Boards & Governance

NACD BLC 2014 Breakout Session – Going Beyond: Stories of Pushing Past Personal Limits

NACD Blog Feed -

It should go without saying that governance in today’s complex business environment is no walk in the park. But are there lessons to be learned from a run in the Sahara? At the recent 2014 NACD Board Leadership Conference, documentary filmmaker Jennifer Steinman aimed to provide the answer to that question in a session titled “Going Beyond: Stories of Pushing Past Personal Limits.”

In the session, Steinman told the story of the creation of her latest film, “Desert Runners,” which follows people who take on the formidable challenge of competing in the 4 Deserts Race Series (4 Deserts). 4 Deserts includes a series of four ultra-marathons: races involving distances greater than the 26.2 miles that compose a typical marathon. The races take place in some of the most inhospitable environments on earth, including the Sahara, Gobi, and Atacama deserts, and Antarctica.

Steinman began the film project with a series of questions, including “what are these perceived limitations that we put on ourselves?” and “are these crazy people?” She arrived at the first race expecting to find a group of elite, superhuman athletes, and was surprised to find that, for the most part, the runners were what you might call “everyday” people; people with day jobs, mortgages, and families. Steinman’s film follows four people who decided to take on this challenge. In the course of the conference session, attendees were introduced—through video clips—to three of them: a student named Samantha, age 25; an American consultant named Ricky, age 33; and Dave, a 56-year-old marketing director and friend of Steinman’s who introduced her to the competition. Dave was one of 13 runners attempting to complete all four grueling races of 4 Deserts in one year, a feat known as the “Grand Slam.”

Steinman shared a series of her favorite clips from the documentary, and as might be imagined, Samantha, Ricky, and Dave confronted a wide variety of physical challenges, including dehydration, illness, exhaustion, and a great deal of pain.

So how did all of that tie into directorship? The challenges and struggles of the runners echoed many of the themes emphasized elsewhere at conference.

An injury suffered by Ricky provides an example. Given the long distances and extreme conditions involved in the races of 4 Deserts, some degree of pain is unavoidable. However, as Steinman pointed out, racers must constantly ask themselves, “is this real pain, pain I need to deal with, pain that can do real damage?” If the answer is “yes” to those questions, as it was in Ricky’s case, a runner needs to recognize this and give it the attention it requires. However, if the answer is “no,” any runner who intends to finish the race must recognize this, and avoid attaching more meaning to the pain than is merited.

As part of risk oversight, directors also receive an overwhelming amount of urgent information from a variety of sources, and must contextualize it on the basis of their own experience so they can ask the right questions of management. The board should ensure that the risk oversight processes in place have the capability to differentiate between a real threat and the intermittent challenges that occur in the normal course of business. When a real threat is detected, a director must not let pride get in the way of taking the appropriate actions, as the consequences could become progressively worse.

Another of Steinman’s film clips showed a series of gruesome injuries suffered by runners. Watching the clips quite naturally might cause one to wonder why anyone would willingly participate in such a competition. Steinman found that part of the answer to that stemmed from the camaraderie of being marooned in the desert with a common goal. While a small contingent of elite runners are in the race to win, the vast majority have the simple goal of finishing. Even a relatively competitive person would likely concede that running consecutive marathons across the Sahara or Antarctica is hardly your typical “participation medal,” and many runners rely on each other at times to accomplish this remarkable feat.

In a particularly poignant clip, a professional runner holds Samantha by the hand and they help each other to the next check point. Though they may be significantly different in kind, corporate directors certainly face their own challenges. The reasons directors take on the responsibilities and liabilities inherent in the role are many, but by concentrating on the reasons they are there, and augmenting their own expertise with the expertise of others around the table, each director, board, and company can reach their goals.

NACD BLC 2014 Breakout Session – Inside the SEC: Anatomy of an Agency

NACD Blog Feed -

The Securities and Exchange Commission (SEC) is charged with maintaining fair and efficient markets, facilitating capital formation, and, like directors, protecting investor interests. This regulatory arm of the federal government has a significant impact on businesses, but many may not effectively understand the commission’s inner workings. Providing directors with an insider look at the SEC was a panel comprised of: Mark D. Cahn, former general counsel of the SEC’s Office of the General Counsel, and partner at WilmerHale; Thomas J. Kim, partner at Sidley Austin and former chief counsel and associate director of the SEC’s Division of Corporation Finance; Troy Paredes, senior strategy and policy advisor at PwC and former SEC commissioner; and moderator Kendra Decker, partner in Grant Thornton’s National Professional Standards Group.

The SEC has five commissioners, each of whom is selected by the president of the United States, and no more than three of them can be from the same political party. The president also selects one commissioner to serve as chair. The chair sets the agenda and makes senior hiring decisions; however, this does not create a hierarchy as that professional title might imply. The commissioners are like a board of directors, with each person maintaining their own, independent voice as they vote on the issues set before them.

“No one commissioner has the power to do anything,” Kim said. “They only have power by acting as a commission, just like a board must act as a collective body.” Although the SEC is generally thought of as a rulemaking entity, Cahn pointed out that it’s a relatively infrequent occurrence that commissioners actually cast a vote. The organization’s day-to-day workings are processed at the staff level—and, in turn, the division heads engage with the commissioners.

