Four Reasons to Cast Sunlight On Director Succession Planning

Sometimes, making decisions in secret seems like the easiest
option. You don’t have to deal with other people’s opinions. You have a better
chance of satisfying your own interests. You can move more quickly because you
only have to sell your idea to one or two other people.

But the easiest option isn’t always the best one. Board
leaders that take the backroom-deal approach to succession planning often
suffer the consequences: impulsive appointments that don’t fit the needs of the
organization, missed opportunities to add diversity, disgruntled directors who
weren’t consulted, and board members who aren’t aware they have outlived their
usefulness.

Letting in some sunlight on this process could alleviate many
of these problems. Here are four reasons why board leaders should create a more
transparent, inclusive succession planning process:

1. It fosters a stronger, healthier board culture.

Here’s a scenario I hear all too often. Some directors at a
Fortune 200 company told me the other day they had received an email from the
lead director that announced two new board members (bios attached) would be
joining them at their next board meeting. The directors, who weren’t even aware
a search was underway, were miffed about being left out of the process. “Why
are we hearing about this after the fact?” they asked. “Why wasn’t our input
solicited?”

This secretive, closed-door approach to board succession creates
distrust among fellow directors and feelings of exclusion that erode teamwork
and collegiality. It’s also a missed opportunity; the directors who were
excluded from the process might have been able to suggest better candidates from
their networks or make useful suggestions about the skills new directors should
bring to the table.

2. It creates a higher-performing board.

Markets change. Technologies change. And companies change
along with them, which means they may need directors with different skills than
in the past. The succession planning process gives board members a chance to
imagine their board dream team, then create profiles of candidates who would help
make the dream a reality.

The nominating and governance committee can use the planning
process to assemble a board skills matrix that outlines the abilities,
experience, and attributes of current directors against the company’s current
and future needs. The full board should discuss and debate this matrix to reach
an agreement on what skills are important today and what skills will be crucial
in the future. Then, they have a clear profile for the types of candidates they
are looking for.

When boards plan ahead on succession, they can also build in
considerations like committee chair rotation by mapping out a timeline of when current
board leaders are likely to retire or need to rotate, which gives the board
plenty of time to find suitable successors. By thinking ahead, boards can
arrange to have new directors and committee members shadow the incumbents and
gain valuable insights before assuming their positions.  

3. It tackles the issue no one wants to talk about: board refreshment.

Nearly half of the directors in PwC’s 2018 Annual Corporate Directors Survey think at least one fellow board member should go, but few lead directors feel comfortable initiating retirement conversations. Because boards are composed of peers, they are unaccustomed to giving each other honest feedback. When a director isn’t pulling his or her weight, or their skills have become less relevant, board leaders have a tough time broaching the subject. “What do we say?” they worry. “How do we explain it to them?” So, they end up saying nothing.

Being transparent about succession planning makes having
these difficult conversations easier. While developing the board skills matrix,
everyone on the board can see whether their expertise and experience fits with
the company’s strategy. This provides board leaders with context for having
conversations with directors whose skills don’t match the organization’s future
needs. Those directors are less likely to be surprised when approached about
retirement and less likely to take it personally.

4. It satisfies stakeholders—the right way.

As investors continue to challenge boards on their
composition, those that lack strong succession plans may rush to assemble more
diverse teams only to end up with a hodgepodge of directors who may not work well
together or understand the company’s operations. Advance succession planning gives
boards the opportunity to be strategic versus reactive and take the time to
find candidates who not only tick a diversity box but also bring key skills and
talent.

By building relationships with promising candidates in
advance of an actual vacancy, boards can cast a wider net and recruit talent
with a diverse array of valuable experiences and perspectives that align with
the company’s long-term strategy.

Opening Closed Doors

Boards that don’t have a formal succession planning process often
scramble for replacements and waste opportunities to be more thoughtful and
deliberate about their recruitment process. When lead directors don’t involve the
entire board in this effort, it can create distrust and resentment. For boards
that have historically taken a closed-door, ad-hoc approach to choosing new
members, the shift to transparency and planning can be a major adjustment. But the
long-term gains of having an open process will make the effort worth it.

For further guidance on this topic, see PwC’s The Road to Strategic Board Succession.  

Paula Loop is a partner with PwC and the leader of PwC’s Governance Insights Center, which strives to strengthen the connection between directors, executive teams, and investors by helping them navigate the evolving governance landscape.

Emerging Technologies and Financial Reporting: Key Questions to Ask

Emerging technologies—such as artificial intelligence, robotic process automation, drones, and blockchain—are changing how business gets done. The Center for Audit Quality (CAQ) has developed a tool to help audit committees execute their oversight responsibilities for financial reporting impacted by emerging technologies. Leveraging the work of the Committee of Sponsoring Organizations of the Treadway Commission (COSO), this tool provides a framework for conducting effective oversight of a company’s use of emerging technologies in the financial reporting process.

