How the Human Trafficking ESG Risk Could Impact Your Business

Of the many things that keep board directors awake at night, human trafficking is probably not high on the list. But when you consider that more than 40 million people (a quarter of them children) are trafficked for forced labor and sexual exploitation, the magnitude of human suffering cannot be ignored by corporations. Human trafficking is the fastest-growing form of international crime and one of the most lucrative of criminal activities in the world.

In the United States, many people think of human trafficking as something that primarily happens overseas, but that’s not the case. The National Center for Missing and Exploited Children receives daily reports of child sex trafficking in all 50 US states and in every type of community throughout the country. It could be happening in your neighborhood.

Several industries are more susceptible to these sorts of crimes, such as financial services, airlines, travel agencies, hoteling, and the short-term rental industry. Regulators are starting to demand more accountability from companies to look for red flags that might indicate possible criminal activity.

Financial Services, Travel, and Hospitality

Financial services firms may encounter suspicious activities when human traffickers attempt to use legitimate firms to conduct illicit financial transactions. An analysis of documented trafficking in the United States showed how financial services firms provide banking and money services business to several industries known to have some degree of human trafficking risk. Some are obvious, such as escort services, illicit massage parlors, and strip clubs. However, many others are not, such as restaurants and food service, agriculture, construction, landscaping, cleaning services, manufacturing, forestry, and even health care.

The hospitality industry is particularly vulnerable to traffickers, especially sex trafficking. Trafficking victims have sued hotels, but historically most of these cases have been dismissed. There are signs that the courts are beginning to hold hotels to a higher standard of accountability for the actions of criminals within their establishments.

Other critical players include airlines and travel agencies, which can use their data to identify red flags. Training and general awareness are important for employees, such as flight attendants, ticket counter staff, and booking agents, to understand the signs of human trafficking, forced labor, and forced sex trafficking.

How Your Board Can Address Risks

Besides the impact on the lives of those directly affected by it, human trafficking creates business risks for those industries that are exposed to it—both directly and through the financial system.

As traffickers become more sophisticated, companies must employ new data-driven measures to prevent, detect, and respond to human trafficking. The following steps will help any company—and its board—become more prepared to fight human trafficking and reduce its risk of exposure:

Educate yourself on how human traffickers might use your industry and specific company to commit their crimes.Update your risk assessment and internal controls to address the risks.Collaborate with the industry and organizations like the Anti-Human Trafficking Intelligence Initiative and others.Use existing industry and company-specific red flags.Train your employees to recognize the signs of human trafficking and forced labor.Know your data and develop human trafficking analytical detection scenarios and escalation procedures.Establish law enforcement liaisons to facilitate reporting of red flags.Incorporate human trafficking litigation or disclosure scenarios into your crisis communications planning. The financial impact of a potential incident is likely to pale next to the cost of reputational damage if you are not prepared.

In addition to the direct business risks, investors are now more aware of social issues. Even institutional investors are more issue-focused, and specifically very conscious of human rights and human dignity issues. Human trafficking allegations or adverse court decisions could impact how investors view the company.

As environmental, social, and governance (ESG) issues are increasingly viewed as serious business risks, companies could face concerns from investors over whether the company remains a good investment, and publicly traded companies may even find themselves in proxy fights with activists over their board seats.

Ken Jones is a senior managing director, Ozgur Vural is a managing director, Edith Wong is a managing director, and Suzanne Blanton is a director at FTI Consulting. FTI Consulting is an independent global business advisory firm dedicated to helping organizations manage change, mitigate risk, and resolve disputes: financial, legal, operational, political and regulatory, reputational, and transactional. FTI Consulting professionals, located in all major business centers throughout the world, work closely with clients to anticipate, illuminate, and overcome complex business challenges and opportunities.

The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, Inc., its management, its subsidiaries, its affiliates, or its other professionals.

FTI Consulting, Inc., including its subsidiaries and affiliates, is a consulting firm and is not a certified public accounting firm or a law firm.

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Creating Healthy Societies and Transforming People Risk in the Post-pandemic Workplace

As COVID-19 and its variants continue to disrupt society, business, and commerce, boards have expanded the scope of their risk oversight to include a broader, “people risks” agenda. Directors responded swiftly to the pandemic, supporting management teams as they faced new challenges to the health and well-being of their workforces. At the same time, there is a rising awareness of the role organizations play in addressing societal concerns at the board level. The intersection of these two issues is where the notion of creating “healthy societies” emerges.

The creation of a healthy society incorporates equitable access to affordable, quality health care, providing healthy environments to live and work in, and creating financial security and a more equitable workforce across race, ethnicity, and gender. These aspects all play a role in our collective and individual health outcomes.