The panel also drew attention to challenges within the commission. For Cahn, the biggest challenge with regard to rulemaking is the Government in the Sunshine Act of 1976, which requires all commission deliberations to be carried out in public. “You end up with meetings of two commissioners with staff members to discuss issues when they could be much more productive to work out matters as a group.”

In addition, trying to pass a rule through a multi-member commission can turn into a game of chess, with each member making suggestions for changes up until the last minute. If a rule passes with a split vote, those dissenting opinions serve as a roadmap to potential litigants who want to challenge the rule—a factor that emphasizes the importance of unanimity within the commission. “I think it [speaks] well for the agency overall when there’s consensus,” Parades said. “But sometimes you can’t bridge those differences. Another aspect is, from time to time, chairs have had a norm where they wouldn’t go forward unless there was a norm of four. What that does, it forces people to compromise and it doesn’t allow those in the majority to say that ‘this is what we’re going to do, regardless.’”

Despite these complexities, Paredes stressed the critical importance of third-party engagement. “The SEC is able to better evaluate the consequences of their rulemaking if they are able to hear from the people their rules are going to impact,” he said. “If [SEC] folks aren’t hearing that through one mechanism or another, there are going to be serious blind spots.”

NACD BLC 2014 Breakout Session – Mindfulness Revolution

NACD Blog Feed -

In Buddhism, mindfulness is a facet of meditation in which an individual focuses their attention on the thoughts, feelings, or sensations happening in the moment. In psychology, studies suggests that mindfulness improves an individual’s quality of life, boosting memory and reducing stress and anxiety, among other benefits. In business, the adoption of these techniques has shown to improve productivity—so much so, that even Fortune 50 companies and the U.S. military are integrating mindfulness practices into the workday. Mindfulness expert Janet Nima Taylor—an American Buddhist nun, author, and co-founder of meditation resource organization Serenity Pause—gave directors attending the 2014 NACD Board Leadership Conference a crash course in effective techniques and how to integrate meditation into a company’s daily operations.

Meditation has been an integral part of wellness for millennia, but it’s a practice that is just now finding wide acceptance in corporate culture—and it’s also a proven means of improving business. According to Taylor, there’s plenty of research that attests to how meditation induces physiological and mental changes that influence how you interact with yourself and the world around you. The key to mindfulness, she said, is to create a gap between stimulus and response. Research says that 90 percent of our day involves responding in habitual ways, but creating this gap allows people to consider alternatives and discover new ways of resolving problems. During her session, Taylor offered three practices that directors can easily integrate into their everyday lives, even while they’re on the go. “If you’re breathing, you have time,” Taylor said.

1. Concentration. Mindfulness is not about stopping thinking, but rather shifts in how we interact with our thoughts. Momentarily forget those top-of-mind concerns and be completely still. Breathe in and count to four. Breathe out, count to six. Physiologically, this exercise lowers blood pressure. Conversely, when people are stressed, they tend to take shallow breaths and their bodies become oxygen deprived. Taking a moment to get the oxygen flowing can impact how you’re able to make decisions because doing so calms the body’s “fight or flight” response along with its associated stress hormones. Concentration also affords an individual heightened awareness of oneself, which allows them to be more present in the moment. By extension, when board meetings get contentious, directors should take a moment to breathe and write down the words that describe how they’re feeling. This exercise forces people to better articulate themselves and moves them away from the desire to be competitive toward wanting to be cooperative despite differences in perspective and opinion.

2. Natural Awareness. In our technology-centric culture, Taylor observed, people tend to live in their heads, making it easy to lose track of what is happening in one’s body below the neck. A person needs to permit himself or herself to do absolutely nothing for five minutes and use their senses to become completely aware of what is happening throughout their body in that given moment. Culturally, people are wired to be continuously active, but research shows that people who set aside time to momentarily do nothing are far more productive than those who are always engaged.

3. Positive Imagery. The human mind has a highly active imagination. This capacity for flights of fancy can be used to an effective end. If faced with a source of stress, create a positive spin on that disruptive force and focus on that self-generated positive imagery. That focus will help neutralize the negative situation.

A study published in the Journal of Occupational Health Psychology showed that employees who participated in a free 12-week mindfulness program showed a significant reduction in stress. Integrating these practices into a business environment starts with the tone at the top. From the boardroom down through the employee level, people can look to leaders’ involvement to signal that these practices are acceptable in the workplace.

“Using the power of your mind is a teachable skill,” Taylor said. For a business, these tools help people to become better empowered to work together. And with company leadership on board, the positive benefits of mindfulness can transcend the organization.

Complexity and the Boardroom

NACD Blog Feed -

At the final plenary session of the 2014 NACD Board Leadership Conference, NACD President and CEO Ken Daly spoke with Steven Reinemund, director of Walmart, Exxon Mobil, Marriott, and American Express, and Gen. H. Hugh Shelton (Ret.), chairman of Red Hat and director of L-3 Communications on the issue of business complexity. The current environment is dynamic, fast-paced, and tumultuous, Daly observed. Not only must boards stay vigilant of disruptive forces—including those identified by NACD’s Directorship 2020®: economics, geopolitics, competition, technology, demographics, innovation, and environment—these forces rarely appear solo. Indeed, multiple forces can strike a company at once, creating a formidable force: complexity.