This framework has five key
components, plus questions within each of the components that audit committees
may ask management and auditors to help inform their oversight. While not a
checklist, these questions should be useful discussion points in audit
committee meetings.

Control
Environment

The control environment is the set
of standards, structures, and processes that provide the foundation for
carrying out internal control across the organization. Audit committees help to
establish the right control environment for the adoption of risk management
practices related to emerging technologies that impact financial reporting.

  1. What
    are the objectives associated with the use of the emerging technology?
  2. How
    does the emerging technology project integrate with management’s existing
    digital and analytics plans?
  3. Does
    use of the emerging technology raise tax, legal, regulatory, or financial
    reporting questions that require external advice?
  4. What
    has the company done to train and maintain its internal resources and
    technological competencies related to emerging technologies?

Risk
Assessment

Audit committees might consider whether management has assessed the risks associated with changes to company processes as a result of emerging technology projects—and whether controls are in place to identify new risks as they arise.

  1. What risks associated with the use of the emerging technology have management considered?
  2. Has management considered the adequacy of the current risk assessment process relative to the risks introduced by the emerging technology?
  3. How has management evaluated the sufficiency of existing policies and procedures related to the safeguarding of assets when implementing the emerging technology?
  4. Has management identified intermediaries or third parties integral to the emerging technology functionality? If so, are current third-party risk management practices sufficient to adequately address the emerging technology?

Control
Activities

Control activities are the specific
actions established to ensure that the risk of failing to meet an objective is
mitigated to an appropriate level.

  1. How
    has management assessed the current control environment to determine whether
    new controls are needed in response to the additional risks introduced by the
    emerging technology?
  2. Are
    controls in place to address the risk that the technology is not operating as
    intended (i.e., to assess the reliability of the outputs from the technology)?
  3. What
    controls are in place to help ensure that those charged with oversight would be
    informed if a cybersecurity breach occurred?
  4. How
    have contingency plans been assessed or updated to help ensure continuity of
    business and management of risks?

Information
and Communication

Audit committees should have
communication protocols for obtaining the information they need to effectively
carry out their responsibilities, which may require the managers of large
technology projects to present their progress on a periodic basis.

  1. How
    will key financial reporting needs be considered to minimize potential
    disruptions when implementing the emerging technology?
  2. How
    will the technology integrate with the current IT systems? Are there any
    integration risks that need to be addressed?
  3. How
    has management evaluated existing IT practices to help ensure they address data
    management and governance for the emerging technology?
  4. Do
    existing communication lines (internal and external) need to be evaluated to
    help ensure continued compliance with financial statement disclosure
    requirements?

Monitoring
Activities

Monitoring represents an ongoing
process to ensure that policies, procedures, and controls are present and
functioning effectively.

  1. What
    monitoring activities have management put in place to validate the operational
    consistency of the emerging technology?
  2. Is
    the frequency of existing monitoring and reporting to the audit committee
    sufficient in light of the pervasiveness of the emerging technology and its
    impact on financial reporting?
  3. What
    monitoring has been established by management to consider the emerging
    technology risks related to recording, processing, summarizing, and reporting
    on financial information—including management’s discussion and analysis—and
    financial statement disclosures?
  4. In
    the event of a failure or deficiency related to management’s obligations, what
    processes and controls are in place to help ensure that appropriate levels of
    management and the audit committee are involved in the review of the related
    disclosures, if applicable?

An understanding of the opportunities and risks that emerging technologies present is essential for audit committees to discharge their oversight responsibilities. I encourage you to consult the full oversight tool, which, like other CAQ resources for audit committees, is available on the CAQ website free of charge.

Cynthia M. Fornelli is a securities lawyer and has served as executive director of the Center for Audit Quality since its establishment in 2007.

Career Partners International Names Bill Kellner New President & COO

Career Partners International (CPI) is pleased to announce the arrival Bill Kellner as new President and COO.  An experienced international business leader, Kellner has held various senior leadership positions in the talent development and human resources industry.

In his new role, Kellner will provide CPI with operational direction and support for Partners across the globe.  Kellner will report to former President & CEO, Douglas Matthews, who has announced his retirement but will continue to serve CPI in an advisory capacity to ensure a seamless leadership transition.  With over 350 locations throughout 50 countries, Kellner looks to solidify CPI’s reputation as the world’s most effective talent development and career transition consultants.

“Bill has proven himself time and time again to be an innovative leader in our industry.  We could not be more excited to welcome him as our new President and COO.  Having previously worked alongside Bill, I am confident he will help our partners continue to deliver exceptional services and grow exponentially,” said Douglas Matthews.

