Thought Leadership in Governance since 1976 - Directors and Boards
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Thought Leadership in Governance since 1976 Annual Report 2022
directorsandboards.com | @DirectorsBoards
Geopolitical Disruption
Invades the Boardroom
Rethinking
Risk Management
International Crises
Require Global Directors
PLUS: Ram Charan on
Combating Inflation
Ready for What’s Around the Corner With extensive experience and deep resources, Faegre Drinker provides directors and their boards with strategic, practical counsel so they’re better able to manage existing issues and handle new challenges. faegredrinker.com © 2022 Faegre Drinker Biddle & Reath LLP. All Rights Reserved.
www.directorsandboards.com
Vol. 46, No. 4 • Annual Report 2022
IN THIS ISSUE
COVER STORY • A WORLD OF RISK
14 Geopolitical Disruption Invades the Boardroom
Directors should plan for risks in talent, supply chain, public health and more.
By Erin Essenmacher
22 Rethinking Risk Management 24
Anticipating emerging risks means reshaping the board.
By Glenn Davis and Chandrasekar Venkataraman
26 The Global Board
International crises increase the need for non-U.S. board members. By Bill Hayes
30 Eight Ways for Boards to Combat Inflation
Ram Charan notes that most senior managers have never seen or dealt with
hyperinflation. By Bill Hayes
32 Cyber Threat Intelligence
A comprehensive cybersecurity program focuses on more than compliance.
By Patrick Bolger and Kelly Miller
36 Keeping an Eye on the Supply Chain
Six questions boards need to ask leadership about risk oversight.
By Tandra Jackson and John Rodi
FEATURE
40 Shareholder Engagement Is an Important
New Skill for Boards
Understand your shareholders’ concerns and establish a productive dialogue.
By Lawrence A. Cunningham
ANNUAL REPORT 2022 1
DIRECTORS TO WATCH: GENDER DIVERSITY
44 Two Steps Forward, One Step Back
Opponents of legislated gender and diversity targets score a hollow
victory. By Scott Chase
46 Director Profiles
Vol. 46, No. 4 • Annual Report 2022
50 Most Urgent Challenges for Directors to Watch
DEPARTMENTS
4 Letter From the Chairman
Borders, Boundaries and Boards By Robert H. Rock
6 Editor's Note
An Ode to Good Governance By Charles Elson
8 BoardBook
44 The latest governance statistics; What’s trending on social media
and online; Boardroom Reads
COLUMNISTS
60 Legal Brief
The SEC Drives Expanded Disclosure Requirements
and Boardroom Change
Proposed rules demand director action on cybersecurity and climate.
By Doug Raymond
62 Compensation Matters
HCM Disclosure: A Strategic Opportunity
Use the proxy to highlight your strengths in human capital management.
By Todd Sirras, Andrew Friedlander and Kevin Kim
72 Endnote
A Dissatisfied Workforce Is the Biggest Risk of All
Boards and companies ignore DEI concerns at their own peril.
By Bill Hayes
DIRECTORS ROSTER
64 Director Roundup for 2021
DIRECTOR SPOTLIGHTS: Roxanne S. Austin, Verizon (p. 65);
NASA/Aubrey Gemignani
Monica Lozano, Apple (p. 66); Brandon Gayle, Zendesk (p. 69);
Mikael Dolsten, Agilent Technologies (p.70)
2 DIRECTORS & BOARDS
Demands on
Modern Corporations
are Changing
.........................................
At Semler Brossy, we are broadening the collective
thinking through wisdom, experience, and deep analytics.
We don’t settle for a ‘middle-of-the-road’ approach.
Clients choose us for our partnership, thorough thinking,
and creative solutions. We take off where others finish,
helping clients address the most pressing issues in
compensation and governance.
los angeles | new york
semlerbrossy.com
LETTER FROM THE CHAIRMAN • ROBERT H. ROCK
Borders, Boundaries and Boards
C
orporate chieftains — notably those boards, the line between top management is being incorporated into the capital allo-
who gather each year in Davos, Switzer- and board oversight has become blurred, cation process, and the CHRO can address
land — may think they live in a world creating concern, confusion and often con- how the company is growing a diverse and
where countries with interdependent econ- sternation. Ostensibly “to find out what’s stable workforce from the front lines to top
omies and companies with interconnected going on,” some board members have taken management. When the board and individ-
markets operate as if there were to talking to managers several ual directors are making such inquiries, it’s
no borders. The notion that levels below the executive suite. always a good idea to inform the CEO of
these connections would en- Given the increasing range the nature and scope of these discussions.
sure both global prosperity and and degree of risks, such as cy- Deeper dives into the organization may
universal peace was shattered berattacks; the growing chal- be warranted, but directors need to be both
by Russia’s invasion of Ukraine. lenges of business operations, aware and respectful of the boundary be-
In contrast to popular political such as global supply chains; tween accessing information and making
theory, countries that between and the rising requirement decisions. The chair or lead director must
them have hundreds of McDon- for disclosures, such as ESG, provide strong leadership to manage and
ald’s restaurants do, in fact, go to the board is taking on more regulate the depth and scope of these in-
war. National borders delineate Bob Rock monitoring and reporting du- quiries so they don’t become too intrusive.
boundaries, and leaders who fail ties. These enhanced respon- These inquiries can consume management
to recognize them do so at their own peril. sibilities require greater understanding of time and create confusion, so individual
Like national borders, boundaries business operations, policies and practices. directors should not make random forays.
for good corporate governance separate Business strategy, CEO succession, talent The degree and scope of board inqui-
management prerogative from board development, corporate culture and more ries may vary depending on the condi-
oversight. Executives have certain respon- remain high priorities on a board’s agenda, tion of the business, the nature of the
sibilities, such as hiring and firing, that are and ample time must be scheduled on a problem and the implications for top
reserved to their discretion. However, board’s calendar to address them. Often management, in particular the CEO. Ex-
with heightened scrutiny coming from with the help of outside consultants, boards ecutive sessions among the independent
activists inside and outside the company, are digging in deeper to better understand directors, led by the chair or lead direc-
some of these prerogatives are no longer and monitor these critical issues. Conse- tor, can help address these issues and
seen as unilateral or exclusive to manage- quently, the line between management pre- determine the board’s course of action.