Drawing from his military background, Gen. Shelton suggested applying a process of “branches and sequels” in boardroom discussions to reduce unknown factors. This process requires that strategy development takes into account all possible actions of your adversaries or competitors—forcing directors to consider the “knowns and the unknowns.”

Reinemund used different terminology to address unknown and unanticipated factors. He said that boards may wish to view disruptors and risks through both offensive and defensive lenses. Most importantly, boards must also combine the two. Although defensive moves can be easier for boards to understand and address, by considering offensive actions the board can help move the business forward.

Turning to the topic of innovation, Daly noted that an unusually high number (95%) of the Standard and Poor’s 500 company earnings have been used to buy back stock or pay dividends. He posed the question: does returning earnings to shareholders reduce or limit the funds available for innovation or acquisitions?

Both panelists agreed that many companies have a large amount of cash available, but often the board can’t find a potential acquisition that fits the company strategy, or the target has such a high multiple that it is not a good purchase. Despite these potential issues, though, the panelists agreed that most large companies need to invest in innovation, through acquisitions or otherwise. Above all, the board has to think in terms of the amount of risk they are willing to take and—if necessary—encourage management to make innovation a priority.

The session ended with a discussion on board accountability. The panelists noted that directors must hold each other accountable for recruiting the right leaders, keeping their skills current, and maintaining the right mix of directors on the board.

Future Trends in Market Disruption

NACD Blog Feed -

Seasoned venture capitalists during a keynote session this morning at the 2014 NACD Board Leadership Conference discussed future trends in marketplace disruption.

Scott Kupor, director of the National Venture Capital Association and managing partner at the venture capital firm Andreessen Horowitz, said that from an entrepreneurial standpoint, the so-called next big thing is whatever a business is doing to be innovative in their field. What many entrepreneurs are doing is streamlining the chain by which products or business ideas make it to market. They’re getting rid of the middle man.

John Backus, managing partner of venture capital firm New Atlantic Ventures, highlighted the importance of companies being aware, and staying ahead, of upcoming trends. As an example, Backus recalled a past employer, a home phone company in the 1990s that was so focused on its way of doing business that it totally missed the technological innovation of the Internet. Companies can essentially be wearing blinders, seeing only what they and their three or four nearest competitors are doing, ignoring the potential for disruptive innovation.

Kupor said his firm missed out on becoming an early investor in Airbnb.com–a San Francisco-based startup founded in 2008 that allows people to list rooms in their homes as being available for temporary rental instead of a hotel. Airbnb is now connecting people to available rooms–or couches to sleep on, in some cases–in 190 countries and more than 34,000 cities. Kupor said that the mistake that he and his team of investors made was in limiting their thinking to whether they would use the service. Their group wouldn’t, so they decided not to invest in the business; however, they later realized that many other people would use the service, so Kupor’s team later decided to invest in Airbnb.

“Big businesses have a really hard time changing the way they do business,” Backus said. “If you don’t innovate, somebody’s going to do it for you.”

Bill Reichert, managing director of Garage Technology Ventures, said that when a company finds out about a new innovative idea, corporate directors can’t just sit in the boardroom at the strategic level and say: “We’ve got to watch that, monitor that.” A company must react.

That reaction can play out in a variety of ways, depending upon the innovation and the industry.

Backus said that in some cases, companies react with merger and acquisitions. They purchase a company whose innovation might be disruptive and competitive to their company’s strategy. Then, they can either foster that innovation and bring it to market, or–in some cases–shutter the innovation to get rid of the threat of competition.

Other companies decide to invest in research and development hubs overseas, outsourcing their innovation to less expensive and more highly concentrated development teams in other countries.

Still other companies spin off their own team of venture capitalists to travel and seek innovative technologies in which to invest.

All the panelists agreed that the key to staying ahead of marketplace trends, after becoming aware of potential innovative ideas, was to take action. In other words, innovation ignored is a bad business practice.

In Conversation with James Jones

NACD Blog Feed -

As the business world is continuously reshaped through advances in technology, growth of new markets, and changing political landscapes, the issues that arise in both the public and private sectors have become increasingly complex. The international crises that dominate news headlines today–the emergence of the Islamic State, the ongoing war in Syria, and the crisis in Ukraine–will play a part in redefining global markets and impact how companies operate in the future. In a conversation with NACD Senior Advisor Jeffrey M. Cunningham, Gen. James L. Jones, USMC (Ret.), former national security advisor to President Barack Obama, Supreme Allied Commander Europe and Commander of the U.S. European Command, and 32nd Commandant of the Marine Corps, shared his perspectives on international policy and global competitiveness.

We are living in dangerous times. Terrorist groups are the common enemy, but unlike the uniformed antagonists this country faced in the conflicts of the 20th century, these insurgents are asymmetric, omnipresent, and far from an easily contained problem. “We need leadership,” Jones said. “And leadership has got to have moral courage and the dedication to do the right thing at the right time. If you wait too long it’s hard to put things back together.” The new challenge of American leadership is, however, forming coalitions to effectively address these problems on the battlefield, as well as in the boardroom.

