NACD BoardVision - NACD Directorship 2020: Board Composition Insights
This week's edition of NACD BoardVision focuses on a number of important boardroom updates. Join Lucy Fato, deputy corporate counsel and corporate secretary of Marsh & McLennan Companies; Alex Wittenberg, partner of Oliver Wyman; Orlando Ashford, president of Mercer’s talent business; Greg Passin, senior partner of Mercer; and Lou Ann Layton, managing director of Marsh National FINPRO, as they discuss topics including emerging risk trends, talent development and human resources, the expanding role of the compensation committee, and D&O insurance.
Peter Gleason: Hello. I'm Peter Gleason, Managing Director of The National Association of Corporate Directors. Last year we started a new initiative called The Directorship 2020. The idea behind this initiative was to look into the future to understand challenges, opportunities and issues directors will be facing in the year 2020 and to help directors deal with those issues as we move forward. To do this, we convened a number of leading experts, our members and subject matter experts to discuss these challenges. We're pleased to bring you some insights from some of the top thought leaders from Marsh and McLennan Companies around the issues of talent development and board composition. Enjoy.
Lucy Fato: Hello, and thank you for joining us today. I'm Lucy Fato, Deputy General Counsel and Corporate Secretary at Marsh and McLennan Companies. Today I'm joined by 4 of my colleagues from 3 of our operating companies, Alex Wittenberg, a partner at Oliver Wyman, Louann Layton, a managing director at Marsh, Gregg Passin, a senior partner at Mercer, and Orlando Ashford, the President of Mercer's talent business. Today we're going to focus on board composition, an important component of effective board leadership. Alex, let's start with you. You spend a lot of time with Oliver Wyman clients, helping them with issues around risk management and integrating risk into strategic decision making, and risk oversight is at the core of what a well functioning board focuses on. What are some of the global risks you think will be top of mind for directors over the coming years?
Alex Wittenberg: Yeah, I think instead of talking about a list of risks that boards can think about, it's probably more pertinent to really talk about a few trends that we're seeing. And this is coming out of our work, be it with the World Economic Forum, with financial professionals and directors. And the first issue really centers around uncertainty in external markets and especially starting to understand the degree of uncertainty when you start to take a longer-term view, and an increased perspective from directors and financial professionals in particular about a lack of precision in terms of being able to understand the range of outcomes in financial performance, in the execution of strategy and frankly, understanding the amount of variability that's going to be embedded in both those activities. I think the second thing that we're seeing is increased focus on the nature of competition and who competitors really are. That may be coming from disruptive technologies, changes in new industrial processes and frankly, altering, dramatic altering of supply chains that are really remaking industries and economies as consumers and governments really demand innovation and frankly reduced costs. And I think the third thing that we're really experiencing is really an outcome of those first 2, which is there's a disproportionate downside in failing to recognize and meet some of these challenges. Companies that had inassailable positions in their industries, over very short periods of time, sometimes 5 to 10 years, find themselves really disappear into irrelevance.
Lucy Fato: In light of all of that, what do you think a board should think about in terms of analyzing its current composition and what skill sets should a board keep in mind when thinking about adding new directors to the mix?
Alex Wittenberg: Right. I think really the first thing is that the board really needs to have a solid understanding of the key drivers of variability and performance. And I think this really needs to connect 3 core pieces - strategy of the firm, performance of the firm and the risks that the firm takes to achieve the first 2. I also think this is an activity that requires the participation of the full board and is not something that can be deferred to a risk committee or an audit committee or compliance's committee. This is really about the board understanding the activities of the firm and what drives value for shareholders. The second issue that I think companies and boards need to come to grips with is that globalization is here to stay for most companies. Whether you have 50 million or 50 billion in sales, I think the cat is really out of the bag on that, and I don't think it's going to be enough, or even feasible, to have a board select a collection of local experts to try and meet various market demands. This is really going to require participation of professionals that have a truly global understanding of the corporation and the context in which it operates.
Lucy Fato: Orlando brings a unique perspective to this conversation because in addition to being the President of Mercer's talent business, he's also a director of a public company and prior to his current role, he was the Chief Human Resources Officer for Marsh and McLennan Companies. So, Orlando. Human capital and talent management are becoming increasingly important topics today in corporate America. And historically, a lot of these issues were really left to senior management to grapple with and boards focused primarily on CEO succession but that seems to be changing. How do you think boards should approach these issues in the coming years?
Orlando Ashford: If you think back to the last 2 blue-ribbon commission reports that NACD sponsored, both were focused on human capital or HR-related topics, so 1 talking about diversity or cognitive diversity and why that's important at the board level, and then this year, or last year's actually, we talked about talent management and the role that the board should play. Historically, the board thought about CEO succession and CEO succession only. But as companies lean into this war on talent, it's becoming clear in order for organizations who effectively execute their business strategies, the ability to identify, recruit and retain the right human capital, the right people, is mission critical for an organization to be successful. And as the board is responsible for the successful governance of an organization, making sure that management is appropriately addressing issues around talent, whether it's the CEO, succession to the CEO or organizational capability that's housed within the organization are all finding their way into the boardroom in order to make sure that any organization is going to be successful. To give you an example, there's some research that Mercer's done that looks at the way that analysts evaluate corporations and analysts may adjust their valuation of an organization anywhere between 5 and 25 percent. On average, it's 18 percent based on their assessment of the quality of leadership. And the quality of leadership is something that management, with the support of the board, actually has control over. And so wouldn't you want to influence the valuation of your company 5, 10, 15 percent by making sure that you had the right people, the right talent at the right time in your organization to be successful? I think the answer's yes.
