New NACD Report Provides Insight Into Emerging Board Matters for 2020
The National Association of Corporate Directors (NACD) recently published its 2020 Governance Outlook: Projections on Emerging Board Matters, bringing together insights from a range of NACD’s partners, including Grant Thornton; Baker Tilly; Weil, Gotshal, and Manges; Deloitte; Spencer Stuart; and Broadridge Financial Solutions.
The report pulls together topics that have risen in importance in 2019 and that show no signs of slowing in 2020. These trends include the looming threat of recession, shifts in the digital landscape, new legal risks for directors, changing aspects of board composition, and the continued importance of environmental, social, and governance (ESG) issues to investors. Each of these trends presents new challenges to directors, which the Outlook report addresses with questions to ask in the boardroom and important strategies to combat the risks.
Below are key takeaways on trends that are projected to grow in importance in 2020.
Board Projections for 2020
Cyberattacks, growing risks of a possible recession, and a war for talent have all combined in an unprecedented way. This means that boards need to work to have a more dynamic operating model, which will allow the board to bend and weather the onslaught of storms. NACD recommends that directors incorporate new strategies into the boardroom, including creating a dynamic operating model, improving transparency into how boards govern, and increasing accountability for both individual and full-board director performances. Utilizing these strategies, alongside the others discussed in the full report, will help boards position themselves to be “fit for the future.”
Preparing for the Next Recession
In the report, Grant Thornton explores the possibility of an incoming recession and how boards can navigate, and continue to innovate despite, the looming economic risks. Boards should look inward and question their readiness for a possible economic downturn and how quickly they could respond to a recession. This means that they should focus on understanding management’s plans for an economic crisis, assess leadership’s ability to lead the company through a downturn, and have the board run through practice crises to plan director responses. Once the board feels confident in its preparation to weather a recession, it can begin to consider options for investments that can help bolster the company’s growth throughout a recession. Innovation goes beyond new technology and can actually help keep a company’s core business strong during an economic downturn.
Strategic Risks for Boards in 2020
Baker Tilly delves into four key risks that they predict boards will face in 2020: mergers and acquisitions (M&A), trade compliance, tax issues, and data privacy. M&A, for example, is a growing risk, as changes in taxes, tariffs, and labor disputes will all affect businesses’ M&A activity. Boards need to be aware of not only their companies’ internal processes to deal with these changes but also how targets of acquisition are dealing with the disruptions. Boards must be able to update their strategy at a faster pace than ever before in order to properly shelter their companies from these risks.
The Caremark decision in 1996officially defined the scope of director liability, cementing directors’ need to be proactive when setting their oversight agendas. In the 2020 Governance Outlook report, Weil, Gotshal, and Manges discusses the need for boards to hone in on mission-critical risks, prepare for heightened shareholder scrutiny regarding oversight practices, and evaluate mechanisms for understanding the effectiveness of their oversight methods. A key tactic for boards to embrace here is to institute protocols that require management to keep the board in the loop on any and all compliance and operational risks in a timely fashion. This keeps the board and management in lockstep on mission-critical oversight systems.
The Digital Frontier
Technology is often discussed using defensive language—focusing on how a company can best protect itself from a cyberattack. According to Deloitte, directors should shift the focus to make technology more of an offensive tool. Boards should ensure they are thinking through offensive applications of technology, engaging with technology leaders within their companies, and supporting management in appropriate experimentation with new tech.
In the report, Spencer Stuart focuses on how boards can remain an asset to the companies they serve. A skill mismatch exists between the current backgrounds and skillsets of the majority of directors (many of whom come from chief financial officer (CFO) and CEO backgrounds) and the skillset mix needed on the board which includes underrepresented areas such as technological skills. Increased diversity of skillsets allows for a broader set of perspectives in the boardroom. Boards should utilize performance assessments to continually evaluate director skills and effectiveness, as well as use tenure limits to refresh the board to ensure director skillsets match the company’s needs.
ESG has continued to grow in importance in the eyes of stakeholders, including investors and employees. Broadridge encourages boards to work to develop deep engagement and understanding with the company’s stakeholders. This is particularly important regarding the “S” of ESG, “social,” as institutional investors have remained focused on board diversity as a key factor in voting.
Reaa Chadha is a former senior research analyst at NACD.