Directors have a critical responsibility to their board and the organization it serves. They must oversee risk by ensuring that:
- Management has a process in place to identify key risks
- Management has an approach to mitigate these risks to an acceptable level.
If these risks are not properly identified and managed, there can be significant ramifications that affect the company’s brand, bottom line, and ultimately, shareholder/stakeholder value. Because supply chains and distribution channels are becoming more integrated and complex, the risks that arise from parties outside of the company’s control are of increasing concern. Third-party compliance and procedures are more important than ever.
Proxy disclosures indicate that a majority of companies view risk oversight as a full-board function. They also indicate that few companies outside of the financial services industry have dedicated risk committees. For efficiency, boards often allocate oversight of specific risks to their board committees. However, research shows a significant number of directors believe there is no clear allocation of specific responsibilities for overseeing major risks among the board and its committees.
Many directors may understand the risks the company faces, but they are not sure who on the board is supposed to oversee them. This structural disconnect can create gaps in risk oversight. When you include the need to embed third-party risks into the overall framework, the need for clear delegation of responsibility increases.
Overseeing Risk in the Talent Agenda
Most boards are inherently focused on compliance-related risks. However, there is a spectrum of other important considerations that may not always on a board’s radar. Three that are specific to the talent agenda of a company include:
- risk and compliance associated with employee benefits and retirement plans
- talent development and performance management; and
- cultural alignment.
The discernible impact of these areas on execution of company strategy places them high on the agenda of most directors. Stem helps boards navigate these key priorities by deploying/developing frameworks to create an objective assessment of the current state and recommend targeted outcomes that are founded on defensible metrics. Additionally, we recommend the ongoing oversight mechanism as well as advice on a suitable road-map to monitor progress. In all instances, we ensure our independence. In other words, the focus and discipline brought to bear in connection with executive compensation is now deployed against the above noted priorities.
Beyond Strategy—The Importance of Execution
Overseeing strategy has always been a core board function. Company strategy lays the foundation for how the company allocates resources, structures operations, and measures success. When well-executed, the right strategy creates significant shareholder/stakeholder value. For a director to effectively contribute to strategy discussions, he or she must dedicate sufficient effort, have the right information, ask the right questions, evaluate the efficacy and team buy-in, and be willing to challenge the assumptions underlying management’s thinking.
Directors realize the importance of strategy discussions. Virtually all discuss the continued viability of the company’s strategy at least once a year; more than one-third discuss strategy twice a year. Still, directors would like to increase the amount of time they dedicate to strategy oversight and execution going forward. The catalysts behind this focus are:
- the evolving patterns of the competitive landscape;
- increased globalization; and
- the impact of new technologies on business models.
Consequently, directors are feeling the pressure to be more agile and re-evaluate the strategy more frequently. Boards that are pre-disposed to value creation in addition to managing risk are paying greater attention to execution, and the main elements of their organization’s talent agenda is coming to the fore-front.
Succession planning…and company culture
One of the most vital and well accepted functions a board of directors can perform is to ensure that companies have a robust and sustainable CEO succession plan. Recent developments have amplified the need for boards to ensure a succession plan is in place, current, and operational. These include the high turnover rate of CEOs, increased shareholder/stakeholder pressure for new CEOs at some companies, and incidents of CEO illness.
A company’s long-term viability depends upon successfully identifying and grooming potential candidates for the CEO role. Directors routinely cite that CEO succession is paramount with a majority expressing a desire to spend more time discussing it. Additionally, most directors have suggested that they are extremely or moderately satisfied with their company’s CEO succession plan.
Increased scrutiny has been placed on the independence aspect of board leadership. Of the companies that have a combined Chair and CEO, about half of these boards are already discussing splitting the role at their next CEO succession. The prevalence of these conversations suggests many directors are re-evaluating their board leadership structure—perhaps in response to continued shareholder/stakeholder activism against combining the role. At the same time, directors are taking a higher interest in developing a better understanding of the broader talent development strategy and the related risks of sub-optimization. They regard these factors as major components to their organization’s ability to execute. They are trying to strike the right balance to ensure that they are not competing for or taking on operational responsibility for the business.
Stem helps boards navigate the alignment issue by deploying/developing frameworks to create an objective assessment of the current state and recommend targeted outcomes that are founded on defensible metrics. Additionally, we recommend the ongoing oversight mechanism as well as advice on a suitable road-map to monitor progress. In all instances, we ensure our independence. In other words, the focus and discipline brought to bear in connection with executive compensation is now deployed against the key priority of alignment.