We sat down with Catherine Allen—Chair and CEO of The Santa Fe Group and a member of multiple corporate boards—to discuss how directors are approaching issues facing the companies they serve, as well as their own boards’ structure and succession. Each of these issues came back to a central theme: The future is here, and boards that aren’t able to adapt to changes as we embark on a new generation will face significant challenges in the years ahead.
Catherine Allen: Six main things have changed in the past five years that are affecting corporate boards: The financial crisis, globalization, shareholder activism, revenue generation and innovation, technology directors and board education. Each of these factors plays a critical role in how boards approach their duties as directors.
Financial Crisis. The financial crisis impacted every board I was on as well as all of corporate America. In one sense, the event helped boards understand there could be a crisis over which they had no control—it just happened and happened to you. In addition, it was a stark reminder that you have to be thoughtful about risk and regulatory compliance. As a result, we’ve seen huge moves to be more conservative about financial bubbles. That’s been a prudent thing.
Globalization. Even if you’re a company that is only focused on the U.S. market or even a region, boards are realizing, whether it’s talent or competition on specific services or goods, or technology changes, the market is more diverse and firms need to understand how customers around the world are different.
Shareholder Activists. A majority of companies have had some kind of shareholder activist activity, and there are often good reasons for it. But I’ve seen a number of bad ones where short-termism and egos of people who want to make a mark on Wall Street pump up the stock for their own purposes before exiting and leaving the company in a tough position. Even if you aren’t approached, you have to understand shareholders’ most pressing concerns.
Revenue Generation and Innovation. During the mortgage and derivative bubble the financial industry took on new risks around mortgages and a lot of revenue came from that. But now it’s harder to find that revenue, so leadership has to be strategic in creating new revenue streams. And that takes innovation. It’s not just with financial companies. Where do those innovations and revenue streams come from, and how do you leverage them?
Directors of Technology. Boards now need a director to understand how dramatically technology is changing business models and disrupting business as usual. And that person must be able to speak eloquently to the rest of the board about that, whether it is someone who can see where mobile is going, or understand cybersecurity, or the difference in demographic groups’ usage of technology.
Board Education. Even though it’s not required, more board members are getting educated by bringing in outside speakers, going to conferences, or reading to stay up to speed, and they need to stay up to speed. That education component is huge, and it’s part of the reason you need diversity on boards. Boards need to stay fresh or be refreshed with new members.
Allen: Personally, I am a big believer in board and personal assessments and in having a certain age limit, although I would argue if you have an age limit you should have exceptions for skill sets. You have some 75-year-olds who are savvy and can stay up on anything,
But then you have other directors who are complacent—and that’s not limited to age. I’m also concerned about tenure over 15 years. Is that person who’s been on the board 20 years really independent? Also, most boards in the past were former CEOs or sitting CEOs or COOs or a legal person who knew how to run a business in a traditional way. Now you need people who are very strategic, and also open to change. The new normal is constant change, and the new attribute is someone who can live with ambiguity. It’s only going to get more complex.
Allen: Whether they are your employees or customers of your customer, you need to understand the Millennial demographic to understand what the world is going to be like. There are 77 million Boomers, 40 million Gen Xers, and 80 million Millennials in the U.S. alone. Millennials around the world are more alike than any other generation because of technology. You have to understand what they’re doing to manage your workforce, to attract, train and retain them, and also to get them to buy your products and services and interact with you.
Many boards are not there yet. Managing a multigenerational workforce and leveraging the best of the generations is not easy. For the Millennials, technology is a given, and they use it in all forms. They want to text, they don’t want person-to-person meetings, and they can multi-task. They are interested in personal development. They want to be promoted or go somewhere else. They don’t have the same loyalty as other generations.
For one company I advise, I helped bring in a Boomer CEO. The Millennials who started the company were innovators and brilliant, but didn’t know how to run a business. It’s an opportunity for the Boomers to reinvent themselves working for Millennial companies. The founders are open to advice because they want to sell or go public. On the other hand, Xers tend to want to do it on their own. Interestingly, the Xers and Millennials don’t get along very well.
Allen: There is talk about it, but chairs of the board or nomination and governance committees tend to be more traditional. They say they want change, but it’s not happening very quickly. When there are three or more women on a board there is substantial difference in positive financial performance and stakeholder perspective, but there isn’t a huge amount of change yet. Women still make up only 17% of corporate boards.
You have to ask what do our stakeholders and customers look like, and does the board reflect that? If 30% of your customer base is African-American and 70% women, are you understanding what your customers or workforce or stakeholders really want and need? There will be more and more pressure on boards for diversity from Millennials as well, who are not yet into investment mode—right now it is mostly large institutions and activists asking these questions.
Another issue is how boards find new candidates. We keep hearing people say there’s no pipeline of women. But what they mean is that there aren’t enough women who are already on boards. If you’re not on your first board, it’s really hard to be considered, and you’re dubbed “inexperienced.” The pool of women who are on boards is much smaller, so to see change we’ll need to look for the talent among those who are not on boards but have the skill sets and experience that is needed in today’s boardroom, such as technology, public policy and communications.
Allen: This comes back to the generational shift. The board needs to understand digital technology to attract the new generation. If they’re going to work for you or buy something from you they are going to go your website first to find out how tech-savvy you are, what is your mission, can they reach you on an app, etc. We really have to ramp up what we’re doing online and in the mobile app environment. That means boards need to be educated about this and have at least a couple directors who can explain it in plain English and business terms. Understanding disruptive technologies and business models will be key.
Allen: Third-party risk is a hot topic. I’ve hired seven people in the last year because it is front and center for many boards as well as companies in general. The explosion of cyber attacks like Target and Home Depot and others were through a vendor or another third party. As a result the CEO was gone and people were calling for resignation of the board risk committee. You may have great privacy and security policies and practices in place, but that vendor or vendor’s vendor who doesn’t could cause the problem.
Third-party risk is the weakest link in protecting company assets, and we’re only going to see an escalation of breaches. We need to evaluate vendors on a regular basis. Third-party risk is not only a management, procurement and sourcing issue, but also a reputational and operational risk.
Allen: As I mentioned, demographic issues will cause challenges as we face the combination of Boomers leaving boards and the workforce and Millennials coming into the workforce. And then we have a much smaller number of Gen Xers to fill the gaps. I can’t reiterate enough how important it is to understand disruptive technologies and business models.
And finally, shareholder activism has ignited the debate between short-termism and longer-term views. The question is how you satisfy Wall Street but take the time to do the R&D and create innovations to make a long-term strategy successful. When you do a strategic plan, three years is now “long-term,” and that makes it a more complex environment.