Boards & Governance

Directors Assess Long-Term Election Implications

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This is the second post in a series addressing the short- and long-term impacts of the 2016 presidential election. Read the first post here.

Directors gathered to discuss the impact of the recent presidential election on November 16, 2016 with audit and risk professionals from accounting firm EisnerAmper. While immediate-term changes were pressing on the minds of directors, they also discussed strategies to address societal and business challenges that coalesced around the following topics.

Can Corporations Bring Back Modern Manufacturing Jobs?

Directors were skeptical that the type of manufacturing jobs that have fueled American economic growth since the end of the second World War would ever return—and asserted that changes in trade agreements may directly impact the ability to create jobs.

Peter Bible

EisnerAmper Chief Risk Officer Peter Bible outlined how the developing administration of President-elect Donald Trump could affect the ability of American companies to export their goods. The Trans-Pacific Partnership (TPP) “is basically on hold now” said Bible. “He wants tariffs on China and Mexico, wants to renegotiate NAFTA, and reconsider the U.S.’s involvement in international trade agreement.” Bible also pointed out that the president can act unilaterally on trade agreements, thus negating congressional checks on trade decisions.

Jill Wittels, chair at eMagin Corp., voiced concern about the pace at which companies could replace factories to offset the impact of tariffs and build more jobs for Americans. “Imposing currency restrictions and tariffs on goods coming in from China, South America, or other parts of Asia would be highly disruptive,” Wittels said. “You don’t instantly create replacement factories in the U.S. at a comparable cost.”

Robert Klatell

Robert Klatell, chair of TTM Technologies, concurred. “Realistically speaking, there is not that much flexibility. We cannot create in the United States the scale of manufacturing that exists in China,” Klatell said. “We don’t have the people or the capital to do it. We’ve rarely had a government willing to support manufacturing the same way that China has in the past 10 to 15 years.”

William Leidsdorf, director at Icahn Enterprises, offered a different viewpoint. “I think you have to look at how Congress may change or water down the president’s decisions,” Leidsdorf said. Trump “is a businessman. He’s a pretty good negotiator. He’s going to go in [to the presidency] and say he’ll do a lot of things and then negotiate.”

Educating the Workforce

Re-educating the American workforce has been a ubiquitous topic at roundtables co-hosted by NACD throughout 2016. This event was no exception.

Sharon Manewitz

A vigorous discussion about the modern workforce was ignited when Carol Robbins, principal of financial services strategic advisory group CER Consulting, cited the invention of a garment-sewing robot as a groundbreaking technology likely to replace countless garment manufacturing workers around the world. Sharon Manewitz, principal and executive director at Manewitz Weiker Associates, a firm that consults with struggling companies, responded: “But who will make the robots? Will they be made here? We need corporate America to help educational institutions change the nature of education in America” to meet the demands of a knowledge-based economy.

The ability of the workforce to be retrained for modern jobs, and how automation will continue to disappear unskilled and lower-skilled positions, was discussed at length. Klatell, however, looked to the future. “Some people won’t make the transition, so we should be focusing on their children,” Klatell argued. “Hopefully, we can get their kids through school with a more meaningful education to make them more employable.”

Laurie Shahon, president of Wilton Capital Group, placed a board lens on some companies’ struggle to fill open positions in certain fields. “Human capital is an issue boards have to deal with,” Shahon said. “We see jobs available in financial services and other industries, but they can’t be filled because there aren’t sufficient qualified people to fill them. The board can and should present alternate cases in its strategy planning to address these changes.”

Deregulation Fallout

If Trump makes good on his campaign promises, deregulation is expected under the new administration and the forthcoming Republican majority congress. How long, though, can directors anticipate deregulated policies to last? Bible pointed out that the current administration might attempt to press through lingering Dodd-Frank provisions. However, he warned that deregulation could cause disruption. “These things are deeply rooted, with a lot of capital behind them,” Bible said. “You can’t just say ‘poof—gone.’ It’s impossible.” Practices that companies have implemented as a result of post-financial crisis legislation [such as the Dodd-Frank Act of 2012] are likely not to disappear as governance best practices because companies invested time, energy, and money to comply with them.

Meanwhile, directors in the room considered what impact deregulation might have on enforcement of the Foreign Corrupt Practices Act (FCPA) and other international business policies by the Department of Justice. Andrea Bonime-Blanc, founder of GEC Risk Advisory, reminded attendees that enforcement of the FCPA, the False Claims Act, and other laws has been on the rise lately. “People are asking, ‘What’s going to happen with FCPA enforcement?’” Bonime-Blanc asked. “Companies can’t just say ‘oh, let’s stop worrying about bribery.’”