Boards that take on managing these “people risks” with the right balance of empathy and economics will be better positioned to secure the organizations’ future during this accelerated period of sustained change.

The Expanded Role of Employers in Supporting Wellness

Before the pandemic, organizations and their boards framed the relationship with their employees through the lens of the workplace environment. Policies were created to help guide the organization and its employees in conducting the work relationship. Organizations often developed benefits, compensation, hiring, and workplace procedures from this perspective.

In just a few months in 2020, the pandemic shifted this paradigm. As many organizations went to remote work arrangements, the line between what happens inside the workplace and outside the workplace dissolved. This shift created a new level of oversight for boards as organizations needed to quickly develop strategic approaches to ensure the health and safety of their employees inside and outside of the workplace.

Boards Take on New Challenges

As boards continue to tackle the ongoing issues related to COVID-19 and its variants, health becomes a new driver in charting the future of an organization. The concept of “healthy societies” offers a means to create a sustainable organizational culture that benefits people, the organization, and the communities in which the organization operates.

The healthy societies concept advocates for the health and well-being of everyone through sustainable means that protect people and the planet. This means providing a safe, professional, and personal work environment that enhances an employee’s well-being, both physical and emotional.

Emotionally and physically healthy employees are better positioned to manage their work and home-life balance, leading to increased productivity. Long-term value can be achieved when organizations and boards take a healthy society approach to developing processes and procedures that impact employees with this shared vision for the future in mind.

Creating a Safe Work Environment for Today and Tomorrow

Providing employees with a safe working environment remains a top concern for most organizations. Changes to the physical design of workspaces, plus the use of masks, sanitizers, physical distancing, temperature checks, testing, and other safety measures, are now almost normalized in the physical workplace. These changes give employees who need to be physically present to perform their jobs the confidence that they are protected. A consistent and sustained safety policy will help make the transition from the home office less stressful for those returning to the workplace.

But a larger question remains for boards and management to now consider: when we emerge from the pandemic, will organizations try to revert to pre-pandemic “business as usual,” or will they create new operating models to ensure flexibility and agility in response to future outbreaks or other disruptions? Boards that advocate for contingency planning that factors in the health and safety of those in the workplace will enable companies to swiftly pivot and maintain productivity in the face of unforeseen circumstances.

Understanding the Emotional Well-being of Employees

The health and safety of employees goes beyond the physical workplace. According to the American Psychological Association, a mental health crisis has emerged as instances of stress, anxiety, and depression are on the rise. This can lead to lower levels of employee well-being and productivity, as well as increased organizational costs. Now, as many companies are asking employees to return to the workplace, new mental health stressors have emerged, as many are reluctant to leave their home offices.

Boards that respond with empathy and take into consideration the mind-set and needs of employees will be better positioned to support leadership in managing this situation. “This was a very human crisis, and that’s a different dimension compared to most business or financial risks,” noted one director who commented on this topic for this article. “Boards had to become more people-focused than they have ever been before.”

Organizations are already responding to the pandemic-related mental health crisis among employees. In the 2020-2021 Global Talent Trends Study by Mercer, 45 percent of US human resources executives reported adding benefits to address mental and emotional health issues. A continued focus on employee well-being will take time and resources, and conversations at the board level about these critical issues will help keep the needs of employees front and center as new policies are proposed.

Reshaping the Paradigm for Talent Acquisition

Talent acquisition and retention continues to be a top challenge facing organizations, according to Mercer’s survey of human resources professionals and risk managers. That challenge is not only finding the right talent to fill the positions, but also creating a diverse organization that works together to contribute to the overall health of our society and contributes to an employee’s sense of inclusion and belonging.

Society and employee populations, especially younger generations, are more culturally aware and awakened in an era of #MeToo, George Floyd, and Greta Thunberg. While the immediate global health crisis took precedence over sexual harassment, systemic racism, and climate change concerns in many ways, they remain at the forefront for leadership and employees. In a tight labor market, employees want to have a strong connection to purposeful organizations that demonstrate strong environmental, social, and governance (ESG) values, and they are more likely to stay at and be more productive for these kinds of employers.

In addition, new technologies, changing demographics, and the pandemic are creating other challenges for employees as they seek not only to find satisfying work but also to work in a manner that contributes to their well-being. This changing nature of work also requires new considerations for talent management. For example, boards should be aware of the legal and operational issues associated with flexible working, gig workers, and technology adoption. As more of the workforce opts into flexible working arrangements, organizations will need to examine investing in digital technology and designing work experiences and benefits that demonstrate a deep understanding of the needs of their people. These topics belong at the board table, as directors can support talent development that leads to healthy and sustained organizational growth.

