The Fearless Boardroom
Posted by Laurie Hays, Edelman, on
Tuesday, September 24, 2019
Laurie Hays is Managing Director for Special Situations at
Edelman. This post is based on an Edelman memorandum by Ms. Hays.
Societal and governance issues pelting boards of
directors—from the rise of the #MeToo movement, activist investors and impact
funds are starting to redefine the traditional relationship between directors
and the CEO. Boards once pals with leadership while keeping to the tradition of
not meddling are now assessing potential structural changes needed to create a
more productive—and safer—relationship.
directors’ personal reputations at stake, as well as personal
liability, they are strengthening monitoring programs, asking tougher
questions and engaging in more vigorous debate on topics boards used
to avoid, such as sexual harassment by the CEO. The upshot: The
question now is not what did the board know but why
didn’t the board know?
“The danger of the CEO
getting directors in trouble as their personal activities have come into focus
has grown exponentially,” observes Charles Elson, director of the Center for
Corporate Governance at the University of Delaware.
Roundtable, which includes some of the largest U.S. companies, just underscored
the need for boards to represent all stakeholders—not just the shareholder—with
statement redefining “the purpose of a corporation to promote ‘an economy
that serves all Americans.’” The statement supersedes previous principles of
corporate governance around shareholder primacy and outlines a “modern standard”
for corporate responsibility.
Despite the Sarbanes
Oxley Act in 2002 cracking down on corporate fraud and strengthening the role of
the independent director, corporate crises have exploded in recent years. PwC,
in its first-ever Global Crisis
Survey released in June and considered the most comprehensive repository of
corporate crisis data, found that 70% of 2,084 responding organizations had
experienced at least one major crisis in the past five years. More chief
executives were dismissed in 2018 for ethical lapses reflecting scandals or
improper conduct than for financial performance or board struggles, according to
a PwC study of CEO turnover.
Several factors explain
the crisis cavalcade:
The American dream
has been fraying due in part to the enormous wealth gap
Social media has
enabled employees to more easily expose wrongdoing either through social media
or traditional media. It’s no longer easy—almost impossible—to buy silence.
millennials, increasingly favor their companies and CEOs helping solve
societal issues—and protesting when they don’t. Edelman’s respected annual
Global Trust Barometer found that 70% of employees this year considered it
critically important for “my CEO” to take the lead on change.
meanwhile, are circling and using any corporate governance weakness to gain
leverage. Expect institutional investors and activists to accelerate their
demand for board quality, effectiveness and shareholder accountability.
Dan Schulman, CEO of
PayPal, identifies reverse-Friedmanism—that the sole purpose of a company
isn’t to make money for shareholders—as the reason companies and boards
must pay attention to more than shareholder returns. For his part, Schulman is
paying particular attention to his employees, their salaries and their concerns.
When the North Carolina legislature passed a law requiring people to use
bathrooms that match the gender on their birth certificates instead of their
gender identity in 2016, he canceled plans to open a global operations center in
Charlotte and invest $3.6 million in the area.
He believes business
needs a social mission. “You have to make your values and the values of your
company real to people through action. It is not easy. Sometimes it’s
uncomfortable to take those stands, but employees and customers expect that of
Directors for the most
part say they are always sweating what they don’t know about what’s going on
inside their companies. They prefer to assume the CEO isn’t hiding anything and
that the CEO welcomes their questions and objective opinions. They worry about
“It’s not micromanaging
if a board is giving consideration to the big “headline risk factors,” says
Harvard Business School Professor Amy Edmondson, who studies how candor at all
levels creates successor enterprises and better results. “Nobody wants to be the
CEO who needs babysitting, so how about being the leader who welcomes the board
as a partner looking out for the CEO and the company’s reputation?”
For sure, the buck
increasingly stops with the board. In a recently published memo, noted
mergers-and-acquisitions lawyer Martin Lipton warns boards that they face real
exposure from failure to monitor their company properly. He cites a Delaware
decision in June creates a new standard and that “to satisfy their duty of
loyalty, directors must make a good faith effort to implement an oversight
system and monitor it themselves.” Exposure from the court’s
decision is real, he maintains.
A sign: This year,
companies including JPMorgan Chase, Blackstone, KKR, Carlyle Group, Aflac and
Moelis & Co. added #MeToo language to their annual reports. Before 2018, the
word ‘sexual’ had only been mentioned once in the risk section of publicly
traded annual reports. But in the first half of 2019, nine public filings
included it, according to Business Insider.
JP Morgan Chase’s
reputation section reads: “Damage to JPMorgan Chase’s reputation could harm its
businesses…Harm to JPMorgan Chase’s reputation can arise from numerous sources,
including: employee misconduct, including discriminatory behavior or harassment,
not appropriately managing social and environmental risk issues associated with
its business activities or those of its clients.”
The New Playbook
The strains require a
fresh approach to identify new structures for business strategy and governance.
It isn’t clear yet what those structures look like.
Stephen Davis, a
governance expert at Harvard Law School
believes that the independent board model “isn’t truly workable without a
crucial reboot.” Namely, directors need their own staff to provide oversight
information that will help them assess whether all stakeholders’ interests are
One example: Boards
receive loads of homework and data to review before every meeting. Did the
annual employee culture climate surveys at companies like NBC, Weinstein & Co.
and CBS offer any hint of a hostile work environment that made women feel
unsafe? Even if women didn’t speak up, an analysis around why questions weren’t
answered can provide useful insights.
Directors with 20-20
hindsight need independent advisors to review such surveys and retool the
analysis to generate questions that will be more insightful.
What is the structure
for considering issues beyond financial performance for a CEO’s annual review
discussion; How to hold a conversation about culture to ascertain whether the
CEO and his team are following the company’s code of conduct and conflict of
interest—which would take the question beyond checking boxes on the Directors
and Officers liability insurance form.
Directors can also ask
the kinds of tough questions that could give an activist an opening—whether it
applies to muddled strategic communications, close relationships with the CEO
that cloud judgments, or lavish spending? Directors can run through a simulation
of an activist attack.
Can directors help CEOs
decide when to take a stand on social issues that, if not handled properly,
could harm trust with employees and endorsers? Sheila Hooda, independent
director on the boards of Mutual of Omaha, ProSight Global, and Virtus
Investment Partners, proposes the structure work more like a “partnership
between the board and the CEO to serve these enhanced needs of governance.”
In today’s disruptive
environment, CEOs might just welcome a fearless board. In the long run, they
will attract longer-term investors and keep themselves and their companies out
of reputation-busting trouble.
Harvard Law School Forum
on Corporate Governance and Financial Regulation
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