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Board Leaders Rethink Strategy, Risk, and Stakeholder Focus
02/18/2021
The year ahead will be about refining—if not fundamentally rethinking—strategic planning and risk management. While not surprising, this overarching takeaway from discussions and polling at the KPMG Board Leadership Conference in January is no doubt eye-opening in its scope and implications for board oversight and leadership.
As our conference conversations highlighted, robust scenario planning—thinking deeply and continually about a company’s future—will be essential as a result of the unprecedented disruption and uncertainty caused by the COVID-19 pandemic and resulting accelerating megatrends.
Further results from conference polling highlight critical issues for lead directors to consider in the context of strategy and risk as they help ensure that the board’s agenda and meeting time are focused on the issues that are most critical to the business. Below are some of the takeaways from our polling.
The shift toward stakeholders and long-term value creation is clear and dramatic. Nearly 90 percent of directors say that, in light of the events of the past year, their companies are reassessing how they address the interests of key stakeholders (in addition to investors); more than two-thirds say that a focus on environmental, social, and governance (ESG) issues is important to long-term performance and value creation; and nearly 90 percent of respondents believe that companies can meet the needs of stakeholders in a socially responsible manner while generating superior financial results. At the same time, 81 percent respond that their companies’ incentive structures encourage management, to some degree, to maximize short-term returns at the expense of long-term returns. Some of the key questions for the CEO and lead director to consider include: How do our incentive structures and culture drive ESG performance? How effectively are we assessing and disclosing the company’s ESG performance?
The focus on climate risk by companies and boards appears to be falling short of investor expectations. Only one-third of directors express confidence that their management teams understand the implications of climate change for their businesses, and only 29 percent say that “addressing climate change” will be of strategic importance to their companies in 2021. This is in contrast to investors’ expectations for companies. In his 2021 letter to CEOs, BlackRock chair and CEO Laurence D. Fink wrote, “No issue ranks higher than climate change on our clients’ lists of priorities.” Fink asked companies to disclose plans explaining “how their business model will be compatible with a net-zero economy,” and how these plans are incorporated into long-term strategy and reviewed by boards of directors. Lead directors should help ensure that management teams are factoring climate issues into their risk analyses and strategies.
Cybersecurity and data privacy and governance are the top global governance risks for companies in 2021. This comes as little surprise given shifts to remote work, online customer engagement, and the growing sophistication of cyber attackers, including nation-states. In light of the recent SolarWinds cyberattack, directors express increasing concern about cyber risks posed by third-party vendors. Lead directors should work with committee chairs to reassess the board’s oversight of cyber risk, including clarifying committee roles.
The pressure—and spotlight—on CEO and corporate leadership is intensifying. Nearly two-thirds of directors say that corporate America is best positioned to help tackle societal problems through leadership by example and innovation, and the vast majority of directors believe that CEOs have a responsibility to take a stand on diversity, equity, and inclusion (DE&I) and other societal issues. But there’s an important caveat: only 8 percent of respondents say that corporate America has had a “strong follow-through” thus far on DE&I and societal commitments. Boards play an important role in turning this around. Is the company using its resources, influence, and capabilities to not only talk the talk, but to walk the walk? Does the board receive regular reporting on DE&I metrics and milestones? Eighty percent of directors report that, given the events of the past year, their boards have intensified their focus on leadership and succession plans for the CEO and senior leaders.
The Biden administration’s policy initiatives will be a key area of focus in the near term. In addition to an economic stimulus package, near-term policy initiatives that directors say should be the focus of board attention include tax reform (which may be part of the stimulus package); the US Securities and Exchange Commission’s regulatory agenda (in particular, new disclosure rules regarding ESG issues, sustainability, and corporate governance); and trade policy and climate-related regulation. Beyond the regulatory and compliance issues that may lie ahead, is the company assessing the potential opportunities presented by the emerging policy agenda?
Given the challenges to come, the role of the lead director and other boardroom leaders in helping to ensure effective board engagement in strategy and risk oversight, a strong CEO-board relationship, and a culture of crisis prevention and readiness has never been more important. The year ahead will clearly put boardroom leadership to the test.
John H. Rodi is leader of the KPMG Board Leadership Center.
KPMG is an NACD strategic content partner, providing directors with critical and timely information, and perspectives. KPMG is a financial supporter of the NACD.
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