The events of the past year have upended the norms of business, causing boards to rethink their oversight role as they help companies navigate challenges and opportunities in this new environment. During our March 18 webcast, Irene Chang Britt, director at Brighthouse Financial and Amica Senior Lifestyles, and Melissa Sawyer, cohead of the corporate governance and activism practice at Sullivan & Cromwell LLP, joined Claudia Allen, senior advisor with the KPMG Board Leadership Center, to discuss how boardroom leaders can help position their companies for the future.
Trust and transparent conversations
Boards must be prepared for both down cycles and up cycles, said Britt. “How do you take advantage of the opportunities that can come through a crisis or a trend?” It’s not only director tenure, it’s the mix of director skill sets, trust, and collaboration among directors that facilitate taking advantage of opportunities, Britt said. “Trust is the foundation of honest, transparent discussions. If there is no trust, you could probably get through the up cycles okay, but … you can’t get through the down cycles if people are grabbing things and keeping them close to the chest.”
“Rather than just management reporting up to the board or the board making pronouncements from on high, it has to be a conversation,” said Sawyer. “That conversation has to be informed by trust, where management feels like they’re going to get useful feedback from the directors, and directors feel like they’re not just being presented to on things that are fait accompli, but they’re being asked to provide useful input.”
“It is not the board’s role to be asking about SKU-level detail, unless it leads to a bigger question that is strategy-related or risk-related,” added Britt.
“As a director, you have to know about the company and then you have to apply your wisdom from analogous situations, from your decades of experience, and be able to think about those third-and fourth-level derivative questions that lead to much more insightful strategic and risk questions than anybody who is close to the detail would be able to ask,” Britt continued. That requires making time to seek out external sources to better understand the industry. “It’s not enough to just listen to management’s presentation and read the board materials. You’ve got to do five or seven times that reading on your own. That’s how you bring your knowledge in.”
Directors “don’t need to see every scrap of paper that the management team sees,” said Sawyer. “With the proliferation of activists on boards, a lot of directors had the sense that they needed reams of data to inform their decisions because the activists were asking for that. I don’t think that the average director needs to have all the data available to make decisions. The lens that directors apply is one of experience, of analogy to other situations that they’ve seen. Having that long-tenured experience is equally important as seeing all the underlying spreadsheets.”
“What you need to do is ask good questions, challenge assumptions, provide a slightly different perspective, or ask, ‘What if things don’t go the way that you expect?’” said Sawyer.
The companies that have weathered the pandemic most successfully are the ones that were the least siloed, according to Sawyer. “They had the most nimble, flexible management teams with a lot of cross-pollination between subject matter specialists.” A management team’s ability to cover each other’s roles and continue to carry on the business is a marker of that sort of flexibility.
Five key takeaways
Risk oversight: The heavy lift for committees
As companies’ risk profiles have changed, boards need to maintain a sharp focus on risk oversight. While there’s no one “right approach,” risk oversight is “a full-board function, with a lot of heavy lifting at the committee level,” said Allen. Sawyer said separate board-level risk committees generally remain rare outside of financial services and healthcare companies with particular regulatory or quality control risks.
How board oversight of risk is structured “depends on the skill sets of your directors, their availability, and their appetite to dig into different issues,” said Sawyer. “The answer really does depend on where they want [risk oversight] and where they think they can most effectively tackle it. I think there are risks that probably are so significant that it’s hard to handle them exclusively at a committee. For a lot of boards, committees do the legwork—the filtering—to figure out what issues really require the other directors’ attention. That makes for a more efficient and effective discussion that engages the full board and the management team.”
Boards should also take a fresh look at management’s crisis plans, since those plans often focus on the last crisis rather than emerging issues. “All crises have their own fingerprints so you really can’t ever do a ‘lessons learned’ and then tuck that book on the shelf,” said Britt. “You have to have an ongoing conversation at the board and senior management level to make sure you have time on the agenda to talk about what’s coming next. That ongoing, disciplined conversation—‘What do we see? Does it matter?’—helps us mentally prepare to handle the next one.”
Sawyer said the ability of the board and management to muster all available resources is “half the battle” during a crisis. “Understand what people’s roles are—because you’re never going to predict exactly where the issue is going to come from, what the attack is going to look like, what the issue could be,” she said. “Be thoughtful about having your Rolodex ready to go, including which external advisors you might need to bring in at any particular point in time.”