Looking at the trajectory of the United States in the 21st century, Jones looked to the past. By 1950, the United States had evolved into a global power with considerable presence on the international stage. That standing, however, is currently in flux, namely because this is a century of competition. “We have economic challenges coming from China, the European Union, Brazil, India, a whole host of areas. And how we compete with those areas is going to dictate where we will be in 2050.”

To enjoy the level of success in 2050 that we enjoyed in 1950, Jones said that the public and private sectors need to work more closely together. “All of our competitors are joined at the hip between public and private interests, and we don’t do that very well,” he said. “The pillars of governance and rule of law need to play a large role in that.” To that end, he added: “I think we talk too much. Before you talk about tactics, you need to make sure you have a strategy.”

Jones also emphasized the need for leaders to foster constructive relationships. Reflecting on his time as national security advisor, he remarked on President Obama’s inclusiveness during cabinet meetings. Jones shared that regardless of politics, President Obama sought out the perspectives of everyone at the table and ensured that anyone who had equity in the issue at hand was heard. And on a global scale, Jones observed that personal relations between heads of state drive the relations between nations.

When asked for his perspective on Edward Snowden, a figure who is as revered as he is reviled, Jones commented: “I don’t have a lot of respect for people who take the coward’s way out. There’s a way to work within the system and taking a lesser traveled road [to say what you need to say] is, in my way of thinking, not honorable and not good for the country. I completely stand behind the leadership aspect of moral responsibility. Leaders are responsible for everything their units do or don’t do. And I think that’s true of the private sector, as well as the public sector. It’s a matter of standing up for the right thing.” He also emphasized the need for leaders to understand the meaning and the impact that their privileged positions carry. “It’s easy to stand up and take a bow, but there are times when you need to stand up and take a hit and you need to be willing to do that.”

Insights From Wikimedia Foundation Advisor Sue Gardner

NACD Blog Feed -

Few companies have disrupted so-called business-as-usual as much as the Wikimedia Foundation. The nonprofit foundation is behind the website Wikipedia, an online, crowd-sourced encyclopedia that has become the fifth most visited website in the world.

At the 2014 NACD Board Leadership Conference, Sue Gardner, the former executive director and current special advisor for Wikimedia, shared her insights on the open nature of Wikipedia and the risks involved in that business model. Her thoughts resonate not only for the technology or publishing companies, but also for corporate boardrooms across a variety of other sectors.

Wikimedia aims to encourage the growth, development, and distribution of free educational content available in multiple languages.

Nobody, however, oversees the contributors.

“I will never read all the articles on Wikipedia, right? Unlike most organizations, there’s no central point of control. It’s very much about trusting the process.”

“For the most part, Wikipedia works great,” Gardner said. The articles contributed to the website are generally cited and thoroughly researched. Contributors to the site actually are very knowledgeable about intellectual property law and copyright law, Gardner said.

“We aspire to contain the sum total of human knowledge.” “But,” Gardner said, “the Achilles’ heel of Wikipedia is that the number of people contributing to the site is small and limited in its diversity.”

“It’s a systemic bias,” she said. “In order to edit Wikipedia, you tend to be living in a wealthy country with a good Internet connection. You have to have the leisure time to edit Wikipedia. What that adds up to is that the typical content contributor is a 25-year-old male grad student in Germany. People from poor parts of the world and women are underrepresented.”

Gardner said she believes that the contributions of women are missing. Several different studies conducted by researchers have found that somewhere between 12 percent and 15 percent of content contributors are women, she said. This dynamic might be a result of what can be a process that is not very collaborative, but more of a rough, confrontational back-and-forth between content generators.

Gardner also discussed the lack of diversity among the technology industry, specifically in Silicon Valley. When she moved to the San Francisco Bay area, she began a three-month tour to seek funding for Wikimedia. In that period, the only women she met were those who held positions such as administrative assistants. None were company leaders or business investors.

I think the lack of gender equality of the Silicon Valley area is a symptom of an immature industry,” Gardner said.

In addition to a lack of diversity, Gardner said she has another concern: data privacy. While many people are concerned about government surveillance, she is weary of vast amounts of data being collected by for-profit companies.

“I worry not just about what the advertisers know and how the information is traded, I also worry increasingly about companies that are going to be bought and sold for parts,” Gardner said. “The whole game in Silicon Valley is that a lot of companies are just going to go under. What is going to happen to the information that they have? I don’t think we’re worried enough about that.”

Generational Dynamics in the Boardroom

NACD Blog Feed -

During today’s keynote address at the 2014 NACD Board Leadership Conference, Chuck Underwood—founder and principal of The Generational Imperative, a consulting firm that provides training and research on generational demographics to businesses and governmental officials—shared some key takeaways on how generational demographics affect corporate governance. He began by sharing three key points about generational dynamics.

  1. “Between birth and the late teens or early 20s, individuals form core values molded by teachings and personal experiences, and those core values are by and large kept for life. People who are approximately the same age group and who have been shaped by similar teachings and experiences are considered to be a generation.
  1. American life in the last 100 years has changed frequently and sharply, and life expectancy has increased because of advances in medicine and improved overall wellness. Individuals now live an average of 30 years longer in 2014 than in 1914. The increased life expectancy, coupled with frequent cultural changes, means there are now five living generations in the United States.
  1. The core values held by each generation exert powerful influence over that generation’s core choices, career decisions, lifestyle preferences, and behaviors—including leadership behavior in companies and in the boardroom,” said Underwood, who hosts the PBS national television series “America’s Generations With Chuck Underwood.”