Raising the Bar for ESG

ESG issues have taken on new meaning in the last ten years and efforts have accelerated globally over the past 18 months. Disparities made more visible during the pandemic triggered new levels of thinking and a sense of urgency to build more inclusive and sustainable economies. Younger generations have chosen to align themselves with brands that demonstrate socially and environmentally conscious values. Climate change, diversity of thought, inclusiveness, wealth disparities, and more are no longer issues that live outside of the boardroom. Understanding the impact of the organization on social and environmental issues and guiding leadership toward sustainable and conscious solutions will go a long way toward building truly healthy societies.

Looking Ahead

After threatening public health and ushering in unprecedented disruptions, the COVID-19 pandemic has uprooted daily life and fundamentally transformed values for companies, employees, and society. Boards that adopt a people-first and healthy society mind-set can help leadership in developing sound strategies for the future. And that future begins with recognizing and embracing the expanded role employers can play in the health and well-being of employees inside and outside the workplace.

Martine Ferland is president and CEO of Mercer and vice chair of Marsh McLennan. She was named to the NACD Directorship 100 in 2021.

Marsh McLennan and NACD thank the following NACD members for sharing their insights for the development of this blog series on risk oversight: Anthony Anderson, Sam Di Piazza, Roy Dunbar, Cynthia Jamison, Shelley Leibowitz, Sara Mathew, Jan Tighe, and Suzanne Vautrinot.

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Increasing Board Agility Is Critical to Risk Oversight

“You’re on mute.” 

This must have been one of the most spoken phrases over the past 18 months as many organizations moved to online meetings and video conferences. The mobility restrictions associated with the COVID-19 pandemic created opportunities to innovate and, in many instances, offered a crash course in being agile—a critical requirement of boards.

As a result of the pandemic and other events of 2020, the scope and scale of issues on the board risk agenda have fundamentally changed, as have many aspects of governance processes. Going forward, boards must build their agility to enable organizations to navigate the new cadence of the business and risk environment.

As a previous NACD BoardTalk post noted, an agile board can “identify and respond effectively to rapid and unexpected changes in the internal and external environment. It is characterized by a forward-looking and exploratory approach that challenges and nurtures both current and future business, enables quicker decision-making, and supports the organization to be more adaptable and innovative when confronted by change.”

To gain insight into the practices adopted and lessons learned from 2020, including on board agility, NACD and Marsh McLennan worked with the Global Network of Director Institutes (GNDI) to conduct a wide-ranging survey of nearly 2,000 directors. The research team also conducted eight accompanying interviews with seasoned directors to provide rich context for our findings in this article.

Overall, 89 percent of the surveyed directors feel their boards have been able to effectively govern during the pandemic—indicating an ability to adjust to the demands of virtual governance, such as increased or even weekly full-board meetings during the height of the crisis. Further, 34 percent are planning to alter their board operating model (including with changes to meeting agendas) based on experiences and learning from the pandemic and responding to other challenges in 2020 and 2021.

Delving further into the findings, we can see that three key elements of an agile board have emerged:

First, the agile board is hybrid. Directors have upskilled themselves and gained comfort with virtual meetings over the course of the pandemic, and 89 percent of GNDI survey respondents agree that digital board engagement would be a helpful tool for board operations moving forward. Additionally, 78 percent expect that at least one in five committee meetings and some full-board meetings will be virtual post-pandemic. As one director that we interviewed for this article noted, being “virtual-first is a great way to rethink the rhythm of board meetings and allows the board to quickly connect on issues as opposed to waiting for board meetings.”

Virtual meetings have many benefits since directors can quickly meet to address fast-moving issues and they free up director time that can be applied to essential board and committee work. In addition, the virtual format requires a more structured and efficient committee agenda to fulfill fiduciary obligations. In one director’s pandemic experience, “The board quickly adapted to a communication structure that was not scheduled and was able to function much more intensely in a virtual world.”

While many directors agree that virtual board meetings are as effective as in-person meetings, there are serious challenges. In the future, boards need to explicitly implement approaches to ensure fully engaged directors in a virtual world. More than two-thirds of GNDI survey respondents (68 percent) noted the negative impact of reduced nonverbal communication among directors during virtual meetings. Board chairs may also need to take additional steps to ensure that minority views are represented, which may be more challenging virtually. Finally, boards may need to reconsider how to apply decision-making techniques such as “red teams” or “tenth man” (where at least one person is appointed to serve as the loyal dissenter) in a virtual world.

As hybrid and virtual board meetings become the norm, boards will need to adopt better tools to support digital board governance, including those used to share secure governance documents, vote, or communicate confidential information.