Bible responded: “I believe that the FCPA will continue to be enforced as a worldwide standard, and that the new administration’s focus is going to be on executive compensation and on market regulation. I don’t think there will be an increase or a decrease in enforcement.” If anything, Bible indicated that directors should be concerned about the risk of tax repatriation from companies that have moved their headquarters offshore. “Is everyone familiar with how the overseas tax issue works?” Bible asked. “There is $2.6 trillion in money offshore, and $500 billion of that is held by tech companies. There are drives to get that money back into the U.S. economy that can be done without addressing the entire tax structure.”

Don’t Give Up on Culture of Inclusion

The social unrest incited or revealed by the vitriolic presidential election was discussed in the context of the culture of inclusion and tolerance that their companies have invested in building for decades. Aside of the moral imperative felt by many attendees, the disruption of hard-won corporate culture by internal or external actors could present a reputation risk to the company.

Wittels noted that a popular American shoe company had been endorsed by an incendiary website littered with forms of hate speech after a senior manager at the shoe company stated that it felt the country was moving in the right direction under the incoming president. While the company released statements strongly stating its commitment to principles of inclusion, “there are comments about boycott,” Wittels said. “This is a real reputational risk, and a risk with consumers, that could instantly in this communication age go viral and affect the bottom line.”

Klatell returned to the question of the board’s responsibility to ensure that the CEO, his direct reports, and management across the organization are responsible for maintaining a culture of respect, dignity, and inclusion. In the face of employees who may be looking to throw principles of inclusion out of the door, Klatell said: “I’d hope that most companies would stand up and say ‘No, this is what we stand for, and this is how we behave.’”

To see the full list of participants, please click here

Here’s What You Missed

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This year’s NACD Global Board Leaders’ Summit did not disappoint. In fact, we upped the ante with hard-hitting keynote addresses (including an “orbital” governance perspective, a comprehensive approach to cybersecurity, and a geopolitical-risk outlook), unprecedented networking opportunities, and can’t-get-them-anywhere-else experiences.

Our 1,300 attendees represented just about every state, 15 countries, and nearly 30 percent of the Fortune 1000. And 60 percent were “Summit regulars”—they keep coming back for more.

Couldn’t join us live? We’ve got the ultimate recap (in no particular order). Here’s what you missed.

Dancing With the Start-Ups

We no longer live in the Mad Men era, when several large brands dominated a particular industry. Start-ups are changing the business landscape and the ways in which we live and work. In partnership with KITE and KPMG, Dancing With the Start-Ups was a competition that invited 12 promising start-ups in three industries to pitch their company in four minutes—and the winner received a prize package worth $30,000. Read this press release to find out who won.

The No. 1 Risk Your Company Is Likely Overlooking

Conversations about culture risk dominated the Strategy and Risk Board Committee Forum and other breakout sessions. Discussions focused on red flags, establishing a stronger onboarding process, and concrete methods for fully engaging board members in their duties as directors.

Diversity

Diversity was not only embodied and discussed during its eponymous half-day Symposium—which focused on the realities of unconscious bias, building the twenty-first century board, and unlocking innovation through diversity—but also was enhanced by the diverse industries, attendee experience levels, and types of companies represented at the Symposium, as well as the learning formats, input, and content of each session throughout the entire Summit. 

Who did our attendees represent?               

38% – Female
62%- Male
30% – Fortune 1000
48 States
15 Countries
190 Board Chairs
43 Industries
47% – Audit Committee
35% – Compensation Committee
39% – Nominating/Governance Committee
7% – Risk Committee

Crickets, Divorce, and the Strategic-Asset Board

Supported by programming that ranged from the newest technologies and emerging ideas to compensation challenges and company strategy, we worked hard to ensure Summit struck the right balance of innovation and need-to-know governance guidance. (See more on eating crickets, the future of divorce, and ways to build a strategic-asset board.)

How to Land Your Next Board Seat

Back by popular demand, this session was standing room only. Whether you were seeking your first board seat or your fifth, “Landing Your Next Board Seat” offered practical takeaways for directors at all career levels.

Higher Ambitions

“Society needs financial wealth . . . but it matters how you make the money,” said Rajendra Sisodia, cofounder and cochair of Conscious Capitalism Inc., and director of the Container Store Group. “Businesses not only create—they can destroy financial wealth, as well.” This keynote by Sisodia was followed by lively discussions on how to develop a higher-ambition board.

Exclusive Opportunities for NACD Fellows

To recognize NACD Fellows (479 in attendance!), several special events were held, including a reception that offered a sneak peek of Innovation Nation, exclusive access to content, networking, and a special gift.

