A twist, but hopefully not twisted . . . a slightly different take on developments likely to impact corporate governance in 2020. A list that doesn’t mention shareholder activism, cybersecurity, climate risks, nor SEC regulation. What follows are perspectives offered from a slightly higher altitude but still within sight of the tarmac.
Preparing for More Volatility. Directors will be expected to confront the tactical and strategic implications to their company of any potential political, social, economic or regulatory volatility. Such uncertainty will be driven in part by the impeachment process, divided government and the 2020 elections, Other drivers may include questions concerning economic growth, trade conflict, income inequality, inflation and, more generally, continued societal fragmentation. To address these challenges will require directors to exercise more engagement, heightened attentiveness and close interaction with management.
Emphasis on Board Refreshment. Board composition will be impacted by the use of more extensive refreshment practices intended to foster the achievement of turnover and diversity goals. This, in recognition of data indicating that director tenure continues to be very extensive; that board vacancies are rare and when they do occur the seat is often taken by an experienced director. Term limits, performance evaluations and retirement requirements will see wider application. More consideration will be given to electing directors with no prior public company board experience.
Re-Examining Purpose. Boards will re-examine the scope of their corporation’s purpose and the related interests of a broader class of stakeholders. Boardroom dialogue will gradually move beyond the basic question of whether there is an obligation to address the relationship between stakeholders and purpose, to the question of how best to address such a relationship. The company’s 2020 governance agenda must provide the board enough time to resolve very practical questions on more meaningful engagement with stakeholder interests and concepts of social responsibility.
Emphasis on Business Judgment Rule. Evolving judicial interpretation of the Caremark standard for director risk oversight will prompt greater board emphasis on satisfying the business judgment rule. This is particularly the case with respect to the risk management program. Special, documented and more informed board effort should be made to engage vigorously with management on key corporate risk factors. Committee charters should more clearly address risk monitoring duties. Senior executives should acknowledge board oversight responsibilities and adopt greater sensitivity to the corporate risk profile.
A Closer Focus on Innovation. Organizational innovation and disruption-related initiatives will receive closer board scrutiny with respect to feasibility, mission relatedness and conflicts of interest. The spectacular demise of several prominent unicorn ventures, regulatory scrutiny of high-profile data and technology ventures and uncertainty of the application of AI systems will combine to increase fiduciary caution. The pace with which innovation and related initiatives are pursued will be more measured. The company’s innovation development process, and the portfolio and compensation of its innovation executives, will receive greater board oversight.
Improving Gender Equality. As part of workforce culture oversight, boards will pursue more detailed initiatives to advance women and improve gender equality within the organization. Gains in women representation in corporate governance and executive leadership will be solidified, and extended to women of color. Greater efforts will be made to address gender diversity at lower levels of management, with boards addressing what McKinsey calls the “broken rung” in the advancement pipeline. Governance will increase its commitment to a more inclusive workforce culture.
Greater Emphasis on Human Capital. The substantial recent uptick in CEO termination will prompt boards to enhance their search and succession activity and to increase their focus on talent development. Shortcomings in succession and executive development practices exposed by crisis or otherwise will be corrected by more formal processes for developing successor candidates for key leadership positions. Directors will more fully confront the engagement required for effective executive succession planning. Greater oversight will be applied to assure linkage between strategic planning and workforce talent pools.
Pushing Change with Compliance Programs. Board oversight of compliance mechanisms will be grounded in a more integrated, coordinated and sophisticated approach across the organization. Boards will encourage the recalibration of organizational compliance efforts to be more responsive to factors such as corporate growth, global footprint, evolving leadership duties and implementation of formal enterprise risk functions. Directors will push compliance structures away from once-sacrosanct silos towards more collaborative internal arrangements, while preserving critical reporting relationships. Management-level compliance complacency will not be tolerated.
Retooling Structure and Process. Increasing competitive pressures and focus on stakeholder interests will lead boards to consider significant changes to board structure and decision-making practices. As the National Association of Corporate Directors has recommended, boards will seek to meet the demands of a different operating reality by reshaping thought processes and operational approaches. They will begin to modernize their expertise and behaviors in order to improve the corporation’s competitiveness. This may lead to new perspectives on board composition and efficient boardroom processes.