Second, the agile board uses a range of insights to support decision-making. An engaged, responsive, and agile board is a vital sounding board for the CEO and their management team. Providing fresh perspectives on difficult issues is critical.

Agile boards are implementing new processes to provide informed input and challenge decisions around strategic issues, as well as to improve risk oversight. For example, 70 percent of survey respondents said they will make greater use of outside experts in scenario planning, strategy, and risk decision-making processes. Sixty-six percent expect to incorporate a broader set of risks into the board information dashboard. Boards may need to adjust their agenda to allow more time for such exercises and exploratory discussions, putting an even greater emphasis on the need for efficient and effective committee processes.

Sixty-three percent of surveyed directors also report that they plan to increase the use of data analytics in the board decision-making process. This may include incorporating digital and analytical tools that assess the risk environment and organizational performance—tools that scan publicly available information to create dashboard summaries of employee sentiment or tools that conduct an outside-in scan of cybersecurity, for example.

Information tools provide board members with efficient access to a much greater range of insights, key metrics, and benchmarks, generating deeper understanding—all of which can support a necessary focus on emerging trends and strategic issues.

Finally, the agile board embraces continuous learning. “Board members do not need to be expert at everything but need to be able to constructively challenge and question management,” one director said. “That requires a certain kind of board member—someone who is in continuous learning mode.”

Agile boards embrace continuous learning in two key areas: organizational strategy and business model, and the expanding spectrum of events and trends driving changes in an organization’s business environment.

Directors are more engaged and involved in robust dialogue across various levels of management than ever before—without impinging on management’s operational role. This enables the board to actively debate and challenge management on their risk assessments, decision-making processes, and conclusions. Many directors noted that these debates are vital to helping management “see around the corners.”

Boards are also turning to directors from a range of professional backgrounds to increase cognitive diversity in the boardroom and to tap expertise on evolving issues such as cybersecurity, digitalization, and environmental, social, and governance (ESG) topics. Increased boardroom diversity across all vectors has many benefits. Still, onboarding a cybersecurity or an ESG expert does not relieve other board members from developing a robust understanding of the interaction between evolving risks and trends. Most boards have about 10 members, and as organizations face a widening array of issues, no board can have an expert on each topic. Since they cannot be “know-it-alls,” boards must become “learn-it-alls.”

Each director must commit to a boardroom culture of continuous learning and inclusivity of diverse experiences, expertise, and insights on evolving topics to support an active and effective boardroom.

With this mandate, board and director agility is vital to supporting management and ensuring that organizations move nimbly through a challenging risk landscape.

Margarita Economides is an engagement manager in the Organizational Effectiveness practice at Oliver Wyman. David Gillespie is an Organizational Effectiveness partner with Oliver Wyman and leads the UK and Ireland businesses.

Marsh McLennan and NACD thank the following NACD members for sharing their insights for the development of this article: Anthony Anderson, Sam Di Piazza, Roy Dunbar, Cynthia Jamison, Shelley Leibowitz, Sara Mathew, Jan Tighe, and Suzanne Vautrinot.

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Data Show Boards Are Taking Steps on Diversity, Equity, and Inclusion

We are in a state of evolution when it comes to tracking, reporting, and goal-setting for diversity, equity, and inclusion (DE&I) measures.

A recent Pearl Meyer On Point survey (to be published at the beginning of October) asked more than 400 directors and C-Suite executives if and how they are tracking and reporting DE&I factors, and to what degree DE&I goals are reflected in executive incentive plans.

The survey clearly indicates that most companies are focused on tracking DE&I, which makes sense given that EEO-1 reporting was introduced in 1965 and includes total number of employees by gender and by race. As a result, companies have historically placed importance on “matching” the overall demographics of the labor market. More than 92 percent of our survey respondents say they track overall diversity, as well as the diversity of their management teams and senior leadership.

However, what companies track is broadening in scope, as is what they do with that information. In addition to traditional lagging measures, such as basic diversity demographics (95 percent of respondents track these), turnover rates (79%), or engagement (78%), which look at things that have already happened, more companies are beginning to follow “activity” measures. Examples include tracking new hires (77%) and promotions into management (52%) and top leadership (55%) ranks. These metrics can indicate what is happening currently within an organization so that action can be taken when situations are out of sync with strategic goals.

There is also growing interest—although in the early stages—in tracking participation in activities that can influence the achievement of DE&I goals, such as leadership and development programs to increase internal promotion rates or employee affinity groups that increase inclusion and belonging. Finally, some companies are giving thought to using more detailed or nuanced measurements (such as turnover, a traditional lagging measure) in ways that provides more insight, for example at the employee level or by job function.

All of this data is important for companies to understand their current state and progress on this journey. But when it comes to setting goals, many organizations are hesitating. Of those that track DE&I metrics, the survey shows just 46 percent set goals.