Golf Simulation, Virtual Reality, and Georgetown Cupcakes

Our Innovation Nation and Partner Showcase offered attendees a unique environment to practice their swing, check out the latest in virtual reality, sample famous local fare, and network. (If you didn’t want to try the crickets, you could taste a glass of wine—sans sulfates.)

Our Members Are Raving

Here are just a few of the glowing reviews attendees left at the end of Summit.

“Summit was the best ever, by a wide margin. This year, you made it a must-attend event!”

“This is the best conferenceI [have attended] every year for four years running—the most innovation, the best new governance ideas, and the best networking. Thank you!”

“Fast paced and exciting! I loved the emphasis on introducing us to innovations happening in the business world today.”

“Thank you for leaning into conscious capitalism and socially responsible business. I’m pleasantly surprised that NACD is so progressive in [its] thinking.”

“NACD has become a thought-provoking forum for the future of business. Governance is important, but is table stakes. Kudos for being on the leading edge of business sustainability and disruptive strategy.”

Like what you’ve heard? MARK YOUR CALENDAR AND JOIN US IN 2017

SAVE BIG BEFORE DECEMBER 31
NACD Global Board Leaders’ Summit
Oct. 1–4 | National Harbor, MD
National Harbor, MD

Positioning Independent Risk Management to Succeed

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Jim DeLoach

Effective chief risk officers are concerned with what the institution may not know. They must occasionally offer a contrarian point of view at crucial decision-making moments when a given strategy, transaction, or deal is under scrutiny or is likely to expose the organization to unacceptable risk. If they do not, who will?

In many organizations, board risk oversight is enhanced when the board and executive management are supported by an effective independent risk management function. Positioning the chief risk officer (CRO) (or equivalent executive) and the independent risk management function to deliver to expectations requires an understanding of how the CRO role can succeed. Let’s explore how to support this essential role.

Key Considerations

While not all CROs are alike, there are factors that offer the board a discussion framework for positioning the CRO (and independent risk management) to succeed.

1.) Inculcate an “everyone is responsible for risk” culture.  If the board, senior management, and operating personnel believe that the CRO is the only position within the organization concerned with risk, the game is over before it begins. Ideally, front-line business unit, process, and functional owners should also be risk owners, or the first line of defense when it comes to identifying, sourcing, managing, and monitoring risk.

2.) Integrate risk into opportunity pursuits and decision-making processes. Striking the appropriate balance between the organization’s market-making and control-related activities is fundamental to what a CRO attempts to achieve. It typically begins with formulating and documenting a risk appetite framework approved by executive management and the board, and integrating that framework into operations. From there, risk considerations are incorporated into decision-making processes, performance evaluations, compensation decisions, and the discipline of monitoring the impact of changes in the business environment on the risk profile.

3.) Clearly define the CRO position. Two distinct CRO roles exist in practice. While there are variants, an understanding of these two roles provides a context for framing the positioning conversation:

  • The “champion” CRO advances and enables the organization’s risk management framework (and supporting methodologies, tools, and techniques), and plays the roles of coordinator and integrator to ensure consistency in application across operating units and functions. The champion CRO plays such roles as educator (as a provider of insights); facilitator (of risk assessments and formalization of risk mitigation plans); and consultant, communicator, and reporter. The champion CRO supports evaluations of enterprise risks and provides transparency into the capabilities around managing the priority risks across the institution.
  • The “line of defense” CRO undertakes the activities of the champion, but also is authorized to play a combination of other roles. These roles include evaluator; initiator; approver (of policies and risk response design); escalator (of significant issues to executive management, including the CEO, and, through appropriate channels, the board); vetoer (of activities affecting compliance with established internal policies); and arbitrator (of disagreements between operating and functional units affecting risk management). The line of defense CRO may not be authorized to assume all of these roles, but clearly reaches beyond a champion CRO with escalatory and/or veto authority.

The key is for the board and CEO to have a mutual understanding of the CRO’s role and function. In heavily regulated industries, such as financial services, the line-of-defense CRO is likely the preferred option. If the focus is primarily on understanding and coordinating an organization’s fragmented risk management efforts and reporting on the state of risk management, a champion CRO might work.

4.) Position the CRO to deliver to expectations. To serve as a second line of defense, a CRO must have sufficient stature with business-line leaders and across the organization. Stature comes from the authority, compensation, and direct reporting lines that command respect. In short, for business-line leaders to collabo­rate effectively with the CRO, they must view the CRO as a peer. This positioning is accentuated if the CRO:

  • Reports to someone who has strong influence on the organization, such as the CEO or executive committee (with administrative reporting to an appropriate C-level executive);
  • Has direct access to a standing committee of the board (i.e., through dotted-line reporting); Engages in mandatory, regularly scheduled executive sessions with the board or a standing committee of the board;
  • Provides periodic reports and escalates issues to executive management and the board; Has influence on compensation practices incenting the desired risk management behaviors; and
  • Is sufficiently resourced with an adequate support staff.