With decades of human resources experience, Kellner is innately aware of the value of CPI’s services.  His strengths in talent management, organizational design, and leadership development make this is a natural fit, sure to enhance the organization’s offerings.

“After meeting with multiple Career Partners International leaders, it became clear that their goals closely aligned with my experience and priorities.  CPI’s dedication to supporting their clients and candidates is truly impactful.  I look forward to continuing this tradition of providing exceptional services,” states Kellner.

The post Career Partners International Names Bill Kellner New President & COO appeared first on CPIWorld.

The Evolving US-China Relationship: What to Pay Attention to In Q1 2019

The year 2018 ended with the
US-China relationship in a precarious position, leaving many onlookers
wondering if this may be another crucial turning point in what’s arguably the
most important bilateral relationship in the global economy—a turning point
that, this time, is taking a hard turn for the worse.

Sixty-seven percent of respondents to the 2018–2019 NACD Public Company Governance Survey were concerned or very concerned that intensifying global trade conflicts would impact their organizations over the next 12 months, and 38 percent of respondents specifically identified increased competition with China as impactful to their organizations.

A survey of US-China Business Council (USCBC) members in 2018 reiterates these concerns: worsening US-China relations ranked as the number one challenge to US companies doing business in China in 2018—up from being ranked as the eighth biggest challenge in 2017. Seventy-three percent of respondents to the USCBC survey also indicated their business with China had been affected by the current US-China trade tensions.

With the future of US-China
relations more uncertain than ever before, here’s what to watch for this
quarter.

Prepare for continued volatility in the short
term as official talks continue.

The Development: Midlevel officials from the United States and China met in Beijing last week to conduct preliminary negotiations on resolving the trade dispute that erupted during 2018 and resulted in $250 billion in tariffs on US imports of Chinese goods and $110 billion in tariffs on Chinese imports of US goods. US President Donald J. Trump and Chinese President Xi Jinping agreed to a 90-day truce in December to stop increasing or initiating new tariffs—and China has since reduced tariffs on US cars and auto parts and recommenced purchases of US soybeans. The first round of talks also resulted in China’s approval for imports of genetically modified crops and a pledge by the Chinese “to purchase a substantial amount of agricultural, energy, manufactured goods, and other products and services,” according to the Office of the US Trade Representative.

A second round of midlevel talks will take place in Washington next week, with a meeting between cabinet-level officials scheduled for January 30. Ahead of these talks, US officials have discussed removing the import tariffs on Chinese goods as a way to advance the trade talks and extract concessions from the Chinese. However, resolving the underlying issues (aside from the trade deficit) that initiated the trade dispute in the first place—Chinese-government-directed acquisitions and investments, forced technology transfers, biased licensing processes, and cyberattacks targeting US networks—may prove difficult, as China collects foreign intellectual property (IP) through these methods to further its own technological supremacy goals. Made in China 2025 (MIC2025) is China’s plan to become the global leader in high-tech manufacturing by developing 10 sectors—including electric cars, agricultural technology, and aerospace engineering, among others—to become 70 percent self-sufficient in these industries by 2025 and completely self-sufficient by 2049 (the 100-year anniversary of the founding of the People’s Republic of China). For MIC2025 to succeed, China relies on copying and building upon Western technology.

Board Considerations: Boards should expect continued volatility in US-China
relations and prepare for tensions to exacerbate further—even if their
businesses aren’t currently affected by the trade dispute. “We’re at an
inflection point [in the US-China relationship],” said USCBC President Craig
Allen. “But like any real inflection point, it’s not safe to say what happens
after that inflection point. We are not wise if we discount the trade conflict
and if we believe it will stay in narrow, tariff-bound lanes. This has the
potential for expanding well beyond that.” The scenario of a prolonged economic
and political “cold war” cannot be ruled out.

Allen provides three possible
scenarios for how a US-China trade truce may shape up by the March 1 deadline,
with all scenarios equally likely:

  1. The Happy Scenario: The United States and China agree to provisions that improve US access to the China market and increase IP protections for US companies—leading the United States to lift the Section 301 tariffs and the Chinese to reciprocate by lifting their own retaliatory tariffs.
  2. The Baseline Scenario: The current arrangement is extended, with the existing tariffs remaining in effect and no agreement being reached by the deadline.
  3. The Unhappy Scenario: President Trump raises tariffs on Chinese goods that are currently at 10 percent to 25 percent, as he has threatened, and begins a process of imposing additional tariffs on the remaining goods imported from China.

