Good Governance: A 2019 To-Do List for Your Company's Board
Publication Date: January 16, 2019

Each year, corporate governance changes with the times and the priorities of investors. This year's governance checklist shares updates on three issues from last year, along with a number of new challenges. In this post, veteran director Betsy Atkins encourages companies (and their boards) to kick off 2019 by focusing on the following seven priorities.



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1. Keep an Eye on the Regulatory Landscape

Each year seems to bring a new watershed governance issue. 2017 was the year of the activist, with an unprecedented volume of activism and proxy actions not just across the U.S. but globally as well. 2018 was the year of #MeToo, a movement that led to the boards of numerous iconic companies scrambling to defend their corporate brands and investigate CEOs accused of sexual harassment.

I expect 2019 to be the year that regulation impacts a variety of businesses. I’m not just referring to high-profile issues, such as the data use and protection regulations being debated for internet goliaths. Sitting on the Wynn Resorts board has taught me that navigating the gaming commission and regulatory compliance is worse than trying to get top secret clearance. Almost every industry has a regulator they are dealing with, and companies that do business globally must navigate a complex regulatory landscape.

For example, a new law passed recently in India goes into effect in February and will limit online sales through Amazon and Wal-Mart. Both companies have bet billions of dollars on the upside of the online retail market in India. Combined, they represent 83% of the Indian online retail market through affiliate relationships, but that new regulation is going to cap online sales through affiliates at 25% via any one online marketplace.

Boards need a window into how upcoming legislation may impact company operations, so they can plan how to help influence and shape it. As regulatory compliance becomes more complex, it should become an annual best practice for board members to ask management to share the 1, 3, and 5-year regulatory agenda. A proactive approach is far better than winding up on the back foot when new legislation is passed.

Nasdaq does an excellent job keeping an eye on the regulatory landscape and participates actively in the debates that shape legislation that will impact its listed companies. The U.S. Securities and Exchange Commission (SEC) employs committees and roundtables to energize public policy discussions affecting public companies, including a recent roundtable on Proxy Access that covered issues about technology and proxy plumbing as well as the rules surrounding proxy advisors and how shareholders can introduce proposals. Another issue of interest that the SEC is looking to advance in 2019 includes a review of the quarterly reporting process for U.S. public companies.

Read More: It's Time to Fix the Proxy Process >>

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2. Review Your Board's Composition

Diversity of board composition is now a front and center topic.

Gender diversity is a must, as companies that fail to proactively address it are going to be under increased scrutiny. Starting in 2020, ISS will note “NO” on re-election of nominating and governance committee chairs if their company does not have at least one woman on their board. Many gender diversity advocacy groups are now aiming towards a near-term target of 30% of public company board members being female. If companies fail to make progress on this issue, there could be more legislation like the new board diversity law that passed in California and the mandatory women on boards bill recently introduced in New Jersey.

Diversity should also be more broadly defined as cognitive diversity, which is the diversity of thought achieved in a group with diversity of ethnicity, age, and demographical geography as well as gender. Experience as a CEO or top corporate executive is no longer a must-have credential for board service. Only 35% of the new S&P 500 directors are active or retired CEOs and other C-suite leaders, down from nearly half (47%) a decade ago. Look for new resources for board members in order to improve the diversity of thought on the board.

Another 2019 must is a digital director on the board. There can be little doubt in today's business environment that adding board members with broad experience in technology (including software, services, cloud, analytics and artificial intelligence) will bring critical insights into the boardroom. There is not a business listed on Nasdaq that cannot apply technology to generate efficiencies in some way, whether to reduce the costs of supply-chain management or take friction out of the customer journey or revolutionize the industry’s business model. Look at the birth of sharing economies like Airbnb and gig-enabled businesses like Uber, Lyft, and Thumbtack.

The velocity of change and disruption has shrunk the average lifespan of companies; pretty much half disappear within a decade. The biggest risk to companies today is that they don't stay contemporary which makes cognitive diversity critical to maintaining a vibrant and sustainable business model for shareholders.

Read More: 2018 U.S. Spencer Stuart Board Index Highlights >>

Read More: ISS 2019 Proxy Voting Guidelines >>

Read More: The Digital Boardroom: Industrial Boards Are Looking for More Tech-Savvy Directors >>

Read More: Five Ways to Raise Your Board's Digital IQ >>

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3. Embrace Environmental, Social and Governance (ESG) Issues

A robust ESG program can open up access to large pools of capital, build a stronger brand, and promote sustainable, long-term growth. 2019 is the year boards have to proactively embrace ESG if their companies haven’t already.

ESG investments are estimated at over $20 trillion in assets under management—representing one of every four dollars under management. These tend to be stickier pools of capital that help promote sustainable, long-term growth. And, as the competition for talent increases and companies seek to be attractive to the millennial workers who already make up a third of the workforce, companies need to articulate a higher purpose. ESG is an excellent framework for explaining your company’s values and mission and purpose.

The low hanging fruit on the ESG tree is creating a baseline to bring visibility to the sustainable business practices the company has already adopted. Most companies are doing many good things in the ESG realm, but they're not measuring them or articulating them to investors. These might include environmental and sustainability reports; social employee initiatives around inclusion, gender diversity, anti-harassment, or anti-predatory practices; or better governance practices in general.

Companies also need to begin the operationalization of measuring ESG initiatives, and there are resources like MSCI and Sustainalytics to help companies identify which ESG criteria make sense for their industry.