5.) Undertake a strategic focus. Consistent with the premise that risks must be owned by the lines of business and functional activities that generate them, the CRO generally operates in a strategic oversight role with authority vested by the executive committee (or a designated risk management committee), the CEO, and/or the board (or a committee of the board). The CRO’s focus must be on understanding enterprise risk, monitoring changes in the risk profile, and aligning risk with tolerance. Therefore, the board needs to ensure that there is an appropriate risk focus. The CRO role should not be perceived as a check-the-box compliance function that forces the business to follow rules imposed on it, as opposed to linking risk and opportunity effectively when creating and protecting enterprise value.

6.) Foster effective board communication. The CRO should have open and free access to the appropriate board contact. For line of defense CROs, the board must be vigilant in ensuring that there is nothing constraining the CRO from reporting to it when significant risk issues arise. To that end, a formalized escalation process should exist, such as written procedures and agreements requiring escalation of any significant issues raised by the risk management function that are being argued by business-line executives, even in circumstances where the CEO resolves disputes between the first and second lines of defense.

In summary, there is no one-size-fits-all approach to the CRO role. Positioning the CRO function within the organization is more than defining the role itself. The depth and breadth of the CRO’s relationships with senior executives and business-line and functional leaders have a significant impact on the CRO’s effectiveness. The stronger these relationships, the more effective the CRO will be in realizing the intended value proposition. As expectations increase, the need for more sophisticated risk professionals grows.

Jim DeLoach is managing director with Protiviti, a global consulting firm. 

At Roundtable, Directors React to Trump Election

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While President-elect Donald Trump worked last week with his transition team from the Trump Tower, directors met just blocks away at the Harvard Club of New York City, to address how in the aftermath of his election boards should begin preparing for what could be sweeping regulatory, tax, and social change.

(Left to right) Robert Klatell, Steven Kreit, and Laurie Shahon

Leading the discussion were EisnerAmper’s Chief Risk Officer Peter Bible and Steven Kreit, an audit partner with the firm. While the directors disagreed on the order and priority of policy changes, there was consensus around one point: Uncertainty will rule. Bible and Kreit suggested directors focus on in the near term and shared recommendations directors might take to remain agile in the face of politically driven risks.

How can a director prepare? Boards must engage deeply in strategy in the coming months. Anthony Buonaguro, president of the New Jersey NACD chapter and director of Enclave Homeowners Association, ignited a debate on whether or not boards will develop investment strategies focused on continued investment abroad.

Anthony Buonaguro

“It resonated with me that we’re facing several years of uncertainty,” Buonaguro said. “Is this going to make boards more conservative? Usually there are two ways that people handle uncertainty: forge ahead as usual, or freeze. If it’s the latter, it’s not good for the economy or stocks. What are boards supposed to do to revamp strategy?” Kreit answered: “You have to put pen to paper and identify scenarios, then plan for them. Will you hit the scenario that happens? Possibly—or not. But if boards don’t strategize, they’re not going to get anywhere.”

NACD Directorship Publisher Christopher Y. Clark asked participants to suggest calls to action. Shaun Higgins, director of Aryzta AG and Carmine Laboratories, reiterated the importance of establishing strong enterprise risk management (ERM) practices. “I think you go into the board meeting and make strategic planning your number one ERM priority,” Higgins said.

Andrea Bonime-Blanc

Andrea Bonime-Blanc, CEO, founder, and director of GEC Risk Advisory LLC, jumped in: “I think the answer is to know what your top strategic risks are that need to be focused on.” Regarding specific risks, Bonime-Blanc said that when assessing the election’s implications, “We must pick the top five risks to integrate into business planning and factor U.S. geopolitical risk into our own strategic planning in a way that we never have had to before.”

The EisnerAmper hosts shared their near-term advice. “I can’t find a better reason for your companies to have ERM systems and processes in place,” Kreit said, noting that this is not the time for “mail-in” board members.

“I think this is a great time to start thinking about whether the people you have in the boat with you are the people you want to have in the boat with you,” Kreit said.