Boards should ask management to consider how the company’s value chain can be diversified over the long term to avoid overreliance on a single country. Audit and risk committee members of industries currently unaffected by the tariffs should consider how long-term economic- or security-related tensions between the United States and China could impact future strategy. As the deep-rooted issues fueling US-China trade tensions, such as forced technology transfers, may not be easily overcome in the short term, boards of companies just entering the China market may reconsider entering into joint ventures—especially in light of China loosening its requirement for foreign automakers to enter into joint ventures with Chinese companies. Directors should ensure management is balancing the need to protect IP—upon which long term strategy may be contingent—with the short-term need to capitalize upon the size of the China market.  

In the short term, boards of
companies exporting goods to China should question whether the Chinese market
still remains profitable given imposed or potential tariffs, and explore alternative
growth strategies in other emerging markets. Boards should ensure management is
seeking alternate suppliers in the case that production inputs coming from
China are, or could be, impacted by escalating tariffs.

China’s government is focused on addressing slowing
economic growth, which may lead to downward pressure on its private sector.

The Development: In addition to undergoing negotiations on the trade dispute with the United States, the Chinese government is under pressure to deal with slowing economic growth and a high percentage of leverage in its stock market. China’s economic growth in Q3 2018 was 6.5 percent, which was its slowest growth reported since the days of the global financial crisis, and China’s projected gross domestic product growth for Q1 2019 was also reduced from 6.5 to 6.3 percent. By the end of 2018, the Shanghai Composite was down over 24 percent in comparison to the end of 2017.

Furthermore, over $600 billion worth of Chinese shares, or 11 percent, have been put up as collateral for loans by company founders or major shareholders—which are at risk of margin calls. To reduce the risk of continued selloffs as the market slides, state-owned enterprises (SOEs) purchased $6.2 billion worth of stakes in 39 Chinese private companies from January to October of 2018, and the government introduced a number of economic measures to cut down on “shadow banking” practices from private companies that were cut off from obtaining loans through official channels.

Board Considerations: The following developments may decrease opportunities for foreign firms to compete in the China market: slowing domestic growth; increased dominance by state-owned enterprises; and protection of mission-critical sectors such as technology, specifically artificial intelligence and e-commerce. Chinese SOEs, as well as Chinese private companies, are known to receive preferential treatment in regards to financing opportunities, tax incentives, and policy enforcement, among other areas. Directors are encouraged to discuss how a slowdown of China’s economic growth might impact profits, and how the company strategy could be adjusted to offset these impacts. Boards should question management’s strategy for competing with both Chinese state-owned and private firms, given their preferential treatment. Directors may also discuss at their board meetings what implications about the appetite of Chinese consumers can be taken away from Apple’s slashed sales forecast.

Slowing economic growth in China is also often coupled with increasing signs of nationalism and censorship from the Communist Party as a way to hedge against domestic instability. American companies operating in China, especially technology companies, should constantly re-evaluate requests for product modifications from the Chinese government, and discuss how those limitations might promulgate human rights violations in China. Could your products be used to further restrict freedoms of Chinese citizens or collect data on their activities? Is your company ready to deal with the reputational backlash from its stakeholders?

Look for continued analysis in the NACD BoardTalk blog on the business climate in China as trade negotiations continue
to evolve.

Survey of Global Directors Finds That Data Is King

In order to benefit from emerging technologies such as automation,
robotics, cognitive computing, and artificial intelligence (AI), companies will
be required to leverage a critical resource: data. Given that reality, it’s not
surprising that big data ranks as a top disruptor for boards—a recent
survey finds that a whopping 63 percent of directors around the world view it
as the biggest technological disruptor.

To help the public understand how directors globally view business
risks and governance issues, the Global Network of Director Institutes—an
international network of 21 corporate director institutes, that includes
founding member NACD—produced the 2018
Global Director Survey Report
. The association represents
130,000 individual members globally and seeks to enhance director
professionalism through research and education. This first-of-its-kind survey
reflects the perspective of roughly 2,000 public and private company directors
from Africa, the Middle East, the Americas, Asia-Pacific, and Europe. The
results provide important insights into the challenges and priorities of board
members around the world.

What social
and economic issues are top of mind for this group of directors?

Boards across the globe are increasingly finding social issues on
their radar. When asked which key social and economic challenges are facing
their countries, participants’ responses largely coalesced around three issues:
poverty and income inequality, taxation and government spending, and the cost
of health care. That said, there were some regional differences in directors’
ranking of these issues. Survey participants from European companies are more concerned
with the cost of health care than their American counterparts, who point to
taxation and government spending as a key priority for their countries. For
their part, Middle Eastern and African directors worry most about poverty and
income inequality.

How do boards
evaluate themselves?

