaminated?
  • Beware the 80/20 governance trap. Only a very small
    portion (let’s call it 20 percent) of what constitutes robust management and
    oversight of environmental and social risks can be measured from outside the
    company. The other 80 percent—what I call “the soft stuff” —is comprised of the internal company practices and business
    processes to manage risk. That 80 percent does not easily lend itself to
    being measured.

External ESG raters
look at “the hard stuff”—aspects of corporate governance and strategy that can
be measured. Examples include gender diversity of the board or executive ranks,
CEO compensation as a multiple of average worker pay, or the mere existence of
a board committee with ESG oversight. But while external ESG raters may measure
the existence of a board committee, it is almost impossible for them to measure
the effectiveness of C-suite and board deliberations about ESG risk.

line: a company may be in compliance today and may receive high marks from
external ESG raters; but directors should take all of that with a grain of
salt.They should insist on
measuring the other 80 percent of what constitutes robust governance.

The “soft stuff” actually can be measured

can measure the soft components of sustainability
governance. They can measure the effectiveness of C-suite and board
deliberations about ESG risk. More than 60 major U.S. corporations have used
the Corporate Sustainability Scorecard, a management tool for companies, built
over 20 years based on industry best practices. The Scorecard is
available to companies requesting access. And, the rating criteria are now
public, published by De|G PRESS (November
2018)in “Sustainability:
What It Is and How to Measure It

I do
not know what went amiss at PG&E. But we do know that, using the Scorecard,
eight peer utilities rated themselves fairly low on over a dozen key
sustainability indicators (KSIs) that aim squarely at the ESG risk oversight
issues highlighted in the PG&E situation. On those dozen KSIs, the peer
utilities rated themselves on average at about Stage 1.7 on a stage 1–4
maturity scale. In other words, they acknowledged they have a long way to go if
they deem those items material to their business.

challenge directors to check it out.

Hedstrom is a member of the NACD faculty, specializing in ESG. He runs his own
advisory firm, working with mostly large companies on oversight of ESG issues.
His earlier book
Sustainability–A Guide for Boards and C-Suites, is available on Amazon or from him at www.hedstromassociates.com.

Leading Businesses Embrace New Role: Creating Long-Term Value Through Purpose

Board members don’t need another tome outlining the
uncertain times in which their companies find themselves. What they need is a road
map to guide their companies in sustainable value creation, which, in a sense,
future proofs their business strategies.

Uneasy markets? Global political uncertainty? Environmental issues?
These are all mega trends, risks, and opportunities for boards to assess and monitor.
Are your company’s senior leaders developing a three- to seven-year plan
demonstrating how they are a step ahead of known issues? When long-term
business plans with forward-looking strategies for sustainable value creation are
made public, investors take notice and move markets.

On behalf of CECP and the Strategic Investor Initiative (SII), we support a coalition of leading companies and investors committed to reorienting capital markets toward the long term. SII does this in four ways:

  1. Convene CEO Investor Forums to provide a venue
    for CEOs to share their long-term strategic plans with audiences of long-term investors.
  2. Share research on insights from the Forums.
  3. Provide answers and perspective to boards
    engaging on these issues.
  4. Assist companies in developing and communicating
    long-term plans, based on cutting-edge research. 

What Information
Matters to Patient Capital Investors?

CECP’s guidance is rooted in the material issue areas that companies should share with investors, identified through investor feedback and CECP research, building toward consolidation and comparability. Through these long-term plan presentations, leading CEOs are setting examples for peer firms to follow.  

CECP provides long-term-plan support to the nearly 30 CEOs of
companies with a market cap of $2 trillion and beyond who are presenting at
SII’s CEO Investor Forums. They present to audiences of 200 institutional
investors representing $25 trillion in assets under management.

The hallmark of CECP guidance is their Investor Letter, signed by us and a coalition of investors, including CalSTRS, Vanguard, BlackRock, andState Street Corp., which builds on the related work of FCLTGlobal and the New Paradigm for corporate governance. The letter shares the collective agreement by these investors about what constitutes a long-term view, and what should be shared with investors in the areas of growth, strategy, and risk.

Each company responds to CECP guidance in different ways, but CECP and George Serafeim from Harvard Business School and KKS Advisors studied the economic significance of plans presented at the CEO Investor Forum to date and found that when specific information is shared in nine key areas, it moves markets:

  1. Financial
  2. Capital
  3. Trends
  4. Competitive
  5. Risks
    and Opportunities
  6. Corporate
  7. Corporate
  8. Human
  9. Long-Term
    Value Creation

For investors to get the most out of these
presentations, CEOs should disclose forward-looking metrics on these subjects,
rather than backward-looking data or boilerplate language. A key investor
expectation is meaningful, future-focused information about corporate
governance arrangements, particularly around the board’s involvement in setting
long-term strategy and the extent to which board composition and executive
compensation are aligned with that strategy. Such commentary can be a powerful
supplement to proxy statement disclosures, and it enables long-term investors
to have confidence that corporate governance arrangements are fit for future

the Role of the Board?