Boards and company management can benefit from learning the core values of the five living American generations and by understanding how to relate to each generation in the marketplace and in the boardroom. The five generations are:

  1. The G.I. Generation, born from 1901 to 1926, is shaped by the experiences of economic prosperity during the roaring 1920s followed by the setbacks of the Great Depression;
  2. The Silent Generation, born from 1927 to 1945, is more financially secure than any other generation that has reached their age;
  3. Baby Boomers, born from 1946 to 1964, currently account for 25 percent of the U.S. population and 50 percent of its wealth;
  4. Generation X, born from 1965 to 1981, is shaped by a materially comfortable childhood that was also emotionally difficult because of divorced and career-driven parents; and
  5. Millennials, born from 1982 to 1996—possibly longer, depending on whether individuals born after 1996 hold to the same core values of Millennials—and living an extended adolescence while also wanting to change the world for the better.

Underwood said that each generation has its own leadership style that is shaped by its unique experiences. He has found there are four general points about generational leadership:

  1. Each generation leads for about two decades.
  2. Each generation’s unique core values determine America’s direction.
  3. Some generations deliver good leadership, some deliver bad.
  4. A generation’s leadership era begins when the oldest are about 65 years old.

The United States is currently undergoing a transition, Underwood said, from one leadership era–that of the Silent Generation—to another: the Baby Boomers.

“Silent Generation white males (minorities and women were allowed the same opportunities) came into an environment in which the corporation was the highest priority, rather than employees. Team players were valued more highly than mavericks,” Underwood said. The value of conformity was stressed to this generation.

They enjoyed lifestyles their G.I. Generation parents never were able to receive because of the Great Depression, and they measured their value based on their material wealth.

The Silent Generation had the expectation that if they conformed and put the company’s needs above their own personal needs, they would be rewarded. Their strong desire for reward, however, led in some cases to corporate corruption.

“This,” Underwood said, “is why eyes are focused on the incoming generation of corporate directors and managers—Baby Boomers, who in their youth helped bring social change through the civil rights’ and women’s rights movements, for example—to help set corporate America back on a solid track.”

Rethinking IR: Investor Insights

NACD Blog Feed -

Shareholder activism is on the rise. Between January 2010 and September 2013, shareholder actions carried out all over the world surged by 88 percent. Going back to the past 10 years, the number of shareholders with specific activist strategies has doubled. These statistics drive home the need for boards to have healthy investor dialogues year-round—not just when in the throes of proxy season. Looking ahead to 2015, a slate of top influencers in the investor community offered their insights on what the top priorities for boards are going to be. Panelists included: Donna F. Anderson, vice president and corporate governance specialist, T. Rowe Price; Glenn Booraem, principal fund controller, Vanguard; and Stu Dalheim, vice president, shareholder advocacy, Calvert. Peter Gleason, director, Nura Health and managing director and CFO, NACD, moderated the panel.

Using NACD’s Investor Perspectives: Critical Issues Board Focus in 2014 as a framework, Gleason noted that first and foremost: “It’s important for the board to know their investors. It’s too easy to lump them all together—but each investor has their own objectives. Engagement strategies are similarly different from one institution to the next. For example, Dalheim explained that at Calvert, their approach is always to engage with constructive outcomes in mind. Furthermore, there are three principles that guide their approach:

  1. Long-term value creation.
  2. Accountability, where management is accountable to the board and the board is accountable to shareholders.
  3. Sustainability, where companies that are sustainable from a financial, environmental, and societal perspectives will be more successful.

In addition, Dalheim explained that the approach to engagement strategy varies depending on the industry. Calvert has analysts that focus on specific sectors and know the governance practices in each sector. In that review process, they see which companies have room to improve. Furthermore, Calvert makes a point of fostering and developing relationships with portfolio companies over time, ensuring that there are open lines of communication. These open lines of communication are fortified by disclosures, which are critical to investor relations.

Anderson emphasized the responsibility of the shareholder on their side of the relationship. From her perspective, shareholders should respond to engagement requests in well-prepared ways, with the proper resources and with a team that is committed to creating a productive engagement experience. On the other side of the table, directors should engage if there has been a request to do so, or that there is a need for those exchanges to take place. With that in mind, she said that there are three key questions an institutional investor should ask before engaging with directors:

  1. Do we have standing to talk to these directors?
  2. Do we have something constructive to offer?
  3. Will this be constructive? And by extension, does the institutional investor think that the board will constructively work with them?

The panel closed by looking ahead at the pressing issues that will present themselves in the coming year. Anderson singled out the issue of bylaws: principles that institutional investors generally believe they can count on, but may not actually be in place for whatever reason. (For example, a company may have revoked its bylaws.) Boards may avoid putting certain bylaws into effect out of fear of activism; however, there needs to be a dialogue about what bylaws boards can change unilaterally.