ment. Boards are getting into areas once rogative and board oversight is no longer as Top executives are accountable for the
considered within management’s sole dis- bright or as fixed as it was a decade ago. management of the business and are re-
cretion, such as talent management. This Directors are getting more involved in warded for its performance. Directors are
encompasses hiring practices, DEI and matters that were once the sole province responsible for corporate governance in
more. Some executive teams are embrac- of management, such as investor rela- terms of assessing performance and moni-
ing this board participation; others are less tions, where greater board engagement toring adherence to policies. Management
welcoming. The former view the board as has come about in response to investor operates the company. The board oversees
helping effect best practices; the latter see community requests. Large asset manag- management. Though the line has moved
it as infringing on good management. ers like BlackRock are requesting to meet somewhat, there should be a boundary be-
Some boards act as if there are no de- with independent directors without man- tween management prerogative and board
fined boundaries. They ebb and flow into agement or legal counsel present. oversight that is recognized by all direc-
areas typically reserved for management Boards and individual directors are in- tors. Like borders, which exist to regulate
decision-making. Whereas “noses in, fingers creasingly meeting independently with interactions between countries, boundaries
out” has been the modus operandi of most the CEO’s direct reports, notably the CFO exist to regulate interactions between top
boards, now some are leaning in further — and CHRO, to discuss, for example, issues management and their boards. Transgress-
sometimes much further — with not only of risk mitigation and talent acquisition re- ing borders and overstepping boundaries
fingers, but feet roaming about. For these spectively. The CFO can answer how ESG can lead to contention and conflict. ■
4 DIRECTORS & BOARDS
EDITOR'S NOTE • CHARLES ELSON, EXECUTIVE EDITOR-AT-LARGE
An Ode to Good Governance
F
or many years, I’ve been asked the independent individuals and creation of directors and chaired by experienced in-
same question: “Does good corpo- a model governance structure that would dividuals. The committee chairs rotated
rate governance really matter?” And aid in the company’s resurrection. When every five years. For years, we began and
for years I’ve replied, “Yes.” Now I have we five new directors retired this May, ended each board meeting with an exec-
more to add. After nearly two decades of the company was healthy, with a market utive session where directors could can-
service, I recently retired from valuation of over $6 billion didly exchange concerns without fear of
the Encompass Health board and paying a regular and sig- offending management or facing reprisal.
as our term limits required. nificant dividend. Primary re- Third was investor relationships. Our
Four other directors who sponsibility for the company’s chairman and our governance chair met
joined the board at roughly reconstruction and recovery periodically with our largest investors to
the same time also departed. rests with a superb manage- listen to their concerns. We were the first
It has been an interesting and ment team whose efforts ul- U.S. public company to adopt a proxy
rewarding experience in many timately bore fruit. But I also reimbursement scheme that would, in
ways and makes the point that must give credit to our board. certain circumstances, reimburse those
I have long advocated: good The directors’ efforts in pro- shareholders mounting management
governance does matter. Charles Elson viding management with challenges for reasonable expenses. We all
When I became involved independent oversight and were subject to a yearly shareholder vote
with Encompass (then Healthsouth) in guidance ensured a happy conclusion to for reelection and bound to term limits to
the early 2000s, the company found it- a painful corporate collapse and recovery, encourage board refreshment. New direc-
self in dire condition. Its CEO had been resulting in substantial shareholder value. tors were chosen for their varying skill sets
arrested for bribery (and later convicted). Among the reasons for this success, first and located and vetted by an independent
Its financials had been muddled in one was composition. In addition to our CEO, search firm. Independent, equity-holding
of the largest financial scandals of the de- the new Healthsouth board consisted of a directors are the investors’ best hope for a
cade. Federal investigations, executive in- diverse group of individuals with experi- fair return. That was our guiding principle.
dictments, shareholder lawsuits, delisting ence in the various areas of our business Fourth was the board’s relationships
and a collapsed share price were crippling. that required focus in the turnaround. Di- with each other and management. We had
The company, which once had been in the rectors with expertise in finance, account- widely differing viewpoints — but our in-
Fortune 500, had an equity valuation of ing, health care, operational management, teractions with one another and manage-
less than $75 million. The business was compliance and corporate governance ment were based on trust, transparency
carrying major debt. Bankruptcy loomed. were recruited. None had any connection and candor.
No annual shareholder meeting could be with prior or current management. All Things turned out well. My two proud-
called, as the company had no audited accumulated significant equity holdings est moments were when we were relisted
financials to present to its investors. In in the company to align our interests with for trading on the NYSE after a long ab-
short, it was a terrific mess. those of our fellow shareholders. sence and the declaration of our first reg-
When I was first asked to join the board, Second was function. We were chaired ular dividend. I was reluctant to cash the
I declined. I had no appetite to swim in by an independent director whose prima- check — I thought about framing it.
such a treacherous stream. But I was im- ry responsibility was to run the affairs of Good governance was not the prima-
pressed by the acumen and integrity of the board, setting board agendas and pre- ry reason for the Encompass Health res-
independent directors Jon Hanson and siding over meetings. I cannot overem- urrection, but it played a vital part. Our
Bob May, who were determined to right phasize the importance of this approach shareholders profited, and so did our
the ship. I also believed in the long-term to board leadership. employees, our patients and the commu-
viability of the business. I signed on. We had five oversight committees: nities in which we operate. Some bad sto-
Among the first things Hanson and May audit, compensation, nominating and ries have happy conclusions — it was good
pursued was recruitment of a new board governance, compliance and finance, corporate governance that helped make
composed of talented and experienced each composed entirely of independent this one so positive. ■
6 DIRECTORS & BOARDS
We’re up to speed, so you can go full speed. SEE CHALLENGES BEFORE THEY’RE CHALLENGING. To make confident decisions about the future, middle market leaders need a different kind of advisor. One who starts by understanding where you want to go and then brings the ideas and insights of an experienced global team to help get you there. Experience the power of being understood. Experience RSM. Subscribe today for timely board insights at rsmus.com/boardinsights RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax and consulting firms. Visit rsmus.com /aboutus for more information regarding RSM US LLP and RSM International.
