Firms are becoming increasingly forced to listen to concerns from activist investors
Concerns around activist investors, lack of diversity, corporate reputation and disruptive technologies are raising increasingly tough questions in the boardroom, according to a women empowering outfit.
Questions revolving around barriers to good decision-making by the board, as well as the right governance structure around innovation, are high on the minds of women directors.
This was the outcome of a recent feedback received by the US-based WomenCorporateDirectors Education and Development Foundation Inc (WCD).
“Many companies today are finding themselves at a crisis point across a number of areas, with the burden to resolve hot-button issues flowing up to the board,” WCD CEO Susan C Keating said in a statement.
At the 2018 WCD Global Institute in New York — which convened more than 200 directors and governance experts from 20 countries around the world — attendees voiced common concerns that public companies and large, privately controlled companies are grappling with, according to its statement.
“At the same time, leadership teams are trying to innovate and not have their companies become obsolete in five years, the pressures from investors, media and the public are dominating many board agendas,” she said.
In the statement, WCD shared the top 10 concerns among directors right now, drawing from discussions at the 2018 WCD Global Institute and experiences attendees shared with their peers.
1. What image is corporate leadership projecting?
Companies are becoming increasingly forced to listen to concerns from activist investors, giving new urgency to maintaining good optics with this group — and walking the walk.
Kimberly Ross, who serves on the boards of the Chubb Corp, Nestlé SA and PQ Corp, said: “You don’t want to look like a board or a management team that is entrenched.
“The best defence is a proactive board and management team not only around strategy, but also around the composition of the board, including diversity. This means being nimble and making changes in skill sets recruited for the board depending on what the times call for.”
2. How can reputation be accounted for in the business model?
“Many companies are struggling with how to incorporate their reputation into their bottom line,” said Dr Anastassia Lauterbach, a director at Dun & Bradstreet Corp and Wirecard AG.
“Organisations such as Facebook Inc — but many others, too — are battling public perceptions about who they really serve: Their advertisers or their users? The Information Age is over, and we are now in the Reputation Age. This entails shifting from monetising eyeballs to a model that doesn’t really exist right now at the same scale of profitability. With public companies, who need to deliver quarterly results, the challenge is that much greater,” she said.
3. How are activists gaining support among key investors?
“The nature of activism has changed dramatically in the past five to 10 years,” said Bill Jenks of KPMG UK’s investor relations consultancy Makinson Cowell.
He said: “It used to be dominated by smaller firms focused on short-termism and stripping companies of cash before moving on quickly to the next opportunity. More recently, activists have emerged with enormous financial, analytical and legal resources behind them — firms with US$20 billion (RM81.6 billion) to US$30 billion under management taking multibillion-dollar positions in mega-cap companies.
“Their resources and experience have allowed them to become much more effective in overcoming voting structures and cultural barriers to change, and they now have much more underlying support from institutional shareholders.”
4. Which issues are making the company vulnerable?
Preparing for investor scrutiny requires taking a hard look at weak links in the organisation.
Tiffany Campion, senior attorney (takeover defence and shareholder activism) at Latham & Watkins LLP, observed that activists were looking for vulnerabilities.
“One vulnerability could be not having a strong, well communicated long-term strategy, or there may be risk factors around social issues that haven’t been addressed or don’t appear to have been addressed by the company’s public communications,” she said.
And, in today’s environment, #MeToo types of sexual harassment incidents raise red flags, the statement added.
5. What are the barriers to good decision-making by the board?
“One of the key governance processes that have remained under-examined is the way boards make decisions,” said Susan Angele, senior advisor of board governance at US audit, tax and advisory firm KPMG LLP’s Board Leadership Centre.
“With greater scrutiny on boards today, the process for getting to the ultimate decision can hold as much consequence as the decision itself. So, as directors seek to ensure that they are supporting their decisions through a sound process, an increasingly important part of governance is recognising blind spots and innate biases that may detrimentally influence board discussion,” she said.
6. How are new technologies creating their own demand?
Tell us the problem and we’ll find the solution. This was the traditional model of how new products were developed in organisations.
“But those days are gone,” said Adriana Karaboutis, chief information and digital officer at National Grid plc.
“Now we see new technologies driving new business models, new customer engagement opportunities and whole new businesses. Gone are the days where the business largely drove the bus and told the technology organisation what they needed.
“Now the business leadership and the board have to become very adept in understanding new technology and what’s out there. What’s becoming possible as new technology and digital services emerge can drive what’s being offered — and create its own demand in the market,” she said.
7. What is the right governance structure around innovation?
Cultivating a culture of innovation in a company is not just about putting out a bunch of new ideas in an unfocused fashion, the WCD statement noted.
“Both boards and management teams can get nervous about the velocity of change in the digital space, and then can get tempted to expend resources across a number of areas to play catch-up,” said Rick Chavez, a partner at Oliver Wyman. But like all other management disciplines that have come before, innovation is its own management discipline. Employing the discipline of constraints and thinking about new initiatives as an investor would — much like a start- up does when working with few resources — provides the rigour, focus and governance needed for companies seeking to innovate,” he said.
8. How can companies create a culture of innovation?
“In the energy business, we all have access to the same technology and the same sources of capital,” said NextEra Energy Inc chairman/CEO James L Robo.
“So, we have to win with our talent, with our team that is focused on innovation. Today, innovation means understanding all the big data generated from the smart grid and predicting when problems are likely to occur, and fixing them before our customers lose power. Innovation means being the largest player in the US energy storage business, which has the potential, when combined with wind and solar energy, to deliver a reliable renewable energy product that can reduce our nation’s dependence on traditional power generation sources,” he said.
9. How will artificial intelligence (AI) affect how work gets done?
“Over the last three to five years, there has been a convergence of three trends that have unleased huge advances in what machines can do,” said Susan Lund, a partner at McKinsey Global Institute.
“There is the wider availability of digital data, the cost of storing and processing that data has fallen sharply, and there has been a jump in mathematical advances that allow us to pro- cess the mountains of data. These advances have enabled us to have AI do things that it didn’t used to be able to do. After years of slow progress in AI, there has been a huge acceleration in what machines can do. Over the next decade — even if you look at a midpoint automation scenario — 15% to 20% of work that’s done in the US or Europe will be replaced by either robots or AI algorithms or a combination of the two.”
10. How is technology affecting the workforce?
Disruptive technology is affecting different workers at different rates. Marina Brogi, a director at Salini Impregilo and Banco Desio e della Brianza, said for Europe, Japan and other regions with ageing populations, automation in general becomes that much more necessary because of the decrease in the working-age population.
“Certain groups of workers who are used to dealing with older-generation machines may be able to more easily adapt to working with a new generation of machines. Compared to those workers who are tied to machines, more problems arise with people who were trained to perform parts of complex and specialised processes that have been disrupted. These highly trained workers feel that they’re no longer part of the useful decision-making process as they were before, and actually tend to be more difficult to reconvert,” she said. — TMR