Booream said that engagement is likely to be triggered by observable components that cause a board to be an outlier—for example, boards whose directors have above-average tenure or boards that lack minority directors. On this score he advised directors to observe the ways in which their boards are outliers, and either own it and explain why their governance practices are in shareholders’ best interests or fix the problems. Shifts in boardroom mindsets will not happen overnight, so it’s important to initiate those conversations as soon as possible.

Dalheim pointed to the issue of director qualifications. He said that boards should have a list of areas of expertise that are needed to effectively oversee the company and then explain how the current board slate illustrates those attributes. In his opinion, this list helps boards identify what’s needed to create growth. Nevertheless, there is currently little disclosure with regard to board evaluations, in terms of either the process or the outcomes. Some companies have an annual statement about board performance–and resulting action steps–which may be a pay that draws increased scrutiny in the coming year.

Recalibrating the Dialogue on Strategy Development

NACD Blog Feed -

Rethink strategy. Briefly, that sums up the message in NACD’s new Blue Ribbon Commission Report on Strategy Development released today at the 2014 Board Leadership Conference. It is well known that the operating marketplace is fast-paced, volatile, and more dynamic than ever before. Companies must be able to react to disruptive forces quickly and correctly–the inability to do so is a real risk to an organization’s health and longevity. And yet, the role of the board in strategy has not evolved to meet the accelerated pace of business. Many boards still oversee strategy development with a “review and concur” approach: management creates a fully formed strategy that is presented to the board for approval with little discussion, and reviewed on an often annual basis.

How, then, can boards become more engaged in the strategy development process without crossing the line into management’s purview? To answer this question, earlier this year NACD convened a group of leading directors, strategy experts, and investors. At the second panel of the day, commission co-chair Raymond Gilmartin, former chairman, president, and CEO of Merck, commissioner Barbara Hackman Franklin, director of Aetna, and Bill McCracken, former chairman and CEO of CA, discussed with Wall Street Journal’s Management News Editor Joann Lublin the key recommendations from the report. These include:

Move to a higher level of engagement in the strategy formulation process. Gilmartin noted that moving past the “review and concur” model is important in light of unpredictability, uncertainty, and the unthinkable. “As directors, we are responsible for the creation of shareholder value, and also the long-term survival of the firm,” noted Gilmartin. “Failure in strategy is the reason why firms fail.”

Engage early with management, and continually. As strategy is formulated and reformulated, Franklin observed that boards need to engage on the underlying assumptions, strategic alternatives that are being considered, the risks involved, and how you manage success or not. And after there is concurrence with the board and management, at every board meeting there should be an update. “In effect, the strategy discussions are going on all year,” summarized Franklin.

Prepare for the future. In addition to becoming more engaged in strategy, McCracken stressed the importance of preparing for the future. Board agendas should be created to discuss the environment, competitors, and opportunities for innovation. “Often, activist investors are coming after [boards] for a lack of bold innovation on the behalf of directors.”

Putting It Into Practice

Panelists also discussed how they have incorporated the report’s recommendations at their respective boards. These areas include:

Director Knowledge and Education

Optimal engagement in strategy development necessitates that directors have the knowledge and context to understand the information presented by management, which requires continual education. From his experience on the board of General Mills, Gilmartin encouraged directors to visit plants and operations to gain context and the ability to interpret reports. Boards need to have a framework to interpret current events, and a common language so that they can discuss it with management.

Board Composition

Gilmartin stressed that boards “really must understand what the capabilities are and what skills are needed to effectively oversee this strategy.” While the board of General Mills does not use individual director evaluations to assess director effectiveness, Gilmartin believes that because of the interactiveness of the board “director evaluation occurs in every meeting with how they participate.”  

Director Time Commitment

Board agendas are packed with little time for discussion–how can directors be encouraged to make the time for more engagement in strategy development? “A board that makes strategy a priority will spend the time on it–this doesn’t require persuasion,” observed Franklin. From her experience, the shift to becoming more engaged in strategy didn’t happen overnight at Aetna. Now the process begins with several meetings on underlying assumptions to the strategy that leads to a full day session on the plan. Once we get to the [full day] meeting we all own it–not just management. After selecting a strategy, the Aetna board receives an update on the plan at every meeting and a deep dive on one element of the strategy.

Board/C-Suite Relations

Panelists noted that as the board moves to a more engaged role in strategy development, management may feel defensive or territorial. Having served as both the non-executive chair and then CEO of CA, McCracken has experienced this situation from both viewpoints. As non-executive chair, McCracken observed: “I set up things for the board to engage more in strategy once I became CEO.” To move CA from a mainframe company to the cloud, McCracken created a task force of directors who knew the industry best and experts from management–encouraging the board to become more engaged. “Then when I was CEO,” McCracken recalled, “the then-elected chair asked me ‘what do you think of this activist board’? I said: I created it–I’ll have to live with it.

The Report of the NACD Blue Ribbon Commission on Strategy Development can be found at the NACD Library.