Telling the company’s ESG story
With stakeholders increasingly focused on ESG issues, Britt said finding an ESG disclosure framework that is right for the company is key. “It has to be the story that you want to tell about how you are stewarding E, S, and G,” said Britt. “Once you have a framework, have a process. Make sure that every committee and every board member is engaged. For instance, as nom/gov chair, I take responsibility for making sure that ESG gets discussed [in all of the committees] and at the full board level. I see myself as ringleader to coordinate and make sure that those discussions happen, not solely at the nom/gov committee.”
“Once you develop your framework and have those deep discussions as a board and with the CEO, the things that matter the most will bubble up,” said Britt, adding, “Then you should put some money where your mouth is” by including some ESG metrics in compensation plans.
Sawyer noted, “The story that you should be telling [about ESG] is the story about what is material to the company, and that varies greatly across industries and company size. Figuring out what that is is part of the larger discussion of strategy and risk, so that disclosure flows from what is informing your own business plans as a company.” Sawyer noted that companies can have legal liability even for ESG statements that are not required to be included in SEC filings. “Companies need an internal process for validating the data that they’re presenting,” she said. “The gold standard for doing that is to subject that information to the same kinds of disclosure controls and procedures that you would implement for your SEC filings.”
ESG will be front and center in shareholder proposals this proxy season, consistent with the trend of the last five years, said Sawyer. This season will also see some “say on climate” proposals asking for a shareholder vote on whether the company is addressing climate risk and proposals seeking to tie compensation to ESG metrics. “What’s more interesting is what’s going to happen during the off season,” when companies engage with their largest shareholders about their priorities for next year, said Sawyer. Increasingly, institutional investors are being very specific about the ESG disclosure they expect to see, for example, on board and C-suite diversity, diversity-related data, sustainability, and climate-related risk. “A lot of work has to be done ahead of those meetings to make sure that management teams and directors have the right talking points to respond to the sort of strenuous perspective that institutional investors will be presenting,” Sawyer said.
With CEOs increasingly speaking out on ESG issues, particularly social issues, the board should be kept informed. “I would encourage all directors to think what is right for the company’s most important stakeholders. Even if the speaking out makes you nervous, you’ve got to put yourself and your ego aside,” said Britt. “Should the board be consulted? Yes, most of the time, because it’s about reputational risk and a reputational stand. Those don’t have to be formal engagements, but I think it would behoove the CEO to have some conversations with at least a set of directors, if not all.”
Having the right individuals in the C-suite and the boardroom
Boards should look at the company’s long-term strategy and put the C-suite and board “up against it” to evaluate whether they have the necessary skills, said Britt. “In a certain chapter of a company’s life, the skill set required of the CEO or top officers may be different from what was needed in the last chapter,” she added. “It is absolutely our obligation to look at people who are different from what we currently have. Diversity, equity, and inclusion absolutely should play a part, because that is often going to lead you to talent that can handle a volatile future.”
In thinking about C-suite succession, including emergency succession, “The best way for boards to develop those plans for internal successors is to be able to have some visibility into them—to actually see the next layer down on the executive team and form a view about how that talent is developing over time.” It’s also important to make sure the management team is flexible so that “you’ve got people already in place who can cover for each other and do dual service until you’re able to figure out a more long-term option.”
As to the board’s own composition, “It’s comfortable, especially for long-standing boards, to look at continuity as the driving force. That’s dangerous these days because things are changing in the market quickly,” she said. “It’s not about throwing out all continuity and experience, but it’s having a good skills matrix to make sure that you’re well suited to carry on into the future.”
Britt says a tool many boards don’t use well is evaluations. “We have to have open and honest performance evaluations. We have to say, ‘Here’s the strategy. Here’s where the strategy is going. Let’s look at our skills matrix. Do we have the right set of skills?’ As a nom/gov chair, I am very clear-eyed about that.”
Britt suggests all directors ask themselves, “’If you owned 51 percent of this company, would you have this person on the board?’ It is a tough question, but you have to have that discipline to be open and honest about your own performance.”
How concerned are you that the accelerating megatrends, coupled with the high level of business disruption and uncertainty, pose a significant threat to your company’s strategy?
As a result of the crises of 2020, what has been the most important change or focus of your board’s involvement in strategy and risk?
Regularly challenging the continuing validity of strategy and risk assumptions
Considering strategic alternatives
Improving risk-related information flowing to the board
Engaging in systematic scenario planning in order to create a vision of the future
Calibrating strategy as needed
Identifying and monitoring key performance indicators
Monitoring strategy execution
Obtaining the views of outside experts
Soliciting dissenting views