To see the full list of participants, please click here

What We Know

Kreit addressed what can be readily understood from the election. “There’s talk about what is going to happen, but no one really knows,” he said. “Board members should really be prepared for anything. Start thinking about some of the concepts Trump has been talking about, what some of his main areas of focus have been.” Work with management to address how the following, possible policy changes might impact business:

  • Anticipate inflation and its impact on cash flow and management, equity valuations, and borrowing abilities. While an initial jump in equity markets was seen, according to Bible, “the debt market got $1 trillion knocked out of it,” a sign of anticipation of inflation. Companies should begin scenario-planning for changes in borrowing ability.
  • Expect early review of tax policy. The dominance of the Republican party across Congress and the executive branch indicate the probability of perhaps even speedy tax reform.
  • Repeal or replacement of the Affordable Care Act. Some changes will come to the policy, and companies should be prepared to address its impact on their workforce.
  • De-regulation and repeal of the Dodd-Frank Act. Bible and Kreit anticipate the repeal of at least some Dodd-Frank provisions, and, at a minimum, a review of leadership at the Consumer Financial Protection Board.
  • Changes are coming to trade. One of the major planks in the Trump platform was a general desire to repeal trade agreements and impose tariffs on China and Mexico, as well as opposition to the Trans-Pacific Partnership. Bible and Kreit underscored the fact that one of the American executive branch’s unilateral powers is to control foreign commerce, which could lead to trade wars “that could trigger a recession,” Bible cautioned.

Kreit also outlined the timeline of key power changes in the White House and Congress:

  • December 19, 2016: The Electoral College convenes to vote.
  • January 3, 2017: The 115th United States Congress convenes.
  • January 6, 2017: Congress declares the president-elect.
  • January 20, 2017: Presidential inauguration marks the beginning of the Trump administration.
  • March-September 2017: Congress anticipated to debate raising the debt ceiling.
  • September 30, 2017: The U.S. government’s fiscal year ends, opening the door for Congress to address budgetary and fiscal matters.

These dates could serve as important milestones for developments impacting their companies.

“Back when we were determining a topic for this discussion, one thing I think we could all agree on was that this election could change the course of the country—and, potentially, the world,” Bible said in summation. “I felt very strongly that we should have this type of dialogue for one reason, and that’s because board leadership is essential for success. It’s a brave new world.”

A second post reporting from this roundtable will address longer-term concerns raised by directors.

Have You Noticed?

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Ashley Marchand Orme

The times, they are a-changin’. And so are we.

NACD’s Research team, headed by Director of Research Friso Van der Oord, has been hard at work making changes to significantly enhance how you experience our content. We heard your feedback, and—with our members as our central focus—we’ve released new, practical types of content and reorganized our closets to help you find what you need, when you need it. Let’s begin with our reorganization.

NACD Resource Centers

We’ve curated the best NACD content on the most universal board governance topics in NACD Board Resource Centers. These resource centers include our best thought leadership, most practical tools, recent expert analysis, and upcoming events. Their content gets refreshed monthly. We now have resource centers available on the following topics, with more to come in the next 6 months:

Board Insights Portal

In addition to Resource Centers, NACD also debuted its Board Insights Portal in the last year. Here, you can find our most recent publications, blogs and articles.

This page also features three drop-down menus that allow you to search for our research and insights by committee type (for the three traditional committees), by topic, or for benchmarking data by company type.

Director Essentials

Among the publications you’ll find in our Resource Centers and Board Insights Portal are a new publication type called our Director Essentials series. This new series offers “essentials” guides for boards on key governance issues, outlining core responsibilities of boards, tactics they can adopt to strengthen oversight and questions they can ask to inform the dialogue with management

Director FAQs

Another new content type is the Director FAQs. These two- to three-page briefs answer the most common questions we receive from our members. Topics include:

Blue Ribbon Commission Reports

We also recently built a dedicated page this year to highlight the findings of the 2016 Blue Ribbon Commission Report on Building the Strategic-Asset Board. This page also includes an executive summary of the report, additional resources related to the report, and links to all other BRCs that NACD has produced over the last decade.

Enhanced Search Function

A cross-departmental team of NACD staff have also worked to improve our website’s search function. We cleared out our old or redundant pages and ensured that our most relevant content appears when you search your favorite governance terms on our site. So now, if we’ve published it, you can more easily find it.

What This Means for You

We hope that these changes will help you and your board to better identify specific resources to frame your boardroom discussions, diagnose an issue, and outline possible solutions. We only ask that you continue to provide us with feedback about your experience finding or using our content. Please offer your comments below, or send an email to me (AMOrme@NACDonline.org) or Friso (FVanderOord@NACDonline.org).

You may also click here for more information on how to gain access to NACD’s exclusive boardroom intelligence.