Cybersecurity: A Wickedly Hard Problem

NACD Blog Feed -

This morning, Ken Daly, president and CEO of NACD, kicked off the second day of the 2014 NACD Board Leadership Conference with the announcement that NACD now has more than 15,000 members. NACD’s focus on timely and relevant information, changing the “unknown unknowns” to “merely uncertain,” is a key driver of the organization’s growth, according to Daly. He then went on to introduce the morning’s keynote speaker, White House Cybersecurity Coordinator Michael Daniel.

Daniel opened his address with the declaration that “cybersecurity is one of the defining challenges of the 21st century.” He noted three macro trends that underlie the cyber threat, as it is

  • more diverse, we are moving from a wired internet to a mostly wireless one;
  • more sophisticated, malicious actors are dividing themselves into companies to levy their expertise; and
  • more dangerous, these actors show willingness to up the scale, to not only disrupt, but attempt to destroy data.

From a technical level, cybersecurity ought to be easy,” said  Daniel, but cybersecurity is much more than a technology problem–it is a technical, economic, psychological, business, physical, and political problem. “Many of these fundamental weaknesses have remained for years, and until we understand these listed human factors, we will continue to fail at this problem.”

In addition, Daniel mentioned an interesting analogy that touched on the impossibility of using a single group to monitor cybersecurity. In this scenario, everyone in the United States lived right on the Rio Grande River. With everyone living on the border, the federal government could not feasibly serve as the only entity in charge of border security. Extending this analogy to the Internet, which lacks an interior, just about everything touches a border in some manner. “Because of this, we cannot assign cybersecurity to just one part of the government or society.”

In that vein, partnerships–both between the government and the private sector and within the private sector–are key elements to defeat malicious actors, according to Daniel. He stated that there are two keys to building these partnerships: through reducing barriers; and encouraging companies to share more information. One former barrier, antitrust laws, should no longer be an impediment to cybersecurity information sharing.

Daniel concluded his address by saying that even though cybersecurity is a “wickedly” hard problem, we are starting to attack it across more dimensions. By working collaboratively across sector and company borders, we have access to many types of tools to address this growing issue.

In Conversation with Dona Young and Carolyn Miles

NACD Blog Feed -

The differences between nonprofit and corporate governance are few and far between when the nonprofit in question has a budget of almost $700 million and operations in more than 120 different countries. But when you are a nonprofit of this size, what should the board’s expectations of management be—and vice versa? Carolyn Miles, president and CEO of Save the Children, and Dona Young, who is a director on the Save the Children board, spoke with NACD Senior Advisor Jeffrey M. Cunningham about how directors can navigate the perils and opportunities of operating around the globe while fostering a top-notch organizational culture.

One of the problems of working in the nonprofit space is controversial topics—for example, immigration, an issue that came to a head with the recent influx of children crossing the U.S. border. For Miles, Save the Children didn’t adopt the attitude of choosing sides, but rather, they chose children. With that mindset, the organization was able to push beyond the immigration debate and focus on the issue of taking care of kids and ensuring their basic human rights. It’s a position that drew criticism but doing otherwise would have been a disservice to the company’s mission.

Both Miles and Young drove home the importance of bringing into the boardroom what’s going on in the field. Young emphasized the need of having a CEO who is continuously communicative with the board. Miles explained a practice she has used of bringing people who are working in the field to attend boardroom meetings and explain their needs to directors. Those lines of communication better inform the board and is a boon to helping the board helping the company accomplish its mission.

Miles also explained how Save the Children’s directors venture out to experience the work that their organization is doing, what she believes is a critical practice. Save the Children’s directors have been to the places that are the toughest—Afghanistan, Liberia, and Iraq. On a recent trip to Liberia, Miles was confronted with about 4,000 cases of Ebola in Liberia, which has created about 2,000 orphans. As a result, Save the Children wanted to consider sending aid, even though the issue at hand was out of the company’s traditional scope.

“We vet the issues together as a board,” Young said. “At the core of our mission, we have to assume risk.” She offered the following process of evaluating resources to ensure that the company can address a certain area of risk.

  • Identify each component of that risk.
  • Identify how each component is to be addressed.
  • Evaluate if the board has the skill sets to attack the issue at hand.

These are tactics that are as relevant for Save the Children as they are for a company such as IBM. Although the traditional scope of Save the Children’s activity did not lie within epidemic disease control, they did, however, know a lot of the pieces of how to assist (e.g., setting up hospital), and the company was able to respond to the Ebola crisis in the ways that it could and in a fashion that was true to its core mission.

Miles also discussed the importance of metrics. From her perspective, it is critical for nonprofits to focus on metrics and not just the “greater good of the cause.” If a company is able to produce palpable results, people who bankroll the organization look to their contributions not as a donation, but as an investment. Young added the importance of the board’s role as a steward of those funds, and the need for discipline and process—if that is not in place, there’s no way company is achieving its goals.

Keynote Address: Carlos Watson, Tales From a Silicon Valley Start Up

NACD Blog Feed -

Carlos Watson is coming off a good week. Last Monday, it was announced that Ozy, Watson’s news and culture website, received a $20 million investment from German media company Axel Springer. Ozy–which just turned one-year old–previously had raised a few million dollars.