Conventional wisdom holds that what gets measured gets managed.
In an effort to enhance governance, assessing directors individually and the
board collectively is critical to ensuring that the board’s composition aligns
with the company’s long-term strategy. The survey found that the majority of
respondents (80%) conduct evaluations. However, out of those who conduct
evaluations, the highest percentage of directors (46%) said their boards
evaluate performance via informal discussions. This is compared to 42 percent
whose assessments are done using formalized discussions and processes. The
Americas led the group in using formal evaluations (57%).

Source: 2018 Global Director Survey Report, p. 16.

How do directors view
the impact of ESG issues on their companies?

Despite investor calls for more robust oversight of environmental
risks, these issues continue to be lower priorities for boards. When asked
about the relevance of select risks to the strategy and operations of their
organizations, nearly half (42%) of respondents said the depletion of fossil
fuels was not at all relevant; 38 percent said the same about measuring carbon
emissions and their carbon footprint. Climate change fared slightly better,
with 30 percent of directors saying it was irrelevant to the company’s strategy
and activities.

Issues involving personnel, however, ranked fairly high for directors: 72 percent believe ethical behavior is critical to company strategy and operations, compared with 65 percent for employee health and safety, and 57 percent for employee relations and engagement. Given the tight labor market in the United States, human-capital management is likely to become a more pressing issue on board agendas. In fact, employee engagement was slightly more important to American directors (62%) than their European counterparts (45%). This concern also underlines the growing focus on culture as an enabler of company strategy and success.

Culture can have wide-ranging repercussions for an organization—both beneficial and detrimental—and, therefore, the board should dedicate adequate time to oversight of organizational culture. As noted in the Report of the NACD Blue Commission on Culture as a Corporate Asset, “a healthy culture serves as a unifying force for the organization and reinforces the elements of the strategy and business model in a productive way,” while a “dysfunctional [one] has the potential to undermine the business model and create significant risk for the company.”

Are directors
confident in their board’s ability to oversee technology?

Technology can either catapult an organization to unexpected
success or so effectively disrupt its business model that the organization
becomes virtually or actually insolvent. And directors believe that big data
and AI are likely to disrupt their companies, with a majority (63%) selecting
big data as the top potential disruptor, closely followed by AI (60%). The
application of emerging technologies is likely to change the ways in which companies
across industries do business; however, it also represents unpredictable risks.
Even if their companies are not early adopters or first movers in their
industries or sectors, directors should ensure their companies are well
positioned to capitalize on the changes these technologies may usher in. 

GNDI also recently issued guidance for boards across the globe to strengthen their oversight of increasingly complex and advanced use of data. These data governance guidelines can be adapted to meet the needs of individual boards.

Source: 2018 Global Director Survey Report, p. 25.

Directors of any company type—regardless of its corporate domicile—are
charged with creating long-term value for their companies. As the global
business landscape continues to evolve, directors must ensure their board is
keeping up with the skill sets and practices necessary for effective oversight.
That said, understanding the answers to the above questions, and how those
answers may vary from region to region, will be increasingly important as more
companies extend their cross-border operations.

For more insight into how varying governance approaches may impact your company’s global operations, download the full 2018 Global Director Survey Report.

New Responsibilities for the Board: Cultivating Investor Trust

Recently published research has revealed new factors for boards of directors to cultivate investor trust in companies. The Edelman Trust Barometer: Institutional Investors surveyed more than 500 chief investment officers, portfolio managers, and buy-side analysts in five countries (the US, Canada, the UK, Germany, and Japan) representing firms that collectively manage over $4.5 trillion in assets.

The research
identifies several new and emerging focus areas for the investment community in
which the board has a direct role:

1. The reputation
of the board itself impacts investor trust.

Boards of directors
have historically operated behind closed doors. If you asked a director whether
they believe their board should have a public reputation, most would respond
with a resounding no. However, the research clearly shows otherwise. Ninety-four
percent of investor respondents said they must trust a company’s board of directors
before making or recommending an investment. Ninety-two percent also agreed that
an engaged and effective board is important when considering a company in which
to invest.

A board’s
reputation is most acutely on display during times of severe corporate
controversy or distress, during which the board’s actions come under a public
microscope. Shareholder activism has similarly intensified the spotlight on boards.
A board viewed as entrenched will be immediately vulnerable to public and
personal attack. Beyond investors, employee groups, labor unions, and non-governmental
organizations are also holding boards publicly accountable with increasing frequency.

In addition
to the obvious characteristics of expertise and perspective, boards must now
consider several reputational dimensions. A board must be known as truly
independent, actively challenging management to ensure the organization is
pursuing the best course to maximize value, and it must be seen as deeply in
touch with strategy and its impact on society. Additionally, a board must be
known for diverse thinking, with diverse perspectives necessary to anticipate
the future.

