While the size, stage, geography and industry may fluctuate, there are several essential elements that should currently concern all boards. Good governance is not static, and the challenges evolve with the times:
1. Social Media
The days of saying that social media does not have a place in the boardroom have come and gone. The importance of this, dare I say, revolution cannot be avoided by conscientious boards any longer.
To wit, per Experian, 27 percent of total U.S. Internet time is spent on social networking sites. According to a Global Web Index Study, Twitter is the fastest growing social network in the world by active users. And in case you think Twitter is the domain of a certain generation, Twitter’s fastest growing age demographic is 55 to 64-year-olds, registering an increase in active users of 79 percent.
There are many more startling statistics about social media, but suffice it to say that even the least technology-oriented companies owe it to themselves to at least understand the facts and implications.
At the other end of the spectrum, consumer product and services companies would be wise to obtain this expertise in the boardroom by recruiting a director with the appropriate experience. Starbucks famously did so in 2011 when the company recruited Clara Shih, 29-year-old CEO of Hearsay Social, a “provider of one of the leading enterprise social media platforms.” This, by the way, is a different skill set than the Chief Information Officer, in case you feel you have already checked this box.
Perhaps the most interesting aspect of diversity in the boardroom is that the definition of what this actually means continues to expand and evolve. In other words, what diversity entails is diverse! Yet, however you define it, one thing is undeniable: Diversity is good for a board and ultimately, a company.
Per a March 2013 report on Corporate Diversity Practices in the S&P 500 conducted by Calvert Investments, a full 71 percent of S&P 100 companies have at least three women and/or minorities on the board of directors. That sounds good, but what about the other 29 percent of the S&P and the majority of companies that fall outside the S&P?
Incidentally, Credit Suisse recently released a report with careful controls for both market-cap and sector, and examined a broad sample of companies over a six-year period (December 2005-December 2011). The rigor of their approach should help to build confidence in the report’s conclusions, which are striking: Among large-cap companies (those with market cap over $10 billion), those with women on the board outperformed those with all-male boards by 26 percent on average over that time period, and the comparable figure for small-to-mid-cap stocks was 17 percent.
3. Succession Planning
This should be old news for corporate boards, but alas there are still many that do not actively pursue and re-pursue succession planning. Although this is a core and essential board activity, it is still commonplace to see companies left without a plan when a CEO departs unexpectedly (either by choice or otherwise).
After an unexpected CEO departure, when there is no succession plan, uncertainty throughout the organization and amongst all stakeholders—including shareholders—ensues. The pressure to alleviate this ambiguity at the top leads to reactive, expensive and sometimes less than optimal solutions.
Last month, athletic apparel company Lululemon announced that their CEO, Christine Day, was stepping down. This was somewhat unexpected, and no successor was named. Some sources have estimated that it may take until the end of the year to name a new CEO. That is an eternity with huge, negative implications that could have perhaps been avoided if some plan and/or bench were in place. The lack of a succession plan is always particularly startling in a company that has been experiencing other leadership and operational challenges.
4. Board Effectiveness & Evaluations
Board effectiveness is not constant, nor is it optional. As circumstances change so can a board’s ability to react accordingly. As such, strengths and weaknesses of your board should be examined realistically and regularly. In fact, board evaluations go hand-in-hand with board effectiveness.
The manner by which this is accomplished can vary, but the exercise of vigorous self-assessment cannot. Boards can adopt a process of self-evaluation or engage with a variety of outside experts. Crucial is the ability to maintain objectivity and attain honest and unbiased information.
Some discussion of board composition should be inherent in any board evaluation. The correct mix of skills and experience evolves with the company, and as such, a periodic examination of whether your board has the appropriate qualifications is important as well.
Executive compensation has been the focus of much discussion and concern of late, and for at least the immediate future it will continue to be in the spotlight.
On July 1st of this year several of the SEC’s proposed changes related to compensation committees go into effect for companies listed on the NYSE and NASDAQ. Amongst these changes is the requirement that any outside compensation consultant be deemed independent according to six independence criteria set forth by the SEC. In the fall and early 2014, the requirement that all members of a compensation committee be independent will take effect as well. These imperatives, as well as the ongoing outcry of activist investors about executive compensation have brought this subject to the forefront.
The onus is on the board and in particular, the compensation committee, to develop compensation plans that facilitate and even enhance the strategy of the business.
There are, of course, many other issues that boards should be thinking about. In fact, the very nature of work in the boardroom has become more rigorous and complex than it has ever been. Unfortunately much of this has been a result of corporate failures and other difficulties. While there is no guarantee that attention to these matters will lead to positive results, a disregard can be precarious.