Is there value in “just” tracking? In working with our clients, we do see that gathering information can lead to a better view of possible next steps and thus has merit. While certain companies aren’t setting specific goals, we see them becoming more nuanced in their data collection and creating a more holistic view of the DE&I landscape. They are actively communicating externally on the subject (46 percent of all respondents in the annual report, 44 percent in the sustainability report, and 39 percent on the corporate website, among other channels) and with employees (52 percent). Survey responses also show that these organizations are planning even more communication in the future.

Finally, our survey shows that while the specifics of plan design vary considerably, 35 percent of responding companies have DE&I represented in some way in their annual executive incentive plans. Another 28 percent indicate they are likely or very likely to include it in the upcoming year.

The data are consistent with the general outlook we hear when talking with directors about DE&I. There’s an overall willingness to do the difficult things that can drive change, but that’s often counter-balanced with concerns about disrupting the organization, spending “too much” time on it, or detracting from very real and urgent financial imperatives.

Despite the difficulty inherent in some of these issues, it is telling that among survey respondents, the strategic importance of DE&I and its support of the company’s talent management and development plans weigh more heavily than external pressures. While progress may feel slow at times, strategically focused boards are committed to achieving a more diverse, equitable, and inclusive organization and unlocking the value that derives from such a workforce.

Beth Florin is a managing director at Pearl Meyer and leads the Survey and Employee Compensation practice. She has specialized experience in the design, development, and implementation of broad-based compensation programs and total remuneration compensation surveys.

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Generally Neglected Accounting Principles

This is an abbreviated version of a more thorough Directorship magazine Viewpoint article exclusively for NACD members. If you are an officer or director of a public, private, or nonprofit organization, you can become an NACD member to view the complete article and related resources.

Executive managers and board members could be forgiven for thinking that now that the International Financial Reporting Standards (IFRS) Foundation has entered the sustainability reporting space, the turbulence surrounding so-called environmental, social, and governance (ESG) disclosures will die down. After all, who could possibly be better than the foundation, the leading international administrator of financial accounting, to step in and quell the cacophony of competing frameworks for nonfinancial accounting?

Indeed, what has been missing the most in nonfinancial reporting for the past 20 years is precisely the kind of rigor and consistency that the IFRS standards possess. Along with the generally accepted accounting principles (GAAP) in the United States, the IFRS standards provide clear guidance for the preparation of financial statements around the world.

But everything the foundation intends to do—and ESG itself—falls well short of true sustainability accounting, thanks mainly to the disregard of core principles of the field. What will the core principles be in the foundation’s vision of sustainability accounting? Which of the competing schools of thought does it subscribe to, and is it the right one? Is it really time to pop the cork on all of this, or does the foundation’s arrival in the sustainability arena amount to a setback of some kind? Business leaders should brace themselves accordingly.

Sustainability Schools of Thought

Far from being a unified field, in the sustainability world there are at least two competing schools of thought. Depending on which ultimately prevails, the makeup of sustainability accounting could go in two very different directions in the coming years.

The first of the two is the sustainability accounting school, a doctrine that concerns itself with stakeholders of all walks and not just shareholders. This is the school most often associated with the Global Reporting Initiative. The challenge it sets out to address is how best to assess an organization’s inside-out impacts on vital resources of all kinds and the well-being of those who depend on them. In that regard, sustainability accounting is stakeholder-centric.

The second is the value creation school, most often associated with the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB), which recently announced their merger to become the Value Reporting Foundation. The primary interest of the value creation school is how best to assess an organization’s ability to create value and then measure and report it—shareholder value, that is.

Embedded within the value creation school are two other underlying doctrines: risk management and impact accounting. Both of these sub-schools, which are associated with, for example, the Task Force on Climate-related Financial Disclosures and the Impact-Weighted Accounting Initiative at Harvard University, respectively, have long-term shareholder value creation at their heart. And contrary to the sustainability accounting school, the chief concern of the value creation school is the outside-in impacts of the world on an organization itself, and the effects they might have on its ability to create shareholder value.

It is the value creation school and its subsidiary doctrines where most of what passes for ESG issues lives. That makes ESG unabashedly shareholder-centric, though its frameworks occasionally include consideration of the impacts organizations have on non-shareholder stakeholders. Even then, it is only the effects such impacts might have on shareholder value that make them important or material in the value-creationist view.

To read the full article, see the July/August 2021 issue of Directorship magazine. Check out the full and previous issues of the magazine here.

Mark W. McElroy is the founding director of the Center for Sustainable Organizations.