Is your company sharing economically significant information
with investors who are looking to invest in companies creating sustainable
value? Here are the actions you can take with your fellow board members and
senior leaders at your company to improve the quality of that communication:

  • develop a long-term plan and inform a new way to look at the company’s long-term, three-to-seven-year strategy.
  • long-term plan. CECP outlines the key questions through detailed, company-specific conversations and shares leading practices.
  • CEO Investor Forum. The event is at capacity for February 25, 2019, with the CEOs of AmerisourceBergen, APTIV, Equinix, JetBlue Airways, and Nestlé presenting, but CEOs are still being accepted for the May 8, 2019, event in Chicago. Or encourage the presentation of the company’s long-term plan in a way that fits your company’s cadence—investor day, annual letter, or a designated call.

Contact CECP to learn more.

McNabb is a former chair and CEO of Vanguard, and cochair of CECP’s Strategic Investor Initiative. Brewster is the CEO of CECP: The CEO Force for Good.

Roadmap For An Effective Management Risk Committee

Many companies have a
management risk committee (MRC) as part of their risk infrastructure. While not
part of the board, such committees, made up of the appropriate executives at
the company and reporting to the board, nonetheless can contribute to the
board’s risk oversight. How can your organization reap the benefits of this
added oversight tool and maximize their effectiveness?

Identify the Company’s Needs

Whether organized as a designated or de facto committee, MRCs have
increasingly been used in recent years, likely due to the growing complexity of
risks inherent to the organization’s strategy and business model and the increasing
sophistication of risk management infrastructure. Additionally, the agenda of
the executive committee may be too crowded to sufficiently cover these matters
and extenuating circumstances may exist (e.g., a history of surprises,
substantive improvements required in the company’s risk management capabilities,
a critical risk meriting special attention, or a need to strengthen risk

There are several merits to consider when evaluating whether
to organize an MRC—for example, ensuring successful implementation of the
organization’s approach to enterprise risk management focusing management
attention on specific risk areas (e.g., technology, litigation, or environmental
issues), identifying emerging risks, and helping the company anticipate and
react to disruptive events and trends. The committee’s deliberations can
enhance the risk dialogue in the C-suite and boardroom by sharpening the focus
on critical enterprise risks and emerging risks.[1]

When it comes to MRCs, the old cliché of one-size-fits-all does not apply. For example, in financial institutions, commodity-based businesses, or operations with hazardous activities, the MRC may focus on managing specific risks inherent to the enterprise’s business model that either are not managed by the business units or are more effectively managed enterprise wide, consistent with a portfolio view. Other MRCs may focus on the risk management process and assume no overall responsibility for mitigating risks.

Set Expectations

As both the board and executive team can benefit from an
effective management risk committee, here are six suggestions for forming and
operating such committees:

1. Clarify MRC responsibilities through the
The charter should specify the committee’s mission or
purpose, membership, duties and responsibilities, authorities (if any), and if
necessary, specific activities it is to perform. It should be approved by the
executive team and reviewed with the appropriate board committee. As directed
by the executive team, the MRC’s responsibilities may include identifying and
prioritizing risks; monitoring changes in the external environment for
strategic risk implications; periodically assessing the entity’s risk culture,
benchmarking peers, and best-of-class organizations; and ensuring the executive
team and the board are considering critical enterprise risks. An MRC offers the
board an opportunity to periodically review the committee charter to ensure it
addresses issues germane to the board’s risk oversight.

2. Include the right people. The
committee, depending on its scope, should combine a diverse range of strategic,
operational, and functional perspectives. The selection criteria might include
experience, knowledge of the business, specialized expertise, and fit. At least
one senior executive should be a member (e.g., an executive sponsor). It may
make sense for the general counsel and a representative from the disclosure
committee to be present. Some companies rotate MRC members to bring a fresh
perspective and create risk awareness across the entity. Size is also a factor;
too large of a group can inhibit dialogue.

3. Conduct effective meetings. Considerations
for meeting frequency include the nature and volatility of the organization’s
strategy, operations, and risks, as well as the scope of responsibilities outlined in the
committee charter. MRCs can meet quarterly, monthly, or more frequently as
necessary, and meeting agendas should be developed by the committee chair with
suggestions from committee members. They might include specific risk issues
(e.g., drill-downs on risks or evaluations of risk appetite), as well as open
discussions of new internal and external developments and other activities.
Briefing materials should be provided in advance of each meeting.