Named after Percy Bysshe Shelly’s sonnet “Ozymandias,” Ozy is attempting to take the world of digital media by storm. With the hope of bridging the gap between seemingly disparate pieces of information, Watson has created an online news source aimed at the millennial generation. According to Watson, the goal was to “be the daily digital brief that could catch people up and vault them ahead.” During his keynote address to NACD’s 2014 Board Leadership Conference, Watson shared his views on this year’s theme–conducting business “beyond borders”–and his “lessons learned” from his start up, or as he put it: “The good, the bad, the ugly, and the really ugly.”  These lessons include:

  1. Design. Watson believes in the aesthetic hypothesis set by Apple, Nest Thermostats, Vogue magazine, and others: Design matters. According to Watson, good design is more than a “nice to have,” it is essential in the value proposition and is exemplified on Ozy’s site.
  1. Importance of good partners. A game-changer for Ozy was when “old media” companies realized that change was happening, and needed to partner with “new media.”
  1. How global the opportunity is. At its inception, Watson’s goal for Ozy was to have one million viewers at the end of its first year. Today, Ozy has five million viewers in one month–from around the world. “The interest from non-U.S. players is significant and exciting.”
  1. Not good, but great people. Watson interviewed 400 people to hire Ozy’s first 50 employees across all the continents. Hiring and retaining the very best employees is a challenge for both mature companies and young start ups.
  1. What it means to work hard. Watson’s mother told him: “I never want to hear that someone outworked my kids.” According to Watson: “In a world of Uber and Lyft, Square and Dropbox, start ups have become sexy. People miss how hard you have to work in order to make those companies come alive.” In fact, one of Watson’s greatest struggles is communicating to people that Ozy will not become Facebook overnight– it will take time.
  1. The Importance of Being Relentlessly Well-Organized. Mountain View, California–the location of Ozy’s headquarters–is the new capital of Silicon Valley. Surrounded by companies such as Google, LinkedIn, and Whatsapp, Watson is able to observe what creates success in start ups. For founders of young start ups it may not come easily, but being well-organized is a great differentiator in those who are successful.
  1. Supersize your dreams. Watson believes “every month, you have to think about how you are going to put yourself out of business.” By doing so at Ozy, it  ensures that the editorial work gets stronger every day, that the product gets better, that marketing improves.
  1. Importance of good “vibes” and chemistry. You hear so much about hard skills and talent, but would I actually enjoy being here with this person 5-6 days straight?” Watson encouraged companies to look for not just talent and skills, but also “good vibes.”
  1. Have the “Luck of the Irish.” Neither Watson nor his partner are of Irish descent. While they have worked incredibly hard, Watson recognizes and appreciates that he has benefitted from luck, good fortune, and serendipity.
  1. Have the right concept. With Ozy, Watson believed he had the right idea, even if news was struggling. When pitching his idea to investors, evening news programs were failing, and native digital media properties were not attractive to Silicon Valley investors. With conviction in his concept, Watson was able to attract initial investors.
  1. Hire a (great) CFO and head of human resources (HR) earlier. The biggest thing Watson would have done differently is hire a terrific CFO and HR director earlier in Ozy’s lifecycle. Ozy grew so quickly that they needed the support. “I think HR is sexy again,” said Watson.

NACD Chairman’s Address

NACD Blog Feed -

Following their inspiring message of peace and love, Dr. Reatha Clark King, chairman of the National Association of Directors, thanked the World Children’s Choir, for “reminding us who holds the future.” She remarked that the numbers at the NACD Board Leadership Conference continue to grow, “tracing diverse participation in every way.”

Dr. King focused her remarks on the idea of the future saying that we are “watching entirely new landscapes rushing to us at lightning speed.” She took William Gibson’s quote: “The future is already here, it is just not evenly distributed yet” and applied it to the audience by stating that “the future is here and having a direct affect on our companies and boardrooms every day.”

Dr. King observed: “New times call for updated challenges for board leadership” and recommended five areas of focus for the updated agenda:

  1. World class excellence in board governance functions: Emphasize the basics. If we don’t take care of the basic functions we won’t have time to take care of the next compelling need.
  1. Innovation: Enable value creation to benefit shareholders, investors, customers, communities, and other stakeholders.
  1. Harness the transformational effects of new discoveries: Mitigate the risks and potentially harmful effects from these discoveries.
  1. Understand and embrace a broad view of our companies’ contributions to society: We need to shift away from being “place-bound” thinkers to being “global” thinkers.
  1. Communicate and keep the public’s trust: The challenge is to communicate clearly with stakeholders.

Warren Bennis has said: “Lleadership is the capacity to translate vision into reality,” and Dr. King pointed out that a major challenge for directors is, “to lead when the rate of change is accelerating rapidly.” She continued by noting that the concept of change is not new; to keep businesses fresh there must always be change. Now, however, simply keeping up with the pace of change is not enough, it is a matter of wholesale reinvention. She mentioned a number of companies and ideas embracing change such as Uber, Lyft, Zipcar, Airbnb, Coursera, Bitcoin, and Square that exemplify the idea—“revolution is relevance.”

Dr King concluded by observing that we cannot wait for the future; the future is here now. There are four things that directors must do in order to ensure their organization’s relevance:

  1. Learn what is coming;
  2. Observe where others are headed;
  3. Envision possibilities; and
  4. Inspire progress.
Subscribe to Lonergan Partners aggregator - Boards & Governance