The US Election: Implications for Companies and Boards

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DJ Peterson

This is the third of a three-part series looking at the global economy and uncertainty in 2016 and 2017. In the first post, the challenges of slow growth in developed and emerging markets was addressed. The second post explored how political entrepreneurs such as Donald Trump have exploited voter anger over limited economic opportunity and the perceived inability of institutions and elites to solve problems.

On November 8, American voters extended a series of striking political surprises and rebukes that in 2016 began with the June referendum on Brexit and in October Colombians’ rejection of a peace deal with rebel forces. Looking forward, the success of Donald Trump raises questions about what will happen next in Europe when voters go to the polls in Italy, the Netherlands, France, and Germany in the coming months. Populism, nationalism, anti-globalism, and authoritarianism seem to be on the rise and time-honored principles and institutions are being weakened as a result.

In the corporate boardroom, disruption usually is thought of in terms of innovation, technology, and the competitive landscape—it is looked at as both opportunity and risk. And while board members are sometimes challenged to address economic disruption in business, political disruption is even more difficult to grasp and manage. Are board members asking the right questions? Are we creating the right scenarios?

Not surprisingly, NACD’s member surveys, as a well as discussions at the 2016 NACD Global Board Leaders’ Summit, reveal that a top concern of board members and corporate executives is how to navigate the tremendous economic and political uncertainty in the world today. A breakdown of broad-based consensus on free trade is a related concern.

Several megatrends driving the political disruption we are seeing include:

  • diminishing economic opportunities for the middle and working class;
  • a sense that urban elites—in government, the media, and business—are distant and not very concerned about the “average person”;
  • social media, which tends to play up societal challenges and divides;
  • and political entrepreneurs who look to capitalize on these trends of unrest.

This has played out on the trade issue. While lower barriers to international movement of goods and services help boost growth, the benefits are diffused throughout an economy while job loses often attributed to trade deals (wrongly or rightly) are concentrated in working class communities—making political mobilization easier. Social media, meanwhile, has helped reduce a complex policy issue to caricatures.

How might these trends impact long-term business and economic success in the United States in the coming years? Expectations are that the new Trump administration, together with the Republican-controlled Congress, will repeal a host of Obama-era laws and regulations, cut and simplify corporate taxes, and appoint business-friendly judges to the courts. These moves would be a boon for many sectors.

But Donald Trump’s populist appeal has also been derived from his willingness to blame countries for having unfair trade advantages; to publicly name and shame firms for sending manufacturing abroad; to criticize large mergers for concentrating economic power; and to target executives for opposing him. We don’t expect such appeals to end once Trump is power. He is likely to use such tactics from the bully pulpit of the presidency to bolster his position and “tell it like it is” personal brand.

Economic populism is one area where activists on the left are likely to be cheered by Donald Trump’s presidency. They certainly have been willing to name and shame companies for actions that they see as out of line with public interests.

This is where board oversight is important.

Directors can pressure test management’s assumptions about the political implications of their actions. Directors should urge management to consider what the political risk implication of the company’s actions are. For example, how will decisions about outsourcing operations, finding tax advantages overseas, or cutting job-training programs and hiring foreign workers be perceived? Will they land the company in the headlines?

Directors can ask management questions about strategy as well:

  • How are we identifying trends and disruptions that may affect the business?
  • Are we integrating political assessments into risk management—regarding, for example, currency, regulation, or supply chain strategy?
  • Are political risks considered as part of our strategic planning processes?
  • Are we considering a range of scenarios and market impacts for a country or an issue?
  • How are we monitoring and reassessing developments? Do we have good information?

Focusing the board lens on the bigger picture, in today’s populist, volatile political world, companies can no longer merely defend themselves against risks and criticize government policies and social activists. Rather, public-private cooperation is needed now more than ever.

At the 2016 NACD Global Board Leaders’ Summit, participants heard about conscious capitalism—shorthand for the many ways companies can make money by doing good for societies they are embedded in. Many proactive business leaders are looking for opportunities to be a part of the solution to the challenges spurning the disruption—from raising hourly wages to hiring and training refugees, to investing in underserved communities and making healthier products. Fostering long-termism is another way that companies can contribute to this aspect of the movement.

Many such initiatives are the results of a CEO’s passion and they often get relegated to the corporate social responsibility portfolio. It’s not hard to name firms and executives that get kudos for one socially responsible initiative but come under withering criticism for major failings in other aspects of their business.

For conscious capitalism to be a meaningful response to recent geopolitical disruption, incentives and priorities must be changed throughout the organization. This is stimulating a rethinking of corporate governance—the core values, norms, and rules that drive corporate behavior. Directors can help ensure long-term, conscientious response to populist pressures on businesses by asking: What is our ultimate mission? What are we doing to help solve today’s problems? How do we maintain and enhance our social and political license to operate?