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How Boards Can Help Build Trusted Companies

This is an abbreviated version of a more thorough Directorship magazine article exclusively for NACD members. If you are an officer or director of a public, private, or nonprofit organization, you can become an NACD member to view the complete article and related resources.

In June, hedge fund manager Christopher James, with just 0.02 percent of company stock, convinced Exxon Mobil institutional investors to vote in three handpicked board members who will press the company to respond more directly and with greater speed to the strategic imperative of climate change. James’ victory is an example of moving from theory to action on the principle of stakeholder capitalism. This idea represents the foundation of trust against which companies and their boards are judged.

Corporate leaders have a responsibility to craft and implement strategy—that’s their job—but the board stands for the interests of the corporation as a whole, and thus is the place where the navigation between the outside and the inside is expected to take place. Boards are the linchpin between interested parties outside the corporation (investors, regulators, the public, nongovernmental organizations, government) and the leadership inside the corporation.

The board’s guidance to Nokia during its restructuring remains an enduring example of how a board must straddle both the internal dynamics of the company while being cognizant of the demands of the external world. In 2008, Nokia shut down a plant in Bochum, Germany, laying off 2,300 employees, shortly after announcing a 67 percent increase in profits. The outrage was so great that Nokia ended up paying 80,000 euro ($95,000) per employee to close the plant. Fast forward to 2011, when Nokia was facing losses for the first time in its history. The board knew that Nokia would have to restructure because it was being out competed in smartphones and was losing share to lower-cost phones from Asia. The scope was huge, affecting 18,000 employees spread across 13 countries. But the board was committed to avoiding the mistakes of 2008. It charged senior executives with the task of coming up with a way to better manage the impending layoffs.

The result was the Nokia Bridge program, which was essentially a bet on trust: Nokia asked employees to stay on at the company—some for as many as two years—while it managed the restructuring. In exchange, Nokia promised employees a soft landing. The Bridge program gave employees a choice of paths to a new future: find a new job at Nokia, find a new job outside Nokia, get funding to start a new business, train for something new, or receive financial support to do something else entirely.

The senior leaders who created the program insisted on obtaining board approval. They explained that during the restructuring they would prioritize the interests of employees over the company’s, and they intended to be transparent about the program and its aims. The bet paid off: 60 percent of affected employees knew their next step the day they left the firm. And Nokia didn’t suffer from the departures and disengagement that usually follow a layoff announcement. In fact, employees brought in 33 percent of revenues from new products, the same proportion they’d brought in before the layoffs were announced. Eventually Nokia’s program was adapted by the Finnish government as a best practice for managing layoffs.

Embracing the goal of building a trusted company—and regaining lost trust—provides a lens through which this kind of navigation and prioritization of interests can take place. Nokia’s shareholders expected actions that would shore up the company’s shaky foundations and return it to profitability, while Nokia’s employees expected job security. Managing trust is in the familiar terrain of managing relationships. What makes it complex in companies is that the interests of groups are unique and at times can conflict; these interests need to be understood, prioritized, and balanced.

We’ve developed a four-element framework that explains why people choose to trust: competence, motives, means (or fairness), and impact. It provides a structure for understanding the actions that need to be taken to build trust.

To read the full article and dive into this framework, see the July/August 2021 issue of Directorship magazine. Check out the full and previous issues of the magazine here.

Sandra J. Sucher is a professor of management practice and Shalene Gupta is a research assistant at Harvard Business School. Before Harvard, Gupta covered tech and diversity at Fortune. They are the coauthors of The Power of Trust: How Companies Build It, Lose It, Regain It (PublicAffairs, Hachette Book Group, 2021).

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Are Universal Proxies in the Cards for 2022?

The US Securities and Exchange Commission (SEC) has been active on various fronts, including enforcement. For corporate directors, one significant development so far this year has been the revival of a previously proposed universal proxy rule, largely favored by institutional investors but opposed by many corporations. Based on the SEC’s stated plans, the revived proposal is the first of many rules to come.

Wide-Ranging Activity

Since Chair Gary Gensler was confirmed in mid-April, the SEC has posted more than 30 accounting and enforcement releases; ordered more than 40 trading suspensions; issued more than 100 litigation releases; and initiated or closed more than 100 administrative proceedings, according to the agency’s “Enforcement” web page. In addition, the SEC has made 15 whistleblower awards worth more than $100 million, reports its Office of the Whistleblower. The agency also recently approved Nasdaq’s new listing rule mandating board diversity disclosures.

As far as new SEC rules go, however, the agency has proceeded with caution under both Gensler and his immediate predecessor, Allison H. Lee, who served as acting chair from January 2021 to mid-April. As of August 17, 2021, the agency under Lee and Gensler issued one interim rule on auditors used by foreign firms. Other than two filing modifications, it has not published a single final rule or proposed rule other than the universal proxy rule discussed here. What is happening instead is a great deal of preparation that is likely to result in a cluster of rules into early 2022.