4. Focus the group dialogue on what executives
and directors may not know.
The management risk committee’s real
value comes from focused dialogue around what’s new, what’s changing, and the
implications regarding emerging opportunities and risks. Heads turn when the
committee escalates insights that aren’t on the radar of the organization’s
leaders. Meetings should be inclusive so that everyone is engaged. Cluttering
meetings with presentations is a mistake—if the right group is assembled, it
makes sense to hear what they have to say. While presentations by different
risk owners explaining how they are addressing risks for which they are
responsible are acceptable, sufficient time should be allowed for discussion
and input.

5. Don’t let the committee get stale.
Taking too broad of a focus and repeating the same activities can sap the
committee’s energy over time. Consider mixing things up and refocusing the
committee’s activities depending on the organization’s needs. For example, if
the economy is in recession, the focus might be on liquidity and monitoring the
impact of cost-cutting and terminations on the risk management process and
internal control structure. It is a good idea to revisit the committee’s
emphasis periodically—at least annually—given the company’s circumstances and
the current business environment.

6. Spot the warning signs of a deteriorating
risk culture.
The committee should watch for signs of a
dysfunctional culture and be sensitive to operating units taking risks
recklessly or forgoing attractive market opportunities through risk-averse
behavior. A pattern of limits violations, near misses, noncompliance incidents,
internal control deficiencies, and foot-dragging on issue remediation are other
signs of potential cultural issues that may warrant escalation.

It’s important to note these six points are illustrative and
are intended to be neither exhaustive nor prescriptive. The chief executive and
executive committee dictate the scope of the management risk committee,
delegating responsibilities consistent with the priorities of the business. The
board can provide input into this direction.

Jim DeLoach is managing director of Protiviti.

Succession Planning Best Practices from Kimberly-Clark

Founded in 1872, Kimberly-Clark Corp., the venerable
packaged goods company that sells brands like Kleenex and Huggies, has grown to
more than $18 billion in revenue, with 43,000 employees worldwide and a coveted
spot at number 163 on the Fortune 500
list. The company could not have made it there without strong leadership, and
part of its secret to growth is sound succession planning for their board.

Thomas Falk, chair and chief executive officer of
Kimberly-Clark, recently spoke at an NACD North Texas Chapter program, sharing
details of the company’s long-term succession planning process. This process
culminated in the announcement of Falk’s imminent move into the executive chair
role, with an internal successor taking the CEO position on January 1, 2019.

“The process of succession planning,” said Falk, “is like creating a sculpture out of clay.” It requires dedication and discipline. Falk suggests that other companies consider the quantitative and qualitative process that he and his board have followed over the years, which has five basic principles:

1. Start early. Falk was only the eighth CEO since Kimberly-Clark went public in 1929. So, with a sense of that history, he knew that starting the identification process for a successor would be at the top of his list. “I started planning for my successor when I started as CEO 16 years ago,” said Falk. He deliberately involved the board in that work. “Hiring the CEO is the most important decision a board can make,” he stressed. “Succession planning is not an individual sport.” As a new CEO, he also had to be secure enough that he could match or exceed any expectations developed as a framework for identifying his successor.

2. Go deep. The first step was to come up with a set of criteria, including attributes such as integrity, operating and international experience, innovation experience, financial acumen, and others. A sizable set of internal candidates was identified to be included in the process, recognizing that a candidate’s experience and growth would be measured over time before any decision would be made.

External scans (versus searches) were routinely completed to ensure that internal candidates were being benchmarked against skills found in the marketplace. Of course, Falk noted that the board had an inherent preference for internal candidates, because a transition to such a candidate would mean less risk for the company.

3. Keep at it. Each year throughout Falk’s tenure, the process continued in an iterative fashion. “I met with board leadership a couple of times a year,” he added. As the company evolved, the criteria might change or be adjusted to reflect what the company needed in coming years; however, the process remained constant. Succession planning was regularly included on executive session agendas. Falk also noted that he made a point to keep tabs on the status of his senior team, checking routinely in recent years on any departure plans to ensure that, if possible, key personnel would never depart at the same time. As it turned out, senior leadership departures ultimately were staggered, with new leaders slotted in over the last several years, ready to support the new CEO in 2019.

4. Keep score. Potential candidates were measured each year, with 360 degree reviews completed along the way. Both qualitative and quantitative measures were documented. The full reviews were shared with the candidates and also with two to three key board members such as the head of the nominating and governance committee. Candidates’ progress was tracked over time. An emphasis was placed on keeping accurate records of performance over time.