™
®
BOARDBOOK
www.directorsandboards.com WHAT’S ON THE AGENDA?
Charles Elson, Executive Editor-at-Large
Bill Hayes, Managing Editor
bhayes@directorsandboards.com
Barbara Wenger, Roster Editor Director Data
Monica McLaughlin, Creative Director
David Shaw, Publishing Director
dshaw@directorsandboards.com How Is ESG Being Handled in the Boardroom?
Mike Bachman, National Account Executive A recent report by Diligent and Spencer Stuart, titled Sustainability in the Spotlight:
215-405-6070
mike.bachman@directorsandboards.com Board ESG Oversight and Strategy, featured nearly 600 corporate directors answering
Scott Chase, National Account Executive
questions that focused on how boards are structuring ESG oversight, the COVID-
301-879-1613 19 pandemic’s effect on ESG, sustainability’s impact on strategy and executive
schase@directorsandboards.com compensation, and more.
Justin Cordaro, National Account Executive Among the key findings emerging from the report are:
215-405-6082
justin.cordaro@directorsandboards.com • 43% of respondents stated that primary oversight of ESG is a responsibility of the full
Ryan Ellis, National Account Executive board, while 30% said the initiative belongs to the nominating committee and 15%
215-405-6075 gave the responsibility to a designated ESG/sustainability committee.
ryan.ellis@directorsandboards.com
• While 15% of boards discussed ESG at every meeting pre-pandemic, the number has
risen to 34% in the wake of COVID-19. Meanwhile, only 4% of respondents say their
Debbie Davis, Marketing Director boards “rarely or never” discuss sustainability in board meetings. Pre-COVID, that
debbie.davis@directorsandboards.com number sat at 20%.
Diane McCollum, Events Director
• On the topic of board incorporation of ESG goals and metrics, 71% of respondents
diane.mccollum@directorsandboards.com
said those factors are being considered in the overall company strategy and 52%
Peter Begalla, Conference Chairman
said they are being incorporated into integrated risk management. ESG goals and
Jillian Kittle, Conference Coordinator
metrics were a factor in director appointment criteria for 48% of respondents, while
jill.kittle@directorsandboards.com
46% said it played a role in deciding executive compensation.
Jerri Smith-Baldwin, Accounting
215-405-6071, • To help increase directors’ understanding and competency around ESG, 42% of
jsmith@directorsandboards.com respondents said their board is working with outside consultants, while 38% spoke
Barbara Wenger, Subscriptions/Fulfillment of engaging in director education and upskilling.
215-405-6072,
bwenger@directorsandboards.com
Where ESG Oversight Is Formalized in Board Governance Documents
70%
Robert Rock, Chair 60% 58
William Rock, President 51
50%
David Shaw, Publishing Director
John Cashman, Digital Director 40%
30% 27 28 28
Editorial and Business Offices
1845 Walnut Street, Suite 900 20%
Philadelphia, PA 19103 11
Ph: 215-567-3200, Fax: 215-405-6078 10% 7
0%
Directors & Boards (ISSN 0364-9156) is published five times None, has not Corporate Audit Nominating/ Compensation ESG/ Other
a year, ©2022 by MLR Holdings LLC. All rights reserved.
been validated or Governance Committee Governance Committee Sustainability
formalized Guidelines Charter Committee Charter Charter Charter
No portion of this publication may be reproduced in any
form whatsoever without prior written permission from the
publisher. Subscriptions are $325 per year in the U.S.; $350 Note: Respondents were asked to select all that apply.
(by air) elsewhere. Article reprints — Contact Jerri Smith
at 215-405-6071.
Source: Sustainability in the Spotlight: Board ESG Oversight and Strategy, Diligent Institute and Spencer Stuart
8 DIRECTORS & BOARDSExecutive Candidates
Require Diverse Boards
A recent survey from theBoardlist, a marketplace of diverse talent
for boards, sought to delineate what candidates for executive positions
find most desirable in a company. The survey polled 200 executives
and found that:
• 85% find psychological safety within a company’s culture is either
extremely important or very important when considering a position.
• When an executive is thinking about joining a company, it is a
benefit to feature a diverse board. Having a diverse board was
seen as an important factor for 78% of executives, with over 34%
believing board diversity was very important.
• Of the executives polled, 36% reported declining an offer because
of a lack of diversity at the leadership level. Those numbers rise
even higher for Black/African-American (54%) and Hispanic/
Latino executives (50%).
Source: theBoardlist
Boards Seeking Out Diverse Thought and Backgrounds
In Board Monitor U.S. 2022, Heidrick What’s different between first-time directors and their more experienced peers (%)
& Struggles’ report on new directors
brought into Fortune 500 boards in First-time public Experienced public
2021, it was found that the boards are board directors board directors
continuing a trend that was started in
late-2020: reaching out to diverse groups
of directors to bring fresh insights and 43 Share of seats 57
perspectives into company stewardship. Experience
• 43% of board seats were filled by first-
time directors. 24 CEO 52
• 45% of seats were filled by women. 9 CFO 17
• An increase was recorded in the
10 COO 21
number of board members with
sustainability and cybersecurity 23 Global head of unit 26
experience.
37 Other C-level 25
• In terms of racial and ethnic diversity,
26% of seats were held by Black Diversity (share of seats)
directors, a steady number after the
dramatic increase of 2020. But Asian/ 45 Women 45
Asian American and Hispanic/Latinx 31 Black directors 22
directors still find themselves woefully
underrepresented at 9% and 6%, 12 Asian or Asian American directors 6
respectively. 5 Hispanic or Latinx directors 7
Source: Board Monitor U.S. 2022, Heidrick & Struggles
ANNUAL REPORT 2022 9BOARDBOOK
®
www.directorsandboards.com Boardroom Reads
Editorial Advisory Board
Robert H. Rock, Chair
Chair, MLR Holdings LLC; director,
Quaker Houghton and Penn Mutual Collective Illusions:
Norman R. Augustine
Retired chairman and CEO, Conformity, Complicity
and the Science of Why
Lockheed Martin
John Chidsey
CEO, Subway Restaurants; director,
Encompass Health, Norwegian Cruise
Line Holdings
We Make Bad Decisions
Robert L. Dilenschneider Reviewed by Howard Brod Brownstein
Chair, The Dilenschneider Group Inc.