Lucy Fato: So, how does that translate to board composition and the skills sets that directors should, might need to have in the future?
Orlando Ashford: I think historically boards were made up of either current or past CEOs and CFOs and that capability is still important in the board room, but given the complexity that exists in today's business environment, it's also important to have other expertise on the board. So, I'll personalize it a little bit. A board seat that I was recruited for was based on the fact that I had HR expertise and had worked internationally. Organizations may be moving into certain geographic markets or into certain industries and so having that professional perspective on the board is becoming more and more important in, in, in addition to having a person that has some generalist business perspective. You need to have deep expertise on a board as well. So, this idea of diversity, whether it's race and gender to bring those different perspectives but also industry and technical competence is an important mix to have in order to make sure that you've got a perspective across all the dimensions that would allow an organization to be successful.
Lucy Fato: Thanks, Orlando. That was very interesting, and it's a nice transition over to Gregg. You know, it's important to remember that when a board is looking for new directors, they also have to keep committee assignments in mind and the skill sets required for those, those kinds of assignments. So, Gregg, in your role as the practice leader for the North American Executive Rewards Business at Mercer, you spend a lot of time with boards and compensation committees in particular, talking about executive compensation and governance-related issues. What are some of the trends you're seeing in this area and what advice are you giving boards today on this topic?
Gregg Passin: Thanks, Lucy. So there really are, in some ways 2 contrasting trends that I talk about. The first is the actual name of the compensation committee itself. More and more we're seeing compensation committees of public boards changing their names to human resource committees or leadership development and compensation committees, something like that, that really takes into consideration the fact that these committees are no longer just focused on executive compensation and benefits as they have in the past. As companies have become more complex, as the issues around executive compensation and leadership have become more complex and global, the committees are broadening their portfolio of responsibilities to succession planning, leadership development, analysis of a broader human capital data throughout the organization. So, the, at, at the same time that they're broadening their portfolios, they're changing their names as well, recognizing the fact that there are much more complex things for them to look at. On the other side of it, it's interesting for public companies in reaction to public scrutiny, greater regulation, greater press coverage and the influence of some of the shareholder advisory firms, we're seeing committees become a little bit more risk-adverse in their operation of executive compensation. So, while it's more complex and they're broadening their portfolio, at the same time they're taking less risk around the design of compensation programs to the fact that we're now seeing many programs becoming sort of very cookie cutter across different companies, where the same types of programs and performance measures are being implemented because many companies don't want to be different from, from the other to reduce the risk. So, we're really seeing this gap in executive compensation governance between the broader complexity and, and portfolio that they're looking at and the, the more risk-mitigation approach that they're taking as well. As far as composition of the board related to this issue, certainly having people on the committee that understand compensation and human resources is very important, much the way that audit committee members need to have people who are financially literate, it's important to have a compensation committees and these broader HR committees to have committee members who are literate in compensation as well as the broader human resource issues that they might, they might look at. At the same, because compensation and incentive plans are so important to drive the business and help support the strategy of the organization, it's always important to have people that really understand the business and the critical success factors for the organization as well.
Lucy Fato: Louann, you've spent the better part of your career helping companies and boards obtain DNO insurance. DNO insurance is a topic that's very important, for obvious reasons, to directors. How does composition play into a carrier's analysis when they're making a decision about whether to provide DNO insurance and if, if so, on what terms and what price?
Louann Layton: Yeah, good question, Lucy. I would, I would first start with the underwriting community assesses what I would consider 3 main areas of a company, their financial condition, their business or operating profile, and then their corporate governance. And corporate governance plays a big role in, like you said, how the underwriters, if they're willing to accept the risk, what coverage they're willing to provide and how to price it. Today I'll focus on the corporate governance piece and specifically board composition. Here, underwriters don't believe that if you have a strong corporate board you're not going to be sued, right. But they do feel that a strong board with good corporate governance practices are less likely to get theirself [phonetic] into trouble and when they do, they have a better defense. From a board composition standpoint, they're looking for diversity of the board. Not diversity in just gender and race but really diversity in skill set and experience. For example, if a board announces or a company announces that they're going into Latin America for the first time, adding a director with Latin American business experience is reassuring to the board. The other factor in board composition that they take into consideration is independence. Is a board truly acting independently? And that's a little bit harder to measure. It's more than looking at insiders versus outsiders. It's really looking at, perhaps from an underwriting perspective, how many overlapping boards the members are on, because that might denote cronyism or friendship. I would also say that underwriters evaluate the committees of the board. 5 years or so ago, the focus was on the audit committee. Today, with the passage of Dodd Frank, they are more concerned with the compensation committee because of the bright light on executive compensation. So, underwriters are asking questions about the board's benchmarking of compensation against its peers as well as their practices and policies around executive compensation. They want to see that the board is not induced, if you will, to give excessive incentive packages to the corporate officers. So, those are a few of the other things that they would ask.
Lucy Fato: Are there are any other trends in the DNO space right now that boards should be mindful of?
Louann Layton: I think it's cyber, cyber, cyber. I mean, I think that because it could, it can pose such a big risk to the company, the DNO underwriters are beginning to ask if the board of directors does understand the profile of a company's cyber vulnerabilities, its potential for severity and/or frequency of loss and what that loss looks like in the way of revenue, reputation, and, and other things.
Lucy Fato: Thank you, everyone. And thank you for joining us today for an interesting and engaging discussion on board compensation and issues for directors to consider over the coming years.
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