2. Investors view environmental and social
considerations as important as governance.

Investor
focus on environmental, social, and corporate governance (ESG) issues is now
pervasive. According to our research, 89 percent of investors say their firm
has changed its voting and/or engagement policy to be more attentive to ESG
risks, and 63 percent report this change has taken place in the past year. Importantly,
in all five countries surveyed, investors strongly agree that environmental and
social practices are as important as governance when it comes to investment
criteria.

In the 2018
proxy season, environmental and social proposals were the largest category on
proxy ballots, accounting for 55 percent of all shareholder proposals, with
climate change and environmental issues ranking as the most common environmental
and social proposal topic. Vanguard and BlackRock have both cited climate
change as a priority issue for 2019. Furthermore, 98 percent of investors think public companies are urgently
obligated to address one or more societal issues relevant to their business,
with cybersecurity, income inequality, and workplace diversity as top
priorities.

Boards of directors must take responsibility for ensuring their
companies are considering impact on society and the environment, proactively
pursuing ways to contribute as positive corporate citizens and communicating
this to the investment community.

3. Investors care
about corporate culture and
expect boards to provide oversight.

Investors see
the impact that healthy culture and engaged employees have on corporate
performance. Countless examples of corporate crises show the value risk of not
maintaining a healthy corporate culture. Our research found that two-thirds of investor
respondents believe maintaining a healthy company culture and enforcing a
corporate code of conduct at all levels of the company have a great deal of
impact on their trust.

There is no question that boards historically believed that corporate culture was not their responsibility. Thankfully, this is changing. Recent research by PwC found that 87 percent of directors believe that an “inappropriate tone at the top leads to problems with corporate culture.”

Corporate culture has become the province of board oversight, and any board that is not proactively evaluating the health of its company’s culture is neglecting an important asset and possibly cultivating a powerful risk. The NACD emphasized the importance of the board’s role in corporate culture in a recent report, which recommended that “directors and company leaders should take a forward-looking, proactive approach to culture oversight in order to achieve a level of discipline that is comparable to leading practices in the management and oversight of risk….Shareholder communications should include a description of how the board carries out its responsibility for overseeing and actively monitoring the company’s culture.”

4. Investors expect boards to stay ahead of
technology disruption.

A board must
be known for having the capacity to steer a company ahead of technology
disruption. Most industries are facing existential threats brought on by
technology, creating real and present danger for corporate valuation and
long-term viability. Investors expect boards to have the foresight to guide
management in anticipating and overcoming these threats. To underscore this
point, our research found that 95 percent of investors believe that a company’s
investment in innovation impacts their level of trust, with 62 percent saying
it impacts their trust a great deal.

Boards must
proactively ensure they have cutting-edge technology expertise among their
ranks, and they must actively challenge management to ensure the company has a
plan to capitalize on technology innovation rather than become a victim of it.

In summary, expectations of boards of directors are rising, not only from the investment community but also across stakeholder groups. Investors, in particular, are prepared to take action if they do not see boards doing enough. Eight-seven percent of institutional investors say their firms are more interested in taking an activist approach, and 92 percent will support a reputable activist investor if they believe change is necessary at a company. Boards should therefore expect activism from any of their investors if they do not proactively embrace these issues and ensure their companies are on the right track.

Lex Suvanto is Global Managing Director of Edelman Financial Communications & Capital Markets.

Judge Approves Settlement in Yahoo! D&O Shareholder Suits

A California judge recently approved a $29 million settlement in three shareholder derivative lawsuits filed against Yahoo!’s former officers and directors over allegations that they breached their fiduciary duties in failing to properly oversee the handling of a series of cyberattacks from 2013 to 2016. Three billion user accounts were compromised in the attacks, making it one of the largest reported hacks in US history.

The settlement
is more or less a win for Yahoo’s former leaders, including ex-CEO Marissa
Mayer, but by no means cause for a victory lap. The settlement is, to date, the
only cash recovery in a derivative action involving a data breach, which sets
potentially dangerous precedent for future breach-related derivative actions.

Until now, breach-related derivative lawsuits have been settled for a combination of governance changes and modest attorney fee awards. The money from the settlement, to be paid by insurance carriers, will go to Altaba, the holding company created after Yahoo’s internet operations were sold to Verizon Communications last year for $4.48 billion.

Under the settlement, the shareholders’ lawyers will walk away with approximately $11 million in fees and expenses, with the remaining $18 million paid directly to Altaba. (Click here to review the settlement in whole.)

While in corporate America $18
million is a relatively modest sum—especially for an Internet pioneer that once
touted a market capitalization of more than $100 billion—it begs the much
broader question of why the insurers broke with precedent and agreed to a
settlement that exceeded governance changes and attorneys’ fees.