Topics on the Horizon

The SEC’s current Agency Rule List discloses more than 30 rules set to be created or modified before April 2022, including potential new rules on the following topics:

climate change disclosure
corporate board diversity
cybersecurity risk governance
human capital management disclosure

clawbacks (to be written as a new rule based on a previously proposed rule, which sparked this NACD comment letter)

pay versus performance (proposed in May 2015; see this original NACD comment letter)

universal proxy (originally proposed November 2016 as a 243-page rule and reopened for comment with a 14-page release in April 2021)

Universal Proxies

At this time, the SEC is most actively focused on the universal proxy rule.

Normally, at annual shareholder meetings investors receive one ballot with the names of directors recommended for appointment by the nominating committee. A separate rule from 2004 attempted to encourage shareholder nominations by requiring nominating committees to disclose the source of nomination by category (e.g., shareholder, recruiter, board member, CEO). However, there are still times when shareholders want to propose their own slate directly to other shareholders. If an election is contested in this way (the case in about 1 percent of elections) there must be two ballots—one from the board (commonly referred to as the management slate, though this is a misnomer) and one from the dissidents.

The SEC wants to require the use of universal proxies for contested elections in public companies with certain exceptions—namely for exempt solicitations, registered investment companies, and business development companies. Although such an option has always been available to shareholders voting in-person at the annual meeting, it has not been available by proxy.

The universal proxy rule, proposed on and off since the proxy rule reforms of 1992, would dictate the use of one ballot rather than two, and thus shareholders could mix and match their votes.

This process is not easy to do under the following rules currently in place:    

The “bona fide nominee” rule, adopted in 1966, which allows for some mix-and-match capability but requires each side of a proxy contest to obtain consent before listing candidates from the other side
The so-called “short slate” rule, adopted in 1992, which provides a limited exemption from the requirement to obtain consent. A dissident can include candidates recommended by the nominating committee in addition to its own candidates, as long as the slate proposes filling less than half of board seats

Comments are still coming in on the universal proxy rule, most of them from institutional shareholders and their affiliates, such as the California Public Employees’ Retirement System, the Council of Institutional Investors, and Institutional Shareholder Services; as these links show, the letters were supportive. However, a half dozen comments representing corporations’ interests expressed concerns about reviving the proposed rule. Cautionary messages were filed by the US Chamber of Commerce and the Society for Corporate Governance. The most detailed letter (listing 20 pages of legal concerns) came from law firm Sidley Austin and was signed by several partners, including Holly Gregory. A common theme in letters opposing the rule is that, as the Chamber letter states, the rule could “increase the frequency and ease of proxy fights for dissident shareholders.”

The number of proxy contests that occur in any given year is low, ranging from a handful to a couple dozen, wrote Fried, Frank, Harris, Shriver & Jacobson in a client memo. Even so, the law firm noted, “Activists routinely threaten to conduct a proxy contest and frequently initiate the process to conduct a proxy fight, including nominating directors, engaging in investor and public relations activities, and making preliminary filings with the SEC.”

NACD has not yet responded to the reissued rule, but the NACD comment letter submitted January 3, 2017 registered opposition to universal ballots because “the ‘mix and match’ voting approach that they empower could result in a final group of directors that might not be optimal for the specific company they would be serving.” NACD added that “the election process should assemble a board of directors whose skill sets are complementary and who are capable of working together to advance corporate strategy.” As a nonprofit, NACD attempts to forge a middle ground on behalf of all directors.

The clash of views between investors and businesses poses a dilemma for the SEC, which according to its three-part mission serves constituencies and markets alike. It is not uncommon for the SEC to go back and forth between a focus on issuers and a focus on shareholders as presidential administrations change. Public company board members, both incumbent and aspiring, have a stake in the outcome of this proposed rule.

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Heavier Committee Work Calls for Coordination, Communication

With standing committees playing an increasingly vital role in helping boards carry out their oversight responsibilities, there is a premium placed on coordination and communication among committees. The overarching challenge—which we see lead directors and nominating and governance committee chairs tackling in various ways—is to help prevent critical risks from falling through the cracks and provide committees with a coordinated, holistic view of how they should oversee vital issues.

This is not a new challenge. Companies and their boards have long dealt with a complex and demanding business and risk environment—from technology and business model disruption to cybersecurity and data governance to investor scrutiny, regulatory and political uncertainty, and geopolitical risk. But the COVID-19 crisis and other events of the past two years have made the business and risk environment even more challenging, with an increased volume of investor and stakeholder demands regarding corporate purpose; environmental, social, and governance (ESG) issues; human capital management (HCM); diversity, equity, and inclusion (DE&I); and more.

