Earlier this month, Diligent had the distinct privilege of hosting a group of board and audit chairs from across Europe and the US for a special event in Lake Como. This event is part of a larger series we hold twice a year, where we bring together public company board directors to discuss important issues facing today’s boards. You can read more about the series and my takeaways from our earlier event in Napa, but our time in Lake Como was an equally incredible opportunity to learn from some of the best minds in governance and discuss board challenges; including, digital disruption and transformation, shareholder activism, and the board’s role in corporate culture.
Digital – True digital transformation starts at the top and is a shared board responsibility
Following our Napa event, we knew we wanted to tackle digital in more depth, given that 30% of attendees there said that embracing digital disruption is the biggest challenge facing their boards. Digital strategy has long been thought as critical to compete; however, long-term success nowadays requires more than just creating a mobile app. It requires a real business transformation that creates sustainable competitive advantages. Our discussion focused not just on how boards keep up on this ever-evolving subject, but also play a more meaningful role in the definition of a company’s digital transformation strategy.
One thing I noticed is that boards can and should be more intrusive on this subject, forcing a conversation with management if it hasn’t already happened. From what I’ve heard, there may be some hesitance from some directors to dive in deep not because of a lack of intellectual curiosity but because they are not subject matter experts. One idea repeatedly suggested is to bring together management and the board for a day of shared learning. Bring in outside experts, visit an incubator, share ideas and hypotheses on how to use technology to truly innovate at the core. This also allows for shared responsibility amongst the board, versus putting the onus on your resident “technology expert” board member, or even a special committee on the periphery. The stakes are just too high for the full board not to be involved.
Interestingly, throughout much of these conversations we found ourselves focusing on the risks – specifically cyber risks – rather than the opportunity technology plays in driving value creation. I suppose this is not much of a surprise given the (much needed) emphasis on the board’s role in providing sound cyber risk oversight as of late; however, are boards being too conservative about digital transformation? Avoiding risk is certainly the fastest way to become obsolete, but a strong board will help management determine the appropriate risk appetite that allows the company to compete more effectively.
Activism – The best boards are always looking for blind spots
Greg Taxin, Managing Director of Spotlight Advisors and founder and former CEO of Glass, Lewis & Co., has experienced the ins and outs of many activist shareholder campaigns and proxy fights. As American-style activism ramps up throughout Europe, some of the region’s most respected companies have come under investor scrutiny recently. This new normal means that board decisions will be watched more carefully and that individual director reputations will be on the line.
Director-level shareholder engagement is far more common in Europe than the US, but as dynamics shift, boards need to make sure they’re also thinking like an activist to spot issues before they emerge and avoid a costly, disruptive fight. Greg took the group through a really fun exercise that had us thinking through both board and activist strategies using a real-life proxy battle as the backdrop.
When it comes to activism, the best defense is a good offense certainly seems to apply. Long before an activist starts poking around, strong boards first, are regularly trying to find holes in their oversight; second, are prepared to change or defend the choices made; and third, are communicating with shareholders about these decisions and approaches. A great first step to uncovering any unseen issues starts by making sure your board has access to the same data and information that a would-be activist has. A good activist is not engaging without extensive research, particularly around how peer companies are both governing and performing. This session, which could easily be replicated in a board working session, was a great opportunity to road test scenarios and uncover our own blind spots.
Culture – Qualitative and quantitative information can work hand-in-hand to support stronger oversight
As we have all witnessed, there has been increase in reported ethical and financial scandals that have rocked the core of many corporations. From Wells Fargo to Volkswagen, the same question always arises: Where was the board?
Corporate culture is hard to define, measure and change but that doesn’t relieve directors from their duty to oversee major levers influencing company operating and stock price performance. It is very clear from the discussion that our attendees believe tone at the top is a major driver. This starts with the board having the right CEO in place, but the board’s own culture is also a reflection. Boards typically face a couple of watershed events throughout the year and those decisions can either support or refute the desired culture.
The idea of trusting your gut also came up repeatedly, but more formal tools are now being adopted to inform and validate qualitative information and experience. The right resources will vary by company, but many are actively looking at employee satisfaction surveys and whistleblower hotline data, and from employees at all levels of the organization.
In my next and final installment of this series, I will share with you my thoughts on the similarities and differences between governance styles and strategies from this group of international directors. Check back next week!