DJ Peterson founded Longview Global Advisors in 2013. Longview Global Advisors is a consultancy that works with clients on a range of tasks that include strategic planning, market intelligence, thought leadership, and executive positioning. Business leaders and investors turn to Longview Global Advisors for a relevant worldview, and Peterson helps them monitor and make sense of the political, economic, and social trends they care about.

NACD Survey Examines Current State of Nonprofit Boards

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Data from the World Bank show that if the global nonprofit sector were its own country, that country’s GDP would represent the sixteenth largest economy in the world. In 2013, the most recent year for which data were available, the nonprofit sector contributed $905.9 billion to the U.S. economy, which is representative of nearly 5.4 percent of U.S. GDP. The nonprofit workforce also accounted for nearly 10 percent of U.S. employment, according to the Bureau of Labor Statistics’ latest calculation.

Nonprofit organizations frequently are managed by an impassioned group of people with a focused mission or social objective. Often equally passionate are the organization’s board of directors, elected to oversee the organization and ensure its long-term viability.

Nonprofit boards, however, aren’t beholden to the same regulations from the government and listing requirements that their public company peers are, nor do their organizations experience the same pressures from investors that their private company peers do (though, in some ways, a nonprofit board may have to cater to donors in a similar way that private companies cater to their investors). Though all company and organization types face some similar challenges, it can be reasonably expected that the governance landscape for nonprofits might evolve differently than that of private and public companies.

NACD recently analyzed the current state of nonprofit governance in its latest 2015-2016 NACD Nonprofit Governance Survey. The survey report was based on the responses from more than 600 directors serving a variety of nonprofit boards that have 16.4 members on average—much higher than the 8.9 directors on public company boards and the 7.6 directors on private company boards.

Director Recruitment

On the subject of director recruitment, 49 percent of respondents identified “experience specific to the organization’s mission” as the most sought-after attribute a new director could offer the board. A significant portion of respondents also gave priority to leadership experience (34%) and financial expertise (22%). Other sought-after attributes for director candidates include fundraising experience and commitment to the mission.

Related findings include:

  • 80 percent of respondents report that their boards use personal networking to identify new director candidates.
  • 20 percent of respondents from large nonprofits indicate their boards use search firms to identify potential board candidates, up from 12 percent in 2014.

Fundraising

A distinct aspect of nonprofit board service is the expectation that directors will actively participate in fundraising efforts for the organization. Sixty-eight percent of respondents indicate their organization engages in fundraising as a part of their business model. Yet, 51 percent of all nonprofit survey respondents say they feel unsure about the organization’s expectations for them to fundraise.

Related findings include:

  • 54 percent of respondents from organizations that do engage in fundraising indicate that there is a documented fundraising strategy for the board.
  • 34 percent of respondents say their boards have a fundraising committee.

Information Flow

A strong majority of nonprofit respondents are satisfied with the quality of information provided to them on corporate performance (86%) and on strategy (84%). However, paralleling private and public company trends, nearly a fifth (19%) of respondents would prefer more information on the organization’s strategy—both short- and long-term objectives.

Related findings include:

  • 60 percent of respondents report that their board does not receive enough cyber-risk information from management.
  • More than one-third of respondents reported they are dissatisfied with the quality of information provided to the board on risks related to technology (37%) and cybersecurity (48%).

For more research and analysis on the current state of nonprofit boards, please click here to access the full 2015–2016 Nonprofit Company Governance Survey.

Cross-Border Information Flows: Existing and Developing Challenges

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In this digital age, an organization’s ability to collect, analyze, aggregate, associate, and securely share data around the world is mission-critical. However, an increasing number of laws have been adopted across the globe regulating and restricting the transfer of information, ranging in type from data privacy-focused regulations to national security-focused regulations.

Joan Meyer

Michael Egan

Regulatory restrictions can present significant challenges for global organizations, as they could directly impact business transformations (e.g., new cloud sourcing arrangements, the collection of mobile and Internet data, big data analysis projects, and the like) and corporate compliance initiatives (e.g., auditing, monitoring, internal investigations, e-discovery, whistleblower hotlines, and other similar compliance undertakings).

Knowing what these restrictions are, how they impact the business, and how the organization is addressing compliance are key to the board’s oversight of data management practices, which are an increasingly fundamental business element.