The official justification for the
settlement payment is that it was in all parties’ best interests and that
significant data security improvements have been put in place with the help of
the plaintiff’s lawyers. That makes sense and is consistent with past
breach-related derivative settlements.

But what accounts for the $18 million
now headed for Altaba’s coffers? There are at least five reasons that merit
consideration:

First, the 120-page shareholder complaint—much of which is heavily redacted—is chock full of nasty allegations. It accuses Yahoo’s former leaders of engaging in a years-long, elaborate plot to cover up hacks going back to 2013, and conducting a “sham” investigation to “conceal the largest hacking incident in U.S. history.” 

Second, Yahoo was a
pioneer of the Internet era and provided news, entertainment, and online
communications—a confidential way for users to communicate with each other. The
expectation was that those communications would stay private, a fact not lost
on the shareholders or insurance carriers. It’s one thing for the corner dry
cleaners not to understand the importance of consumer privacy. It’s quite
another for an Internet company to lose sight of this fact.

Third, shareholder derivative suits are difficult but not impossible cases to win. Shareholders carry a heavy legal burden and must show that board members breached their fiduciary responsibilities by consciously disregarding their duties. These claims have been called “possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment.” Yet, even with such an uphill climb, the insurance carriers clearly saw the risk of potentially damaging facts coming out in the course of the case that might substantiate the allegations in the shareholders’ complaint.

Fourth, the U.S. Securities and Exchange Commission (SEC) cease and desist order against Yahoo for failing to make timely disclosure of the data breach—the agency’s first action for a cybersecurity disclosure violation—also contains fistfuls of harmful charges. In fining the company $35 million for its tardy disclosure, the SEC didn’t mince words. According to the cease and desist order, “Yahoo had learned of a massive breach of its user database that resulted in the theft, unauthorized access, or acquisition of hundreds of millions of its user’s personal data…Yahoo senior management and relevant legal staff did not properly assess the scope, business impact or legal implications of the breach…[and] did not share information regarding the breach with Yahoo’s auditors or outside counsel…”

And finally, although the sale of Yahoo’s Internet assets to Verizon went through, the purchase price was lowered to $4.48 billion because of the cyberattacks and Yahoo’s failure to disclose them during the due diligence process. That resulted in a $350 million or 7.25 percent hack discount.

Even if there’s a hint of truth
behind the allegations made against Yahoo’s former leaders, the risks of not
settling the derivative cases would be overwhelming and explain the insurers’ motivation
for breaking with precedent. At minimum, though, companies and their boards might
want to think long and hard before concluding that they have nothing to fear
from shareholders.

Craig A. Newman is a partner
with Patterson Belknap Webb & Tyler , the New York law firm, and chair of
its Privacy and Data Security Practice. All thoughts are his own. 

Launch the New Year with Your Own Board of Directors

One common piece of career advice is to find a mentor, someone you respect and trust to offer guidance on your journey.  If you have a mentor, or multiple mentors, how can you take this process a step further to elevate your career development?  Start this year off with a strategy to establish your own board of directors.  A group of people you can go to for goal setting, problem-solving, and to hold you accountable.  When you look at any company with a board, there’s usually a lawyer, a strategist, an accountant, and a human resources leader. Just as a company benefits from various experts, so will you. Surround yourself with people who have skill sets, personalities, and experiences that are different than yours.

What’s in it for me?

  • Receive advice from individuals who have specialized knowledge and/or business experience that is different than your background.
  • Acquire feedback on how they see you leading yourself and others.
  • Accelerate introductions to other key stakeholders in your development.
  • Gain encouragement, support, and honest reactions from other professionals who want to see you succeed.

What’s in it for them?

  • Expand their relationships.
  • Expedite their knowledge of other areas within the organization or the community.
  • Improve their strategic and political acumen.
  • Fast-track another person in achieving their goals.

How do I approach a potential board member?

  • Let the person know that you respect and admire them.
  • Explain what you would like the person to do to serve as your advisor on your personal board of directors.
  • Offer to reciprocate by helping the potential board member.

What do I need to know about selecting and maximizing my board of directors?

  • Identify people you admire inside and outside your organization. These advisors are people with important connections and those who want to see you succeed.
  • Use your board to provide guidance about professional image and presence, to expose you to valuable connections, and to provide unique outside perspectives.
  • Just as a code of behavior applies to networking groups, it is also critical to thoughtfully manage the advisor-protégé relationship. Most advisors are more than happy to provide guidance to a protégé that is eager to learn and uses the advisor’s time well.
  • Expressing gratitude to advisors is a requirement of this special relationship. You can also reciprocate your board’s generosity by offering to support your advisors in their future endeavors.