B
Ann Korologos
Former U.S. Secretary of Labor; director,
ooks currently being recommended Such a book is Collective Illusions:
Harman International, Michael Kors for corporate board members are Conformity, Complicity and the Science
typically about emerging governance of Why We Make Bad Decisions by Todd
Martin Lipton issues like ESG and DEI, and the board Rose (Hachette, 2022). Rose, a trained
Founding partner of Wachtell, Lipton,
Rosen & Katz member’s bookshelf is usually filled neuroscientist and former faculty member
with deeper dives into topics like risk at Harvard Graduate School of Education,
Indra Nooyi management and M&A. Rarely does a provides a detailed and interesting
Former chair and CEO, PepsiCo; book come along that, while intended for analysis of the science behind how normal
director, Amazon
general readership, is also of particular human beings are affected by various
Susan R. Salka interest for board members. types of biases and blind spots, which lead
President and CEO, AMN Healthcare to bad decisions. From an evolutionary
Services Inc.
viewpoint, this raises the question of
Anne Simpson why humans developed in this way. The
Global head of sustainability, Franklin answer seems to lie in a larger social need
Templeton being met, one of fitting in with the group,
Jeffrey A. Sonnenfeld following what other people think or do
Senior associate dean for leadership in order to avoid being the exception or
studies, Lester Crown Professor in the suffer the embarrassment of being wrong.
Practice of Management at Yale School Effective board governance benefits
of Management; founder of the Chief
Executive Leadership Institute
from board members being healthily
skeptical and establishing a board culture
Gabrielle Sulzberger that does not squelch or disfavor differing
Strategic adviser, Two Sigma Impact; viewpoints or challenging questions. Rose
director, Mastercard and Brixmor
Property Group points out that, in society, we learn not
to be an exception from the herd, not to
Maggie Wilderotter question “authority” and to implicitly trust
CEO, Grand Reserve Inn; Former CEO,
that whatever everyone else is doing must
Frontier Communications; director,
Costco, Lyft, Chobani, Hewlett Packard be OK. Therefore, it is not hard to envision
Enterprise; chair, DocuSign a board dynamic that encourages a “go
along to get along” mentality, which can
10 DIRECTORS & BOARDSBOARDBOOK
#CorpGov: What’s Trending
lead to overlooking potentially important facts and avoiding
further inquiry.
The terms that Rose uses for the forms of bias he describes
(conformity bias, copycat trap, etc.) have appeared elsewhere.
However, his book cites extensive and varied research that
shows repeatedly how we disregard our personal feelings
about a topic in favor of how we believe others feel. Examples
include research that asked people how they felt about certain
issues, followed by how they believed others felt. Invariably,
the arithmetic did not line up: If as many people really believed
“A” instead of “B” (as they said they did individually), it would
be impossible for the number of other people that they assume
believe “B” to exist. This may explain why so often in history
populations have accepted or gone along with positions that
they individually believed to be wrong simply because they did
not believe enough support existed for a different viewpoint.
Why is this important to directors? Board members must
avoid the risks of groupthink, which too often invades boards
as well as management teams. Rose advocates developing an
awareness that begins with oneself but can be expanded to the
groups of which one is a part. This can address the preexisting
inertia and momentum toward a given conclusion that should
be questioned or proved. He refers to this as developing
“personal congruence” and explains how it can be developed
and strengthened within oneself and extended to the groups of
which one is a part, such as a board of directors.
Rose is a scientist and cites many research studies to illustrate
his points. But his book is written for the general reader and is
quite understandable to nonscientists. While many have heard
about cognitive bias and related subjects, this book really
illustrates in a completely understandable way how easily we
as human beings overlook and ignore facts that should be the
impetus for further inquiry and, possibly, further action. I can
easily see board members experiencing a shift in their thinking
and adopting Rose’s encouragement of self-awareness regarding
societal forces that limit our thinking and action, and extending
that learning to the boards on which they serve.
Howard Brod Brownstein is president of The Brownstein
Corporation, an M&A and turnaround management firm, and
serves as an independent corporate board member for Merakey
and P&F Industries Inc.
ANNUAL REPORT 2022 11BOARDBOOK
Top Articles on www.DirectorsAndBoards.com Cybersecurity Is
Essential to ESG and
virtual experiences in lieu of in-person ones. Corporate Governance
As COVID-19 spread throughout 2020 and
Make cybersecurity part of your
into 2021, more companies began including
approach to ESG.
digital transformation objectives in their overall
business strategies. In a Harvard Business By Erica Vinish and
Review study, 86% of those surveyed said their Adriana Villasenor
W
organizations accelerated digital transformation hile there may not be a C in
TECH-
during the pandemic; of those, 91% said their ESG, the increasingly digital
organizations were planning to continue with landscape of business is proving
SAVVINESS
these efforts beyond the pandemic (“Digital that you can’t have a complete
acceleration redefines the future of work,” appreciation of environmental,
Harvard Business Review, Sept. 2, 2021).