5. Separate emergency planning. Falk also ensured that crisis succession planning discussions happened at different times than discussions on the natural succession plan. “Emergency planning is not just a name in an envelope,” said Falk. “We looked at what each senior leader would have to do in an emergency. For example, the CFO would have to talk to investors. The human resources leader might have to start a new search.” This planning was updated every year, with an eye toward ensuring uninterrupted company operations. This work could also point out weak spots, which would benefit non-emergency operations.

Of course, activists can precipitate a management change, or, according to Falk, “If the CEO ever stagnates, then that person has to get out of the way.” In the case of Kimberly-Clark, after more than 24 years in the Fortune 500, smart succession planning did its job. In January, Michael D. Hsu took over the reigns as Chief Executive Officer of Kimberly-Clark Corporation. Before becoming CEO in January 2019, Hsu was chief operating officer, leading day-to-day operations of Kimberly-Clark’s business units, along with the global innovation, marketing and supply chain functions. He joined Kimberly-Clark in 2012 as group president of the company’s nearly $8 billion North American Consumer Products business.

NACD North Texas wishes to thank Mr. Falk for sharing his insights and experience. Offering programming in the areas of Dallas and Ft. Worth, NACD North Texas welcomes NACD members and visitors. More information can be found here.

Kimberly Simpson is an
NACD regional director, providing strategic support to NACD chapters. Simpson,
a former general counsel, was a U.S. Marshall Memorial Fellow to Europe in

CES Experience 2019: New Trends and Their Implications for Board Oversight

How will smart homes, driverless vehicles, digital voice
assistants, robot helpers, wearable technology, 5G connectivity, and other
emerging technologies transform your company’s industry?

The promise of these innovations was on display at the
Consumer Electronics Show (CES®) in Las Vegas earlier this month,
bringing together more than 4,500 exhibitors from across the globe and drawing more
than 180,000 visitors for a week-long extravaganza.

For the second year in a row, NACD partnered with the
Consumer Technology Association and Grant Thornton to host CES®
Experience, a director-centered program that develops directors’ digital
fluency as their enterprises face the implications of new, transformative

During curated tours, attendees engaged with a dizzying
array of new products, some that will launch this year and others that may
never go to market. They also heard from experts and entrepreneurs who helped them
find the right signals among the many noises heard over the course of the event,
pinpointing which trends and breakthrough innovations will matter most.

The program led to rich conversation among directors about how
to spark more innovation at their companies, how to address growing concerns
about the misuse of data privacy, and how to prepare for the tectonic shifts
that technology will unleash in how we work and live.

The most relevant takeaways for the director community are
distilled below.

The Major Technology

  • Everything as a Device. Every physical product will soon be connected to the Internet, making even cars into what you could classify as connected devices. The distinctions between digital devices and mere devices will continue to rapidly vanish. This accelerating trend will impact how companies develop products, deliver services, and design business models. For example, wearable technologies and remote monitoring and diagnostic capabilities are starting to transform health care. Mirrors can now be equipped with tools that diagnose skin problems while toothbrushes offer coaching tips for better dental care. Or, in the instance of driverless mobility, consumers may subscribe to a service instead of buying a vehicle. As part of the service, consumers could have access to different types of cars, receive continuous software updates, and enjoy entertainment services available in the vehicle.  
Jeffrey McCreary, director of Benchmark Electronics, discusses the interconnectivity of devices.
  • Exponential Increases in Computing Power and Speed. A number of exhibitors at CES touted the potential of 5G wireless connectivity, which is exponentially faster than current 4G speed. Many predict that 5G will accelerate the development of driverless transportation, virtual reality, and all types of Internet of Things applications that would require real- or nearly-real-time connectivity. That said, the timing of the arrival of a true 5G network remains unclear.

    More uncertain still is the promise of quantum computing. Developers of quantum computers theorize that these machines may be able to harness the power of subatomic particles to compute at speeds and with capabilities exponentially greater than that of classic computing—and with far greater storage capacities. At CES, IBM unveiled what it is calling its first commercial quantum computer, stressing that this is a first attempt and that companies can use IBM’s cloud quantum-computing tools for their own quantum-computing experiments. Nevertheless, companies that better understand the long-term business implications of these significant leaps in both speed and power will be at a significant advantage.

  • Voice is the
    platform of the future.
    Digital voice assistant capabilities, such as Amazon’s Alexa and the
    Google Home Assistant, are rapidly going mainstream and are on the cusp of entering
    the enterprise market. Eventually, every office worker could have a voice
    assistant that can schedule meetings, book travel, or help find information in
    your customer database, which is likely to boost productivity, but may initially
    pose a formidable challenge for corporate information technology (IT)
  • Datafication of
    are going through a painful but potentially very rewarding transition from
    being just digital to fully data-driven. Digital sales and marketing will
    simply be table stakes. Over time, the winners are those companies that can
    reap major benefits from investments in artificial intelligence (AI) to build
    more formidable customer experiences, make better business decisions, and
    achieve massive productivity gains. The ability to collect, process, and analyze
    large and diverse sets of data is already a key competitive advantage, and will
    only continue to be a more important informant of strategy. Boards will need to
    probe whether their enterprises have a clear vision for using AI, and whether
    their employees are able to organize their data effectively to exploit AI’s
Ryan McManus on the news ways that data will dictate business strategy.