Board members should ask their management teams to come forward with a plan to articulate the company's ESG position during 2019. If a holistic ESG program is too big to tackle in the near term, challenge management teams should come forward with a baseline and develop an ESG program to implement and publicize in 2020.

Read More: Strong ESG Practices Can Benefit Companies and Investors: Here's How >>

Read More: ESG Investing and Your Company: Is Your Board Ready? >>

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4. Proactively Engage Major Shareholders

There has been a sea change with regards to in-person shareholder engagement during the past several years. It used to be that CEOs held an analyst call once a quarter and followed up afterwards with a few major funds that were big shareholders. Now, index funds are disproportionately dominating the shareholder base, and they are creating in-house governance groups to monitor governance practices and issues within their portfolio companies. In a trend that began quietly but is picking up pace, index funds are requesting visibility from the board, including the chairman, lead independent director or compensation committee chair (it varies depending on the issues that the fund is sensitive to).

Boards should proactively ask their companies' governance teams if major shareholders want access to board members, and if so they need to determine which board members will engage in direct outreach (under management guidance of course), target the major shareholders they will visit, and determine what issues should be discussed.

Companies with large hedge fund ownership should proactively seek to engage these shareholders as well—don't wait for them to come to you, especially if an issue is brewing. Hedge fund activity by means of shareholders proposals continues to decline, but only because they have refined their tactics to stir public debate on their portfolio companies' business strategy and agitate for change without making a single SEC filing.

Read More: Corporate Governance Teams, Investor Relations, and the Changing Governance Landscape >>

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5. Quantify and Assess Tech-Readiness of the Company

Every company is a technology company in some way, and all boards should be continuously researching macro trends in technological innovation and digital enablement. These trends include robotic process automation, data analytics, artificial intelligence (AI), and machine learning. Disruptive technologies have the power to transform your business - delighting consumers, bringing efficiencies to supply chains, and lowering costs.

Hand-in-hand with keeping up with technology trends is ensuring the company is ready and able to adopt those new technologies. The ability to apply innovative technologies to the business is so significant to a company's viability that it should be of equal or greater concern to the board than cyber security. Boards need to consider developing a framework or template to assess the technology enablement of a company holistically: Are the company's software development and R&D teams continually updating their skills? Does the company's website convert sales leads? Does the company have omni-channel sales capabilities? Are ERP systems integrated? Is data analytics being deployed in decision making? Are there areas where machine learning and AI could save time and money?

Boards must routinely assess if the companies they are leading are laggards or frontrunners in technology enablement; if not, they risk becoming blindsided by technology like Blockbuster was by the streaming of video content.

Read More: 5 Ways Companies are Transforming Their Businesses with Machine Learning >>

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6. Develop a Social Media Crisis Management Plan

2018 taught us that we live in a real-time social media world, where a crisis is playing out in the public domain before the company has a chance to deal with it. Hours are the new days when it comes to social media crisis management. This has been true for a few years for business-to-consumer companies, but business-to-business companies are going to face this new reality too.

To make the most of those first precious hours after a crisis occurs, update the company's crisis management plan to be social media centric, with the top ten social media disasters or risks already thought through and on-the-shelf responses prepared.

The company should engage an outside social media consultant as a crisis partner. The firm should specialize in social media communication—not just offer social media as part of a larger traditional PR firm. Social media firms have a whole different network of getting the message out there and understand that crisis management requires a whole different approach.

Starbucks (Nasdaq: SBUX) is a great example of how to handle a social media crisis. When there was an allegation of racial bias leveled at Starbucks front-line staff, the whole company shut down and immediately retrained all of their employees. Starbucks' response to this crisis ultimately enhanced their company brand.

Read More: Managing Brand Risk in an Age of Social Media >>

Read More: Build Your Social Media Crisis Management Plan in 10 Steps >>

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7. Review Retirement Policies for C-Level Executives and Board Members

The model of corporate board service as a part-time gig for retired CEOs who are coaching with corporate playbooks from the '80s and '90s doesn't work anymore. The rate of change has accelerated so dramatically that a board slate of contemporary perspectives and experiences has gone beyond a competitive advantage to become a necessity of survival.

That doesn't mean companies should rush to stack their boards with millennials. Experienced executives bring wisdom and big picture perspective that is acquired through decades of experience. Contemporary perspectives are not age dependent, but rather engaged dependent. Boards need seasoned former executives who have remained deeply engaged in the business world and are dedicated life-long learners.

That said, it's important to strike the right balance between experience and ensuring the board has new and evolving skill sets critical to navigating the exponential rate of change. Mandatory retirement ages for board members, tied to board refreshment planning, are an effective way for a company to onboard the evolving skill sets and modern perspectives it will need in the boardroom in the next 3-5 years. Just be sure those policies allow for special exceptions, so exceptional talent and wisdom isn't lost due to an arbitrary age limit.

Companies should also review their executive retirement age policies before it becomes an issue and an exception must be made to keep valuable C-level executives as it did at Merck.

Read More: Board Refreshment: Finding the Right Balance >>

Read More: CEOs & Mandatory Retirement Age >>

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Betsy Atkins serves as President and Chief Executive Officer at Baja Corp, a venture capital firm. She is currently on the board of directors of Cognizant Technology Solutions Corporation (Nasdaq: CTSH), Wynn Resorts (Nasdaq: WYNN), Schneider Electric, and a private company, Volvo Car Corporation. She previously served on the board of directors of The Nasdaq Stock Market LLC and as CEO and Board Chairman at Clear Standards.