Take the time to work with your board.  Focus on high priority situations and deliver on your commitments.  By utilizing this group you can gain exponentially more feedback and advice than through a typical mentor relationship.  Remember, your hardest critics can be the best people you learn from this year.

 

Authored by Barbara A. F. Greene, CEO of Greene and Associates, Inc. A CPI Firm

ICF Master Certified Coach and M.S. Degree in Counseling

The post Launch the New Year with Your Own Board of Directors appeared first on CPIWorld.

CES Experience 2019: How the Ground Is Shifting

The directors who traveled to Las Vegas to attend NACD’s CES Experience were well prepared to walk onto the showroom floor on Tuesday. A lively panel moderated by Nichole Jordan, Grant Thornton’s national managing partner of markets, clients & industry, helped prepare participants on how to best to sift through the hype and sheer size of the annual technology extravaganza that this year features some 4,400 exhibitors sprawled over 11 venues. Said panelist Nora Denzel, a CES veteran who serves on the boards of Advanced Micro Devices, Ericsson, and Talend: “Look at how the ground is shifting.”

Small group tours of around 20 directors and guests each were
led by The Palmer Group, with CES Experience attendees separated into two groups
led by Shelly Palmer and Jared Palmer. Each group toured two massive halls of
the Las Vegas Convention Center, which one of several major venues for the trade
show and where some of the most impressive exhibits are on display. Tour groups
explored the north and central halls of the convention center, focusing primarily
on vehicle, audio, and video technologies.

Some observations from today’s CES tour follow.

Voice is now the
ubiquitous interface.
While Amazon’s Alexa and other voice-command
applications were built into nearly everything yet again this year, the systems
are always getting smarter. While touring an exhibit of the Kohler connected
bathroom exhibit, one director pointed out that he was interested in
understanding the use in geriatric care application, while another director
mentioned that he had already outfitted his mother’s home with the devices.
From controlling the temperature of your bathwater to using on-the-spot
translation technologies, voice command is here to stay—and improves with use.
Directors should ask their managers have a strategy to include the application,
even in ways that might not seem obvious.

Kohler displays the power and convenience of the connected home.
Photo credit: Jamie Mason

The 5G revolution is
getting closer.
Be aware: there aren’t many 5G devices that companies were
ready to display. However, Intel, Qualcomm, Dlink, and others demonstrated
future applications or actual hardware slated to be released later this year. Autonomous
vehicle technology displayed by automakers showed the promise of what may come
with minimal latency and a wealth of sensors. Ford, for instance, demonstrated an
intersection without stop lights
. The catch? Once 5G technology
connects to in-vehicle sensors, cars will theoretically be able to talk to one
another and make real-time traffic calculations. While the promise of what 5G
could do to transform cities is alluring, we’re not quite there yet. One
director asked Jared Palmer, engineering lead at The Palmer Group and one of
our tour guides, when he thinks we’ll see cities build the infrastructure for
this future. The answer? “Whenever we can pass an infrastructure bill.”

A Qualcomm spokesperson demonstrates the difference in speed between 4G and 5G wireless networks. Photo credit: Jamie Mason

Wearables make
providing health care data easy.
Would you be more likely to wear a heart
rate monitor on your morning run if you were able to wear it on a specialized
washable shirt? Could your skin chemistry change how a wearable medical device
is used? These are questions that companies such as 3M and Qus are helping
wearable medical technologies answer. CES exhibitors also showed off the “gamification”
of health care, including an application that identifies where teeth need the
most attention while brushing, as well as many devices to escape from
technology.

A spokesman from Qus explains the benefits of wearable athletic performance tracking.
Photo credit: Jamie Mason

Everyone loves flying
cars and robots.
As cities see changes in how people get around, companies
are exploring innovative, more varied solutions. One of the most jaw-dropping new
technologies at CES this year was Bell Flights’ flying
car concept
, which could be available from Uber as soon as 2020.
Meanwhile, one of Samsung’s many impressive displays included a family of
domestic robots. These exhibits showcase incremental improvements in day-to-day
life that have become commonplace at CES—and yet are no less awe-inspiring.
While in recent years CES has become less about paradigm-shifting mega-releases
of products, companies are moving so fast to create new versions of products
and release them that each year demonstrates something a bit better than
before. The same can be said for these Bell and Samsung products.

Bell’s spectacular flying car concept. Photo credit: Jamie Mason
Samsung’s friendly domestic robot. Photo credit: Jamie Mason

The mind truly reels walking amid competing exhibits, faces colored by neon display lights and the shine of new electronics. The only way to fully appreciate the size and possibilities represented at CES is to see it for yourself.

NACD will deliver more short videos on its social channels and look for coverage of NACD and Grant Thornton’s CES Experience in the March/April 2019 edition of NACD Directorship.