Data governance in the next few years will become an increasingly important board responsibility. Recently, the Global Network of Director Institutes (GNDI) published guidance on this growing board mandate.

Strategies for Governing Technology-Driven

  • Anticipate shifts in customer preferences and how that creates opportunities for innovation. Boards should probe whether management has a nuanced understanding of customer preferences and a point of view of how those preferences may change—and with what speed—as a result of new technologies coming to market. Consider, for example, that consumer expectations about frictionless, on-demand services that allow them to spend more time on professional and personal pursuits are now much higher as a result of engaging with Amazon or Uber.

    These companies display the economic power of new digital platforms. These new platforms will control the customer experience, continuously gather data, and create entirely new market places. And this model is quickly spreading to industries outside of consumer and enterprise technology, including asset management, publishing, fashion, and consumer lending. Boards should assess whether their enterprises are in a position of building and owning these types of digital platforms, or are ready to become a lead contributor to the new business ecosystems these digital platforms are creating.

  • Support the management team through sense making. The ability of directors to recognize linkages between seemingly disparate technology innovations, societal shifts, and new market forces will become an even more important asset in the boardroom. Boards are in a unique position, given the diverse experiences of directors, to spot and clarify emerging patterns, to connect the dots, and to offer management actionable insights about how their companies can continue to thrive in a changing world. But time must be set aside during and between board meetings to focus directors on this task, while ongoing education will be important to strengthen their sense-making skills.
  • Create conditions for innovation to succeed in your enterprise. Faced with the threat of imminent industry disruption, many boards are calling for breakthrough innovation at their companies, but rarely assess whether management has established the right environment for the type of innovation that could reinvent their business, not just improve it. Is management willing to accept failure? Is compensation at all levels aligned with our innovation goals? Have we set the right time horizons for longer-term innovations to develop and get traction? Some directors who attended the event warned about the danger of innovation “theater,” where boards are wowed by high-tech innovation labs which in reality are completely disconnected from the rest of the business.   
  • Fixate on business-model innovations that new technologies may enable. Rather than becoming experts on every new technology trend, directors are likely much better positioned to assess how new technologies could either threaten existing business models or offer the potential to deliver more value to customers and create more profitable revenue streams. For example, in light of the growing opportunity to offer customers not only a physical product but also personalized support by analyzing data generated through their use of the product, do subscription or service-based models offer better economics than traditional unit sales models?
  • Assess human-capital risk and strategy needs in response to technology disruption. The pace and scope of technology change is already disrupting workforce management and planning. In the next few years, companies will need to make critical decisions about what jobs to displace, how to reskill employees, and what new jobs to create. For example, while the recruiting of top engineering talent is now really competitive and therefore very expensive, companies must assess whether in the near future AI capabilities will replace many of the programming jobs they are desperately trying to fill. Or, how does the company envision how workers can effectively partner with non-human counterparts in performing key tasks? NACD recently published new guidance on how boards should oversee this increasingly important governance domain.
Shelly Palmer considers the strategic implications of AI on the future of the workforce.
  • Consider adapting
    your current oversight structure to govern technology-driven innovation.
    Finally, boards
    will need to challenge their own oversight approach. Do they dedicate
    sufficient time on the board agenda not just for management’s reporting on
    innovation, but also for expansive dialogue that allows room for outside
    perspectives? If innovation is so critical to making sure the company business
    endures, does it make more sense to establish a separate board-level technology
    or innovation committee or create a separate, non-fiduciary advisory board, at
    least temporarily, to offer guidance to the full board? Does the CEO
    evaluation, compensation, and succession planning effectively reflect the
    importance of technology-driven innovation? Has the board clearly defined its
    responsibilities versus those of management in the oversight of innovation?

The next blog will share highlights from CES discussions about risk and regulation involving technology, including the misuse of data and the decline in consumer trust.

Mission Accomplished—and Continually Renewed

“Mission accomplished.” These
are two words any leader loves to hear, and yet as a nonprofit educational
association, NACD knows that our mission to educate directors is never completely
finished. It continues and it evolves over time. With every new era in our
growth, we refine what we mean by this purpose.