IN THE BOARDROOM Corporate boards are seeing a renewed focus
social and corporate governance
concerns without extensive
Director technology knowledge is key on technology expertise as well, especially as knowledge and understanding of
to company performance and growth. organizations face more technology-driven risks, cybersecurity.
such as cybersecurity and privacy. As an example,
By Carey Oven and Rich Penkoski
the National Association of Corporate Directors
W
CYBERSECURITY’S ROLE IN
hen the COVID-19 pandemic upended found in 2021 that 43% of S&P 500 company CORPORATE GOVERNANCE
our lives in March 2020, little did we board directors mentioned their technology Environmental, social and corporate
know that it would usher in a new wave of background in public disclosures (Aman Kidwai, governance concerns are top of
digital transformation and technology adoption “Corporate boards are putting tech expertise mind for organizations and their
for companies across nearly every industry. higher on their hiring wish list,” Fortune, Dec. stakeholders. Those stakeholders
Suddenly, many office employees completed 21, 2021), compared with 34% in 2018. A 2021 are not just investors. Organizations
their work from home and needed access report on U.S. boards compiled by Heidrick & have experienced an uptick in
to tools and resources that enabled remote Struggles predicts that this trend will pick up ESG-related inquiries from clients,
collaboration. Online grocery sales increased in 2022 as companies offer permanent hybrid employees, recruits, debt ratings
exponentially as many shoppers looked for or fully remote workplace options (Heidrick agencies and the media. While
ways to avoid crowded public spaces. Movies & Struggles, Board Monitor US 2021). https:// environmental and social topics are
were brought straight to streaming platforms www.directorsandboards.com/articles/ front and center, there is a crucial
and entertainment companies provided singletech-savviness-boardroom element that is being overlooked,
and it carries significant risk if not
properly addressed: cybersecurity.
CEO Pay Records a one of the authors of the report (along with Traditional corporate governance
Major Increase in 2021 fellow principal Joanna Czyzewski), says the is focused more on auditing
significant increase in pay year over year came financials, board composition,
Report finds bonus payouts bolstering
as a bit of a surprise. shareholder rights, compliance
CEO financial performance. By Bill Hayes
“Our initial assumption prior to the research and business ethics. While
A ccording to early proxy filers, 2021 was a
bounce-back year for CEOs, with total pay
recording an uptick of 19% and bonus payouts
is that pay was going to be up from the prior
year, since 2020 was so challenging because
of the pandemic. But we were not anticipating
these remain important areas
for corporate consideration,
failing to implement proper
up nearly 75% from 2020. such a big bounce back in performance, which cybersecurity governance leaves
Such were the findings of a recent led to higher actual bonus payouts.” organizations exposed, putting
Compensation Advisory Partners report, Early For 2021, performance in areas such as their viability at risk. Depending
Filers: Performance Bounced Back, CEO Pay revenue, earnings per share and pre-tax income on the industry, a cybersecurity
Up. The report, which reviews CEO pay levels all saw increases. Revenue growth was up risk can cause significantly
among 50 companies with fiscal years ending 17.1% among early filers, pre-tax income rose more damage than a social or
between August and October 2021, also finds by 62.5% and earnings per share climbed environmental risk. Cybersecurity
90% of companies with a payout at or above by a whopping 71%, numbers that trump the incidents can permanently cripple
targeted numbers and 50% of surveyed financial performance levels of 2018-2019, an organization. https://www.
companies including ESG as a metric in CEO prior to the onset of the coronavirus pandemic. directorsandboards.com/articles/
incentive plan design. Lauren Peek, principal https://www.directorsandboards.com/articles/ singlecybersecurity-essential-esg-
at Compensation Advisory Partners and singleceo-pay-records-major-increase-2021 and-corporate-governance
12 DIRECTORS & BOARDSPassion is your parachute. Businesses don’t need wings to fly. It’s inspired leadership that takes them to new heights. KPMG is proud to congratulate members of Women Corporate Directors for being named 2022 Directors to Watch in recognition of their soaring business success. kpmg.com © 2021 KPMG LLP, a Delaware limited liability partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. NDP207913-1A
A WORLD OF RISK
GEOPOLITICAL Directors should plan for risks in talent, supply chain,
public health and more. BY ERIN ESSENMACHER
T
he notion that every company is a technology company became a popular
idea over the past decade, as advancements in software, data analytics and
artificial intelligence profoundly transformed the business landscape.
Companies of all stripes are now coming to recognize that the same
holds true when it comes to thinking globally. The past three years have
provided a master class in how quickly events that were once consid-
ered black swans can become a cascade of real-time risks that require a signif-
icant shift in the approach to both company strategy and risk management.
EVERY COMPANY IS A GLOBAL COMPANY
Overlapping shockwaves of a worldwide pandemic, historic supply chain
shortages and war in Europe have reinforced that companies of all sizes,
across industries, are impacted by disruptions as far-flung as Wuhan or
Kyiv. “The interconnectedness of the world’s economies is significant.
This is true despite protective measures countries have taken, starting
with the Great Financial Crisis and continuing through the US-China
trade wars, COVID-19 lockdowns and the Ukraine conflict,” says Krishna
Kumar, VP, international, at the RAND Corporation. “Supply chain risks
that had started becoming evident during COVID-19 have been amplified
by the conflict in Ukraine. It illustrates how events not exactly in our back-
yard can cause serious disruptions to companies and societies.” He points
out that while the disruption is most immediate for companies that fled Rus-
sia either because of sanctions or public pressure, “other companies that do not
directly have business in Russia and Ukraine are also impacted due to shortages
and increasing prices.”
14 DIRECTORS & BOARDSA WORLD OF RISK
DISRUPTION
Invades the
Boardroom
ANNUAL REPORT 2022 15A WORLD OF RISK
The need for a geopolitical-centric lens
on risk is in many ways the result of con-
BETSY ATKINS verging risk factors that have emerged over
the past few decades, says James Lam, pres-
BOARD MEMBER: WYNN LAS VEGAS, VOLVO ident of risk management firm James Lam
CAR GROUP & Associates and a director for Recology
Which major risk areas are public company boards preparing (where he serves as chair) and RiskLens.
for at this time? “In the 1980s, we thought first and fore-
Cybersecurity is a major risk area right now for public compa- most about financial risk. In the 1990s,
ny boards. Perhaps it’s time to look at increasing the budget for companies started focusing more on op-
cyber and adding external services to augment internal compa- erational risk. Then digital transforma-
ny monitoring capabilities. Also think about rotating regular bou- tion meant companies were thinking more
tique cyber penetration testing to mitigate risk. Another major deeply about strategic risk. Geopolitical
challenge is attracting, engaging and retaining talent in a hybrid risk compounds and connects all these
work environment. risks in a way that is very significant, and
that I haven’t seen before.”
