Almost every article, white paper or study about governance underscores how complex, how uncertain and how risky the business environment has become. While all of this data points toward increasingly difficult challenges for boards and corporate leaders, there is no playbook for how companies will manage these issues in today’s environment. Specifically, the CEO’s role has become murkier and less defined, requiring boards to evolve from their recent focus on compliance to place greater emphasis on their role as a strategic advisor to CEOs and management. We envision these challenges will have a significant impact on board composition and refreshment.
The omniscient CEO concept is dated, and many CEOs are outspoken about their desire to continuously work on their own development and welcome input from the board. In our CEO study from 2018, one CEO said, “[It’s about] stepping back and reflecting, acknowledging that I do not have all the answers and also do not need to have them.”
To help CEOs find these answers, boards will seek directors with a diverse set of skills and perspectives gained through leadership experience in roles beyond the traditional CEO/CFO director profile. Meeting expectations will require directors to have recent, relevant insights into the marketplace, and it suggests an increased demand for tapping into the talent pool of “board-ready” active executives. Identifying, attracting and retaining directors with the requisite skill sets poses its own set of challenges. From a recruiting standpoint, attracting active executives can be difficult given capacity constraints that arise from the individuals’ day-to-day commitments and other limitations on external board service. From a retention perspective, new directors will likely have a different age, ethnic or gender profile compared to current directors and many lack prior board experience. These differences place a greater emphasis on boards to support new directors with a well-designed onboarding and integration process.
While there is no “how-to” guide for CEOs or boards to succeed in today’s market, creating a diverse board with recent and relevant skills and experiences will play a key role in enhancing the board’s ability to serve as an engaged strategic advisor to management.
Al Prieto leads Egon Zehnder’s New York office, coordinating the engagements of a consulting team that serves clients throughout the New York metropolitan area. In addition, he co-leads the firm’s U.S. Board Consulting Practice as an advisor on matters surrounding best-in-class corporate governance, including board composition, board search and succession planning, board assessments and CEO succession planning. Mr. Prieto remains active in the firm’s global Health Practice, conducting CEO search and succession projects for clients in the biopharmaceutical sector.
Prior to joining Egon Zehnder, Mr. Prieto worked at AstraZeneca as its Regional Business Director in Europe with responsibility for commercial operations across Central and Eastern Europe. Earlier in his career, he led a variety of health-care-delivery ventures that included retail-pharmacy-based health clinics, disease-management services, and ancillary health-care facilities. He also founded InSite Clinical Trials, a U.S. biopharmaceutical clinical product-development-services firm that was later sold to UnitedHealthcare.
Boards of directors are facing increasing demands from investors to prioritize what is the most significant asset for many companies—its workforce. Human capital management (HCM) covers a wide range of topics including recruitment, retention, training and engagement, wages and benefits, health and safety, and diversity and inclusion. While environmental issues, such as climate change, and governance issues, such as board diversity and executive compensation, have received significant attention over the last several years, in 2019, we expect that boards of directors will be more focused on addressing ever-expanding HCM issues in the workplace.
Investing in human capital can reap dividends and reduce risk, especially in a tight labor market. Studies have shown that companies included in Fortune magazine’s “100 Best Companies to Work For” list earned greater returns over the long term. From a risk management perspective, highly engaged employees may be more personally committed to their employers over the long term, more willing to protect the company’s assets and to comply with company policies and procedures.
Not to be overlooked is the impact of the #MeToo movement and the emphasis on corporate culture as an asset, which has underscored the board’s role in the oversight of reputation and business risk relating to HCM matters. Investors are demanding that boards of directors evaluate, disclose and engage on human capital matters. BlackRock has identified HCM as one of its top five investment stewardship priorities. Michelle Edkins, Managing Director and Global Head of Investment Stewardship at BlackRock, emphasized that HCM “is both a board and a management issue” and that BlackRock expects “a company’s board to be deeply engaged in the oversight of a company’s strategy and defining of a company’s purpose—to help ensure the effective strategic implementation of HCM throughout their organization.” Also notable are the 71 shareholder proposals submitted on human capital issues during the 2018 proxy season, including on labor, workplace diversity and pay equity.
Heading into the 2019 proxy season, boards of directors should consider some of the following steps to sharpen their focus on HCM as part of their overall business and risk management strategy:
Lyuba Goltser is a Partner in Weil’s Public Company Advisory Group in New York. She advises public and private companies, foreign private issuers, and private equity sponsors on a full range of corporate governance and compliance issues, including in M&A, capital markets and corporate restructuring transactions. She represents boards of directors, audit committees and special committees on complex governance matters including internal investigations, shareholder activism, leadership transitions and related party transactions. She advises public companies on financial restatements and internal control issues and Sarbanes-Oxley implementation. She also regularly advises on SEC regulations and compliance issues faced by newly-listed public companies and companies preparing to go public. Ms. Goltser was recognized as a 2015 Capital Markets “Rising Star” by Law360 and is recommended for Corporate Governance by Legal 500 US.
In my years engaging with hundreds of company boards and management at BlackRock and Dimensional, there was one simple, reliable way to diagnose a company’s governance vulnerability (e.g., against activists, against shareholder opposition on key annual meeting votes): information asymmetry. Before engagements, I would simply cover various company disclosures, including what the management was communicating to the sell side at earnings and investor days, then try to correlate the messaging with what I heard from the company via proxy disclosures and during my engagements with them. It was eerily consistent—the companies that exhibited a disjunction between what they were saying to the sell side during earnings and what they were saying to the “governance side” tended to be the companies that had issues with activists and at annual meetings. Last year, for example, I engaged with a company whose proxy CD&A disclosed that executive incentivization metrics were related to aggressive M&A, when the CEO at earnings stressed that the company’s strategic imperatives were balance sheet discipline, capital efficiency and deleveraging. When I flagged this company as an outlier for Say on Pay, I also noted that it could be an activist target. Sure enough, when the company proposed a merger with another company and the market sent the price down by 18%, a noted activist waged a brutally effective campaign and eventually replaced the majority of its board. I know that information asymmetry isn’t the most exciting topic, but, in my view, it is the key issue that can create problems during proxy season if not resolved. Every company, during offseason, should review its proxy work streams and flows to honestly assess whether there are silos around IR and corporate secretarial teams, and break those information barriers should they exist.
Lyndon Park, Managing Director and Head of ICR Governance Advisory Solutions, directly advises boards and management teams on complex corporate governance, ESG and event-driven issues. Previously, Mr. Park was Head of Global Corporate Governance at Dimensional Fund Advisors where he oversaw and implemented the firm’s global stewardship and ESG initiatives. Prior to Dimensional, he was Partner and Head of Governance & Listing Standards at Equilibrium Stock Exchange, a capital markets start-up. Mr. Park began his career in governance at BlackRock by supporting BlackRock’s board of directors, before serving as one of BlackRock Investment Stewardship team’s lead governance analysts. In his combined tenure as a governance leader at BlackRock and Dimensional, he engaged with hundreds of board and management teams on matters related to corporate strategy, governance, ESG and event-driven/crisis situations, and has covered and made decisions on most of the key contentious proxy battles in recent years as an investor.