Shortly after I became CEO, we changed our mission statement to better reflect the value we deliver to our members. Accordingly, our mission statement reads: NACD elevates board performance by providing board members with practical insights through world-class education, leading-edge research, and an ever-growing network of directors.

we had any doubts about the power of our newly clarified calling, our
membership numbers allayed them. In December 2018, our membership numbers
passed the 20,000 mark, mainly as the result of more full boards joining us.  

Our members rely on us for the
education, research, and networking they need to accomplish their work in an
ever-changing environment. At the same time, we rely on them—especially through
our nationwide chapter system—to inform us of their key concerns and insights.
Through this circle of knowledge, we advance the director profession.

One opportunity to get a glimpse into the concerns of our members is our annual survey of public company directors. For example, this year’s 2018–2019 NACD Public Company Governance Survey reveals that 82 percent of its more than 500 respondents report that disruptive risks are “much or moderately more important” than they were just five years ago. And most are “concerned” or “very concerned” about intensifying global trade conflicts (67%) and domestic political volatility (51%).

In the same survey, a large majority of directors, some 7 in 10 (68%),
expressed the belief that the members of their boards need to strengthen their
understanding of the risks facing the company. The top five risks listed in
that survey report were change in the regulatory climate, economic slowdown,
cybersecurity threats, business-model disruptions, and geopolitical volatility.

NACD’s 2019 Governance Outlook: Projections on Emerging Board Matters also revealed a high level of concern about risks. In his lead article in that publication, Friso van der Oord, NACD’s director of Research and Editorial, notes that “boards have a major opportunity to become better sense makers to management in this disruptive environment,” and recommends action steps for boards. He urges boards to consider disruptive risks in board-management discussions and as part of their oversight of management, thus ensuring that management will integrate disruption considerations into strategy, performance, and decision making, and of course into risk management itself. He also recommends that boards invest in the skills—within the organization and on the board itself—necessary to navigate disruptive risks.

As boards work to help their organization navigate the
potential for risk that lies ahead in 2019, they can rest assured that NACD
offers a continuing supply of resources to help boards plan and prepare for
these risks. We have hundreds of resources available through our website, and a
team of membership advisors to help members navigate them.

Our 2018 Blue Ribbon Commission report, Adaptive Governance: Board Oversight of Disruptive Risks, makes 11 recommendations for board action and provides a toolkit of resources that empower directors to take these actions. For example, one of the recommendations of the Commission was that boards should “improve the visibility of disruptive risks in boardroom discussions, and ensure directors stay informed between board meetings.” But rather than letting directors fend for themselves, the Commission offers three tools for implementing that particular recommendation, namely a “Taxonomy of Disruptive Risks,” “The Role of the Board in Oversight of Geopolitical Risk,” and “Sample Board-Level Reporting: Scenario Analysis and Disruptive Risks.”

Such tools are
not just “nice to have.” For some boards, they will become critical. As one
member of our 2018 Commission stated, “Investors,
regulators, and legislators keep raising the bar for boards on the oversight of
everything from cybersecurity to culture.”

From my travels around the world, I can attest that our
members are striving to keep pace with rising expectations and can serve as
shining examples for others. That is why NACD aims to provide a continuing
stream of relevant, actionable resources. 

In this way we not only accomplish our mission, but also bring life to our vision: “NACD aspires to a world where corporate directors are recognized by all stakeholders as trusted stewards of long-term value creation.”

Inspired by the examples of your fellow directors, and drawing on the resources that arise from our community, I encourage you to strengthen your work as a steward of value in 2019 and beyond.

Mission and vision
accomplished—and to be continued. 

Being Attuned to Forces of Change Is Vital For Corporate Performance

We are living through a period of immense upheaval—economic, geopolitical, technological, societal, and environmental—which makes it harder for companies to succeed with the business models that served them well in the past. Indeed, over the past five years, the profits of the top 700 multinational companies have fallen by around 25 percent.

The annual Global Risks Report, prepared by the World Economic Forum with the support of Marsh & McLennan Companies and other partners, and launched in the run up to the annual World Economic Forum meeting in Davos, Switzerland, explores the key forces shaping uncertainty, volatility, and disruption in the world today. Some key takeaways are set out below.

Three Global Risks Stand Out

First, 2019 is unlikely to see any
let-up in
political friction—neither on the
domestic front in many countries, nor on the global stage. Almost all the global risk
experts surveyed for the report reckoned that economic tensions among major
powers and trade relations will deteriorate this year, and levels of gloom
about broader geopolitical discord were only slightly lower. Against a backdrop
of rising societal frustration, many democratic governments are incapacitated
by deadlock or division, while rising levels of pushback are on the radar of
more authoritarian regimes.  

Is this more problematic than twelve months ago? Arguably, confrontational positions are more entrenched and the pressure on government delivery is more acute. Levels of brinkmanship may reach an extraordinary pitch, with the possibility of disastrous missteps. And all this is taking place against a more bearish economic outlook, where a snapping of fragile ties may suddenly drain market confidence.