What do you consider to be the best practices for identifying Russia’s invasion of Ukraine is the latest
company risks before it is too late to prepare and the board crisis to reveal the compounding nature of
is in crisis mode? global risk. “It underscores the increasing
One of the best ways to think about company risk prepara- link between business and economics on
tion is to have a meeting dedicated to reviewing what manage- the one hand, and geopolitics on the other,”
ment identifies as their top ten risks. For example, if you were a says Kumar. “It means companies might
restaurant company, your risks might include tainted food sup- have to pursue strategies that are as geopo-
ply/food poisoning, loss of consumer credit card information, a litically savvy as they are business-savvy.”
mass shooter onsite, etc. Go through the top ten risks and ask
management what their plan is for each. One of the best exercis- FROM “JUST IN TIME” TO
es is to ask the CEO and company spokesperson to go through “JUST IN CASE”
social media and video practice sessions, actually recording and Even the boards of larger multinational
practicing responses to risks. Identify your social media resourc- companies, which may already have geopo-
es, along with traditional crises management consultants. litical risk firmly on their radar, have found
they must seriously reconsider old assump-
Are there potential risk areas you see coming down the line tions that no longer hold true. “I’m on a
that boards should be keeping an eye on? Swedish board,” says Nora Denzel, who
A less obvious but really impactful risk (especially longer-term) serves on the boards of Advanced Micro
is the threat of new, more innovative startup interlopers. No- Devices, Ericsson, NortonLifeLock and
body wants to wake up and find our they’re Blockbuster or SUSE. “Five years ago, we still believed that
Borders. Purposefully request an outside-in look at new com- there was global trade. But then Xi Jinping
petitive entrants and what different business models or go-to- came out with the China 2025 plan and it
market channels are emerging. For example, although it may became really clear that the two big guys
not be obvious now, how are you thinking about web 3.0 or the were drifting apart. The technical stan-
metaverse and how this could possibly affect your business di- dards are bifurcating and now we have to
rectly or in some adjacent way? What if the CEO is unexpected- think about what China wants. What does
ly ill or has a personal crisis, or there are negative events sur- the U.S. want? And then try to make sure
rounding your CEO and the CEO needs to be rapidly replaced? that we stay on the right side with both.”
Who is the successor? How ready is your successor? Geopolitical shockwaves have also up-
ended long-held views about supply chain
risk. Over the past three decades, the focus
16 DIRECTORS & BOARDSA WORLD OF RISK
on “just in time” manufacturing emphasized OVERLAPPING RISKS
efficiency as companies took advantage of The links between crit- SAM BRIGHT
interconnected free trade to reduce surplus ical infrastructure and Member, board of
inventory. The assumption that a lean supply geopolitical instability trustees, TIAA; advisory
chain was a risk-mitigation best practice has underscore the complex, council member, The
Smithsonian Institution;
been suddenly — and painfully — turned on interconnected nature of chief product and
its head. the risks most companies experience officer,
Myrna Soto, who serves on the boards of face. This has also shown Upwork
Consumers Energy, Spirit Airlines, TriNet, up acutely in the labor
Popular Inc. and Headspace Health, has felt market. “We used to base NORA DENZEL
the impact of supply disruption across her projects end-to-end in one Board member,
board portfolio but says the multipliers of that country because it stream- Advanced Micro
Devices, Ericsson,
risk are felt most acutely in the energy space, a lined the workflow,” says NortonLifeLock, SUSE
backbone of critical infrastructure. Denzel. “Now we realize
“The production of energy requires a lot of the strategy of end-to-end
heavy equipment that has components that are projects in one country
manufactured all across the globe, so that has could give us single points
become an area of risk that we are focusing on of failure if you have to va- KRISHNA KUMAR
significantly. We look at timelines and time- cate an entire country.” Vice president,
international, RAND
tables for delivery because we can’t just say, The interconnected na- Corporation
‘Whoops, can’t do it.’ When you are providing ture of the global economy
critical power services, it has to be done.” means that the knock-on
Supply chain woes also mean companies effects of events around
that considered efficiency as synonymous the world have big impacts
with risk mitigation are taking a very differ- to talent risk here in the
ent tack. “Now we’re willing to take on more U.S., too. “When you think JAMES LAM
Board chair, Recology;
capital allocation for financial bets that might about the pandemic and audit committee chair,
not have 100% clear return, but we do it just the Great Resignation, the RiskLens; president,
in case,” says Denzel. “We really looked very impact on talent and talent James Lam & Associates
closely through the supply chain, identifying management is very sig- Inc.
second sources or third sources. We’ve even nificant,” says Lam. “Vol-
talked about whether to make sure it’s all untary turnover rates are
sourced from America, because that’s about going up significantly, and MYRNA SOTO
the only thing you can trust.” the employer/employee Board member, Delinea,
Kumar recognizes this as well and urges cor- power balance has really Headspace Health,
porate leaders to rethink investments in infra- shifted to the employees.” Popular Inc., Spirit
Airlines, TriNet; founder
structure based on inputs from a single source. For Soto, talent is the
and CEO, Apogee
“There is a company-level parallel to the large number one risk that keeps Executive Advisors LLC
investment sunk into the Nord Stream pipe- her up at night. “If you
line to transfer natural gas from Russia to Ger- look at the industries that
many,” he says, referring to the construction I serve in, every single one
project that gave Germany a direct line to of them has seen impacts
Russian energy. In tying itself so fully to one from labor shortages. The airline is a great ex-
country as its primary energy supplier, Germa- ample. Never in our wildest dreams would we
ny has been boxed in, making it more difficult have thought that we would be faced with such
for the country to respond as it would like to a significant labor challenge to the extent it has
Russian aggression. a direct impact on the number of flights we can
ANNUAL REPORT 2022 17A WORLD OF RISK
EFFECTIVE OVERSIGHT OF GLOBAL RISK:
Six Key Questions Boards Should Ask
N
ow is a good time to revis- risk only in terms of potential losses shift. Sometimes people just adjust
it risk assumptions with man- or negative events and not about the but don’t thoughtfully consider how
agement. A robust dialogue upside opportunities or unexpected many clicks to the right or the left
can ensure alignment between the variances that could impact the orga- that adjustment should be.”
board and management and better nization? That’s limiting. What would
position the company to handle the it look like if we thought about risk What are the future scenarios that
next global crises. more broadly and deeply, given the could impact our business, and how
business environment and the global are we planning for them now?