Knowledge is Power

Because regulations are increasingly impacting how information may be collected, used, and transferred, it is essential for directors and executives to understand these regulations and to apply best practices. By doing so, boards can help their organizations mitigate the risk of exposure to regulatory noncompliance, in particular as the potential penalties for noncompliance become increasingly material. To accomplish this, boards must ensure that their organizations are informed of the five W’s of data to stay ahead of the compliance curve:

  • Who – Who are we, who are our data subjects, and who has access to our data?
  • Where – Where do we keep our data and where do we transfer our data?
  • Why – Why do we collect and transfer this data?
  • When –When are we retaining data and for how long, and when do we share it with others outside the organization?
  • What – What solutions do we have in place to safeguard regulated data and what elements are in place address any local requirements, including cross-border transfer requirements?

Data Privacy-Related Cross-Border Transfer Restrictions

Outside of the United States, many jurisdictions, including those in the European Union, regulate the collection, processing, and transfer of personal data via comprehensive data protection laws that cover a broad range of personal data and activities related to such information, including its collection, use, and transfer. Considering the ubiquity of data collection for marketing, commerce, and employment purposes, these regulations have significant implications for a broad range of businesses.

Personal data covered by these regulations is often broadly defined to include any information relating to, or that could be linked to, an identified or identifiable individual, including the following:

  • Name
  • Email address (including work email address)
  • Title
  • Telephone number
  • Payment card information
  • IP address

These regulations often restrict the transfer of such personal data across international borders unless certain conditions are met. The first question in the analysis is often whether the data is being transferred to a jurisdiction that provides similar or “adequate” protection for personal data.

If the answer is “no,” then investigate whether:

  1. adequate safeguards have been put in place or some other justification for the transfer can be relied upon; and/or
  2. whether a derogation applies (e.g., the data subject has consented to the transfer or the transfer is required for the performance of a contract).

It is important to note that accessing personal data remotely in a different jurisdiction from the one in which it is stored is often viewed by foreign regulators as a transfer to that other jurisdiction (e.g., viewing data stored in Germany from a computer in the U.S.). It is also noteworthy that United States’ legal protections for personal data frequently fail to meet the “adequacy” standards of authorities in more highly regulated jurisdictions, such as those in the European Union.

Data Privacy-Related Cross-Border Transfer Solutions

There are several solutions for organizations that need to transfer personal data across borders to countries that may not be deemed to provide “adequate” protection to personal data by certain foreign authorities, such as the United States. Boards should ask management teams to verify that one or more of the following solutions is in place to comply with applicable cross-border data transfer restrictions:

  • Consent – Where appropriate, ensure that the data subject has given his/her voluntary and unambiguous consent to the proposed transfer. It is important to note that this option may not be available for employee data in certain jurisdictions in which employees are generally not seen as able to provide voluntary consent to their employers, such as in Germany or France.
  • Data Transfer Agreements – Review whether or not contractual provisions designed to provide adequate protection to the personal data transferred are utilized by the organization both for internal cross-border transfers between affiliated entities and for transfers to third parties (e.g., the EU Standard Contractual Clauses).
  • Binding Corporate Rules – Determine whether the organization should adopt enhanced internal personal data protection policies and procedures within the group of companies, referred to as Binding Corporate Rules, and have those approved by the applicable regulators in order to rely on them as a solution.
  • EU-U.S. Privacy Shield Framework – For transfers of personal data from the European Economic Area to the United States, determine whether the recently approved EU-U.S. Privacy Shield Framework, which provides that organizations self-certified to the Framework are deemed to provide “adequate” protection to personal data by the European Commission, may be an appropriate solution.

These solutions will likely continue to evolve, along with the various regulations that impose the restrictions, in order to address the ever-changing digital marketplace. For example, under the new European General Data Protection Regulation (GDPR), which comes into effect in May of 2018, requirements around what constitutes valid data subject consent will have more prescriptive conditions and any new decisions by the European authorities deeming that a non-EU jurisdiction provides “adequate protection for personal data” will likely be subject to more rigorous requirements (although existing “adequacy” decisions will be grandfathered). The penalties are also increasing, with fines for violating the GDPR going up to EUR 20,000,000, or 4 percent of the total worldwide annual turnover of the preceding financial year, whichever is higher. Furthermore, beyond data privacy-related cross-border transfer restrictions, boards should also be aware that there may be additional potentially applicable cross-border transfer restrictions on organizations, including those related to national security or state secrets.

Given the significant financial and regulatory burdens for non-compliance, boards need to understand how these cross-border transfer regulations may impact their organization and stay informed of their organization’s compliance position, and any risk decisions made related thereto, when it comes to both current and future data collections and uses.

As a partner at Baker & McKenzie LLP, Michael Egan advises clients across a range of industries regarding the legal aspects of global privacy and data protection, data security, information technology, and related restrictions on data collection and transfer. Joan Meyer chairs the North America Compliance, Investigations & Government Enforcement Practice Group at the firm. 

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