Second, the evolving cyber threat landscape has become integral to national security agenda. Cyber is the global risk of most concern to US business leaders (a view shared indeed by executives across advanced economies), with the scope for breaches and widespread damage escalating in line with the ever-greater deployment of digital applications across business ecosystems.

risk is exacerbated by a clear asymmetry between the capabilities of
state-affiliated hackers and the security arrangements of most individual
companies, which has obliged governments to play a stronger role in supporting
corporate endeavors. This, in turn, has escalated to policy level concerns
about the use of foreign technology in critical infrastructure, exposures
generated through corporate supply chains, and more intrusive foreign state
data requirements on company operations abroad.

Third, the long-term toll from extreme weather and climate change could dwarf all others, if we collectively fail to make the rapid and far-reaching transitions required in the next twelve years to prevent global temperature rises from exceeding the 1.5⁰C target. For the global risk experts surveyed for the report, extreme weather and the failure of climate adaptation and mitigation measures dominated risk concerns on a ten-year horizon, and a suite of national climate assessments have spelled out the consequences for individual countries.

Given the uncertainty surrounding multilateral climate agreements,
business leaders will need to navigate a dual challenge: responding to
increasing pressure from investors, customers, and other constituents (such as
state and municipal authorities) to commit to climate-related goals, all while
developing contingency plans that anticipate greater climate-related challenges.

Cross-Cutting Consequences

First, the undermining of multilateral
arrangements and promotion of nationalist agenda is sapping systemic will and
capacity to resolve cross-border challenges
. Not only is this spawning new risks and permitting
intractable problems to fester—in the near term it is placing companies of all
shapes and sizes at the mercy of political wrangling.

subject to new tariffs, sanctions, investment constraints, legislative and regulatory
requirements, requests for favors, and unwarranted attacks, firms need to be prepared
for the prospect of high performance volatility, shock events, and an erosion
of competitive positioning.

Second, a tightening nexus of political, economic and technological risks is threatening much-needed investment in infrastructure, a form of investment that is so vital for business continuity, economic progress, and societal prosperity. Analysis suggests that the shortfall of expected investment versus global need will amount to $18 trillion by 2040 (a $4 trillion shortfall in the US alone), requiring a 23 percent increase in current annual investment to close it.

onslaught from natural catastrophes and the escalation of foreign state-sponsored
cyberattacks is threatening the reliability of assets and systems on which we
all depend. At the same time, economic protectionism and national security
concerns are jeopardizing infrastructure development programs, affecting capital
availability, supplier choices, and construction costs. Better public-private
cooperation is needed both to enhance the resilience of critical infrastructure
and to ensure new projects are attractive for investors.

Third, many of the
structural shifts in the global risk landscape have engendered considerable emotional
strain for individuals and communities
, and the continuous psychological
impact should not be underestimated, both in the workplace and society at large. Looking simply through a business operations lens, a
failure to grapple with these developments may herald productivity issues, accidents,
insider threats, and industrial action among other potential disruptions.

In the rush towards new business models and workflow automation opportunities, firms should reflect hard on how to cultivate the right enabling environment for personnel, in terms of working conditions, career opportunities, and financial security arrangements, even when job security cannot be guaranteed.

Corporate Governance Imperatives

These are challenging times, to say the least, and the board and management teams have no choice but to embrace a world beset by complex uncertainties and strategic emerging threats. Few companies are under the illusion that they can control or inoculate themselves from these macro-level risks, but many have yet to fully appreciate the many ways in which their business might be affected, and to use these insights to arrive at effective and affordable responses.

The 2018 NACD Blue Ribbon Commission report on the governance of disruptive risks clearly articulated the importance of adaptive governance in a world where disruption is continuous. Boards have a vital role in helping set the tone from the top by demanding good intelligence on disruptive risks and establishing the right forum for discussing early warning signals and strategic implications. They should also set expectations of management teams as to how this type of risk thinking should percolate through the entire organization to spur agile, creative solutions that will help business leaders better navigate the challenges of a fast-changing world.

Richard Smith-Bingham leads MMC’s thinking on how
companies and governments can best anticipate and negotiate new challenges in
the macro-level risk landscape. He has been on the Advisory Board of the World
Economic Forum’s Global Risks Report for the past six years.

Fink Letter Says Purpose and Profits Inextricable: He’s Not the First

“Purpose is
not the sole pursuit of profits but the animating force for achieving them.
Profits are in no way inconsistent with purpose—in fact, profits and purpose
are inextricably linked.”