How do we think about risk as a environment that we live in?” Lam suggests gaming out scenari-
company? os together and then applying pre-
It may seem basic, but risk is a broad Have emerging risks changed how mortems or backcasting on the neg-
term that can be subjective. Make we think about risk appetite. If so, ative and positive scenarios, working
sure your board and the manage- how and why? backwards from there. What are the
ment team are clear, explicit and in- “I don’t know if any of us came underlying conditions and poten-
tentional about what it means for through the pandemic with the same tial implications to the company?
your company. James Lam suggests risk appetite that we had before,” What metrics should we put in place
the following to facilitate the discus- says Nora Denzel. “I would defi- to monitor for these emerging risks?
sion: “Do we think about risk in spe- nitely probe how that has changed What are the early-warning indica-
cific risk types? Do we think about and ask if we feel good about that tors and strategies that we need to
complete on a daily basis. Or take the energy “In the past, we just asked ‘What’s the impact?’
board: It used to be that the number of workers and ‘What’s the probability?’” says Denzel.
in the sector was a result of the career opportu- “Five or ten years ago, if you had questioned
nities provided to field workers who provided that approach by asking, ‘What if we have to
a wide array of services for the country’s power vacate an entire country?,’ the board would
infrastructure. That has changed, and we’re in a not have taken that seriously because the risk
very competitive marketplace for talent. Now was low probability. That’s changed.” In other
we’re talking about apprenticeship programs to words, old-school risk models are not sufficient
get people into certain roles that support the to fully gauge potential threats in a new world
energy company. That’s not something that was order where shocks don’t come neatly and se-
on our radar in the same way six years ago.” quentially but are multiple, cascading and even
overlapping.
THE BENEFITS OF SCENARIO PLANNING “Risks don’t live in silos,” says Lam. “So in-
The interconnectedness of talent and geopol- stead of thinking about risk in specific catego-
itics underscores another shift in how boards ries, like strategic, financial, operational, geopo-
must reevaluate risk oversight to meet the mo- litical and reputational, you have to think about
ment. It is no longer enough to consider what risk scenarios. These scenarios would have a
risk factors are at play. Now, boards must fun- confluence of different types of risk. So now
damentally change how they think about risk. that we have Russia in Ukraine, what happens
18 DIRECTORS & BOARDSA WORLD OF RISK
put in place? Ask management what ing annually, should you consider a Does our company culture foster
they would do to minimize downside more frequent cadence? flexibility, resilience and agility?
risks: What would you do to control Krishna Kumar suggests boards
unexpected variances? What would Are we using the right benchmarks? probe more on how the manage-
you do to invest in upside opportuni- Managing through dynamic and un- ment team is preparing to become
ties? What if more than one of these precedented risk calls for new strat- more resilient to shocks, while still
scenarios happened simultaneously? egies. That includes how the com- staying flexible. Does the manage-
“This is a critical part of the board’s pany measures itself against peers. ment team have a clear understand-
role,” says Lam. “It is not always sec- For example, Denzel says that, rath- ing of their supply chains — not
ond nature to management, which er than simply using industry peers, just on their immediate inputs but
is focused on day-to-day operations. her technology boards have looked also those a level or two below?
I think asking about these scenari- to industries that are more highly Are they sourcing cost-effective in-
os and gaming them out together is regulated to gauge their own prog- puts? Are they becoming too risk-
really important.” ress. “We didn’t have the risk sophis- averse and shunning global oppor-
tication of a financial services firm,” tunities? Is the management team
When did we last look into our con- says Denzel. “So, rather than go to paying enough attention to poten-
trol systems? the other technology companies, we tial geopolitical ramifications of their
This, says Denzel, is a critical part look at financial services companies investments? Has the board con-
of the “verify” piece of the board’s and others that are highly regulated sidered the ramifications of various
“trust but verify” mandate. Consider on how they do the balance sheet. risks through the lens of different
how often your company discusses There’s a ton of things they do that stakeholders, and is the company
risk and compliance at the full board we didn’t know. We may not adopt prepared to respond appropriately
level. Is it more than a check-the-box all of them, but we definitely went to when crisis does impact one or all
exercise? If it is currently happen- the better wheel maker.” of them?
if China invades Taiwan? What kind of situation that are rooted in future states, including pre-
would that be from a geopolitical business and mortems and backcasting.”
supply chain perspective? That’s not risk-specif- Premortems are based on negative states
ic, it’s really scenario-specific.” of the future that start with the end in mind.
Denzel agrees. “We use more data visualiza- “Take a very dramatic negative scenario, like
tion. It’s more nuanced. We used to only look at China invading Taiwan.” Lam explains. “You
first-order effects. Now we look at first-, second- ask, ‘What are the conditions associated with
or third-order effects. It used to be if a risk was that? What if we do nothing? Where would we
low probability but high impact, we didn’t do be as an organization?’ From that future state,
much with it. Now it’s more about digging into then look backwards and ask, ‘What are the
the consequences.” conditions that would get us here?’ Internal
All of this means moving from a reliance on conditions, external conditions, controllable
basic tools, like risk assessments with probabili- variables, uncontrollable variables — and then
ty and severity ratings, to more robust modeling map out the things to measure. What things
that takes into consideration scenario-planning are we going to monitor and respond to help
future states of the world, and the macroeco- mitigate those impacts? How does that impact
nomic and business conditions for each. “Sce- our considerations for risk appetite, our risk
nario planning is a good best practice.” says management capabilities and our capacity to
Lam. “But it should be augmented with tools absorb potential losses?”