So wrote BlackRock founder, chair, and CEO Laurence D. Fink in his recently released 2019 letter to CEOs of the asset manager’s portfolio companies. And yes, it appeared in bold-face type. The letter, which was published January 17 on the BlackRock website, comes at a time of great uncertainty and at a time when managers, boards, and investors increasingly embrace the theory of stakeholder, not shareholder, primacy. In essence, Fink is calling for boards to oversee the management of business for the long term, and to do so by aligning profits with purpose. Fink specifically wants management and boards to articulate how their purpose informs their strategy, and to explain that linkage to investors.

This is becoming well-trod territory. While the dueling theories of stakeholder versus
shareholder continue to bifurcate some boards and management, there has been a
steady increase in the rise of companies who align purpose and profits. Such companies
as The Container Store, Campbell Soup Co., and PepsiCo—to name but a few—have
taken the stakeholder theory to the very core of their businesses.

Arguing for long-term value creation and the alignment of mission, purpose, and strategy is hardly new. In fact, NACD has been advocating for and tracking the progress of long-term value creation theory for decades, and our Blue Ribbon Commission reports and surveys demonstrate that.

What’s different about Fink’s appeal—in addition to his
outsized influence given the massive sums of other people’s money managed by
the 30-year-old BlackRock—is the context for his latest appeal. The fragility
of the global landscape, Fink writes, makes corporations and governments alike
more susceptible to short-term behavior. Combine that with a growing distrust
of governments and the proclivity of younger generations such as millennials to
hold the companies they work for, buy from, and invest in to a higher purpose,
and what results is rocket fuel for the theory of stakeholder versus
shareholder primacy.

Fink’s 2019 letter builds on the mandate from his 2018 CEO letter for corporate management to construct a strategic framework for long-term value creation that can be articulated by management and the board alike to investors such as BlackRock. “In order to make engagement with shareholders as productive as possible, companies must be able to describe their strategy for long-term growth. I want to reiterate our request, outlined in past letters, that you publicly articulate your company’s strategic framework for long-term value creation and explicitly affirm that it has been reviewed by your board of directors. This demonstrates to investors that your board is engaged with the strategic direction of the company.”

That also echoes the findings and recommendations of the 2015 NACD Blue Ribbon Commission Report on the Board and Long-term Value Creation. And indeed, Fink’s 2018 letter may have had a real impact. Board oversight of long-term strategy is now the top priority in discussions between boards and institutional investors, based on NACD’s most recent survey of public company directors.

As Fink implores in this year’s letter, the world needs
business leadership: “As divisions continue to deepen, companies must
demonstrate their commitment to the countries, regions, and communities where
they operate, particularly on issues central to the world’s future prosperity.”
In order to put its money where its mouth is, BlackRock takes an
engagement-first approach to its investments. Its engagement priorities this
year, according to Fink (and in this order), are: “governance, including your
company’s approach to board diversity; corporate strategy and capital
allocation; compensation that promotes long-termism; environmental risks and
opportunities; and human capital management.”

Also contributing to a focus on environmental, social, and governance (ESG) issues is the growing popularity of Certified B Corporations. B Lab was started in 2007 as the certifying agency for companies “that meet the highest standards of verified, overall social and environmental performance, public transparency, and legal accountability to balance profit and purpose.” B Corp companies now include Danone North America, Patagonia, Gap subsidiary Athleta, and the Unilever-owned Seventh Generation and Ben & Jerry’s.

The B Corp model also reportedly
helped inspire Sen. Elizabeth Warren (D-MA) to propose the Accountable
Capitalism Act that would require companies with revenues over $1 billion to
consider the interests of employees, customers, and their communities alongside
those of investors. Warren earlier this month announced a run for the
Democrats’ 2020 presidential nomination. As one commentator wrote, the stakeholder
versus shareholder primacy debate could soon be aired on prime time.

And let us not forget legal titan Martin Lipton. The founding partner of Wachtell Lipton Rosen & Katz published “The New Paradigm” in 2016, which, at the behest of the World Economic Forum, provided a road map for long-term value creation aimed at companies, asset managers, and investors. One of the paradigm’s precepts for management and boards was to: “Set high standards for the corporation, including with respect to human rights, and the integration of relevant sustainability and environmental, social and governance (‘ESG’) and corporate social responsibility (‘CSR’) matters into strategic and operational planning for the achievement of long-term value.”

While Fink is hardly the first to endorse corporate purpose,
BlackRock’s cadre of 30 or so investment stewards have begun speaking to
companies about how their purpose aligns with culture and corporate strategy. “We
have no intention of telling companies what their purpose should be—that is the
role of your management team and your board of directors,” Fink writes in the
2019 letter. “Rather, we seek to understand how a company’s purpose informs its
strategy and culture to underpin sustainable financial performance.”

Forewarned is forearmed.