ANNUAL REPORT 2022 19A WORLD OF RISK
JOYCE CACHO
BOARD MEMBER: SUNRISE BANKS NA, WORLD BENCHMARKING ALLIANCE
Which major risk areas are pub- lab where you’re on the other side I’ve looked at what employees see
lic company boards preparing for looking through a glass window, as valuable to commit to being on a
at this time? seeing how the experiment goes team. They’re voting with their feet.
Climate change and the 500-page for another company, such as busi- They’re resigning. It’s on board di-
document that the SEC released ness peers or an adjacent industry rectors to do less talking about
with proposed rules, but that’s not in your supply chain. The compa- “We can’t find employees,” and
the half of it. It is at the nexus of ny has been in that lab. Board di- look at the business model and
climate change and people, and rectors who are asking for analy- the assumption that it’s a 20-year
then how you address those in- sis of company data since March career that people are looking for.
tegrated risks by putting in good 2020, from a strategic, “reset the The expectation employees have
governance. To me, that’s the big- next normal” viewpoint, are di- of companies in 2022 is that they
gest risk. It’s not climate change or aled in on their fiduciary account- are going to pay more than lip ser-
employees or investors or commu- ability of duty of oversight. What vice to creating cultures that wel-
nities or people in the streets. It’s was your share price then? What is come people who don’t look like
a combination of any two of those your share price now? What vola- them. Today, creating a diverse,
items, and then add to those risk tility did the share price see since equitable, belonging corporate
(and opportunity) factors technolo- March 2020? Use that as a start- culture is a business imperative. If
gy and the pace at which the land- ing point for preparing not only for you only have people who look like
scape is changing. The risks are future public health pandemics, the historic majority of people who
coming at companies faster. It’s but crisis response in a fast-paced, are in business and in the board-
almost like a pitch that comes at business ecosystem and for other room, your product development
a batter harder than expected. It industry-disruptive issues. is passive. Because you’re assum-
comes with a need for board di- ing that somebody who doesn’t
rectors to look at business critical Are there potential risk areas look like you, with your same in-
issues in an integrative way. you see coming down the line come, with your same education,
that boards should be keeping is going to consider your product
What do you consider to be the an eye on? the way you consider the product,
best practices for identifying Employee welfare: It refers to that and that’s the beginning of enter-
company risks before it is too late whole area of people on the in- prise risk of driving business
to prepare and the board is in cri- side – how you recruit them, forward with assumptions
sis mode? how you retain them, how you that are outdated.
Acknowledging the one million get them to express themselves
people in the U.S. who died from as their whole selves. And truly
COVID, and their families. There’s them being not assets, as you write
nothing like having real data to be in your annual report, but assets as
able to analyze. To me, it’s almost those who keep you up to date on
like companies, and especially risks, on risk management, and
public companies, have been in possible outcomes. Again, we’ve
the lab for two-plus years. Not a had two years of a real-world lab.
20 DIRECTORS & BOARDSA WORLD OF RISK
Boards should also be careful not to get so stayed close to them. We gave them money if
overwhelmed with the downsides of a fraught they needed it. Not just our people, but their
global landscape that they forget the inter- families, pets and grandparents. We under-
related nature of risk and opportunity. This, stand that if the family’s not settled down, your
says Lam, is where the notion of backcasting worker isn’t going to be.”
comes in. Backcasting is a strategic planning Sam Bright, a member of the board of trust-
model that assists in envisioning what you ees at TIAA and chief product and experience
want to achieve in the future, including step- officer at Upwork, credits Upwork’s strong
ping stones toward getting to desired results, corporate culture with helping the company
such as community engagement and forming secure the safety and livelihood of thousands
a strong team. “Backcasting involves consid- of the company’s freelance talent and team
ering positive states for the future, and then members.
working backward to identify what it will take “As an organization, as a culture, we rallied
in the present to get there. An example might around our shared values,” says Bright. “Things
be a highly successful digital transformation like health and safety came first in considering
leading to dramatic increases in growth and how our decisions would be judged with the
value. So instead of focusing on the typical passage of time and taking into consideration
three- or five-year plan, management starts the impact to all of our stakeholders.” Those
with a desirable future state and then asks, shared values, coupled with the agility at the
‘How do we get here? What strategy and tal- core of Upwork’s business model, enabled the
ent do we need? What investments would we company to move quickly to build support
make? How do we fail faster? What risk appe- structures for their affected stakeholders, in-
tite would we set?’” cluding accelerating access to payments, cre-
Kumar also sees potential upside and be- ating check-in features for freelancers to easily
lieves the current state of play is ripe for inno- and quickly let clients know about their safety
vation. “While these factors may seem to cre- and work status, and establishing an option
ate a perfect storm for companies, they are also for both employees and customers to donate
an invitation to rethink strategies, strengthen directly to those affected, with no strings at-
resilience and become more innovative in tached.
production processes by using alternate input “There is a deep level of empathy embed-
from alternate sources and seeking new mar- ded in our company and it caused people to
kets for their products.” act in a really expeditious way. It reaffirmed
that our team and our customer relationships
CRISES REVEAL BOARD CHARACTER are strengthened by our shared purpose and
Kumar’s point about creating more flexible values,” says Bright. “I think crises reveal you.
strategies alludes to a critical risk factor that It was inspiring to see all the various func-
existing models are less likely to capture. tions show up and leverage the resources at
While in many ways U.S. businesses are still their disposal to make a difference for all of
grappling with the aftereffects of the pan- our stakeholders. We are an innovative culture,
demic, a picture is beginning to emerge of the we’re an empathic culture — and it really shows
qualities that enabled organizational resil- through in moments of stress.” ■
ience. A common thread? Company cultures
built on agility, innovation and people-cen- Erin Essenmacher is a board director and stra-
tered values. tegic advisor. She spent nearly 10 years in exec-
“Every company whose board I serve on utive leadership at the National Association of
that had people in Ukraine, we helped them,” Corporate Directors, most recently as president
says Denzel. “We helped evacuate them, we and chief strategy officer.
ANNUAL REPORT 2022 21You can also read