As a result, many boards are delegating specific oversight duties to standing committees—beyond those prescribed to the audit, compensation, and governance committees by stock exchange listing requirements—for a more intensive review of issues and risks. For example, depending on the company size, industry, and other unique company considerations, we see boards delegating to various standing committees responsibility for supporting the board’s oversight of ESG, HCM, cybersecurity and data governance, legal and regulatory compliance, mergers and acquisitions, and culture.

Multiple committees may have responsibility for specific aspects of one issue. For example, elements of ESG frequently reside across the nominating and governance, compensation, and audit committees. Cybersecurity is often on the audit committee’s plate but may also fall under the purview of a technology or other committee. HCM issues, meanwhile, may span both the compensation and governance committees. Boards should expect such overlapping oversight responsibilities. But in the absence of close coordination and communication, there is a risk that the board may become balkanized, with each standing committee focused on its own oversight activities and thus failing to share important information that other committees and the entire board may need for their respective oversight.

Effective communication and coordination among committees is an ongoing challenge that can be exacerbated by several factors, including overloaded committee agendas; the absence of clear delineation of oversight responsibilities; a lack of sensitivity to (or understanding of) the information needs of each committee; a “default mentality” in which directors or committees assume that the audit committee (or another committee) has sole responsibility for specific risks; simultaneous committee meetings that prevent directors from attending the meetings of other committees as a way to stay apprised of issues potentially affecting their own committee’s oversight activities; and boilerplate committee reporting to the board.

To help promote effective information sharing and coordination among committees, boards can do the following:

Identify areas where committee oversight responsibilities may overlap and develop a process for frequent communication, sharing, and discussion of oversight activities in these areas.
Maintain overlapping committee memberships or informal cross-attendance at committee meetings when inter-committee coordination is of strategic importance and hold joint committee meetings periodically.
Hold regular meetings of standing committee chairs to discuss oversight activities.
Insist on robust committee reports to the entire board. Well-focused and appropriately detailed information can help keep all standing committees informed of matters potentially affecting their oversight responsibilities.

Patrick A. Lee is a senior advisor with the KPMG Board Leadership Center.

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Climate Governance Must Include Lobbying Oversight

One of the key themes of the 2021 proxy season was the dramatic surge in investor interest in climate lobbying. Five winning shareholder proposals asked companies to report on how their lobbying aligned with the Paris Agreement, a trend that is sure to spur even more investor action in 2022. 

Ceres recently assessed publicly available information on 96 large, US-based companies to understand how they are engaging in climate policy. What we found is that while these businesses increasingly recognize the threat of climate change and are oftentimes reducing their own greenhouse gas emissions, they seldom advocate for ambitious climate policies.

More specifically, among the assessed companies, 74 percent publicly acknowledge climate change as a material risk to their enterprises, 88 percent formally charge their boards with the responsibility to oversee climate or sustainability, and 92 percent are setting emissions reduction goals for their own operations. Essentially, they recognize the problem and commit to individual action—steps that show enormous progress.

Unfortunately, we cannot solve the climate crisis unilaterally. Since emissions anywhere contribute to climate change everywhere, collective action is necessary to ensure a level playing field where all emitters act responsibly. Companies that face climate risks should support strong policy solutions, but they often focus on the constraints rather than the benefits. 

Of the companies we assessed, only 40 percent have engaged directly with lawmakers on the importance of specific science-based climate policies (i.e., policies aiming to keep global warming within 1.5 degrees Celsius of pre-industrial temperatures). Twenty-one percent have lobbied in opposition to such policies, and these were often the same companies that were establishing targets and lobbying for climate regulation in other contexts. These misalignments raise serious issues around climate governance, which boards should address by taking the following three steps:

1. Assess the value-creation opportunities that open with climate regulation in place. Firms generally prefer free markets over increased regulation, but what would uncontrolled climate change really look like for your organization? Chances are, increased storm activity, wildfires, droughts, and populations displaced as a result of these climatic changes would negatively impact operations. Meanwhile, investment in low-carbon product development would be more challenging without government support—think of electric cars, which can benefit from public investment in charging infrastructure.

Boards can engage management to embed climate risks within the larger enterprise risk management (ERM) system. This embedding process should consider the latest climate science, including projections of the physical and transition risks of climate change that could affect a company’s operations and value chain. An assessment of the current regulatory environment and how that environment is projected to change in the coming years is similarly crucial. A helpful reference while conducting these assessments is the 2018 guidance on how to integrate environmental, social, and governance (ESG) issues into the traditional ERM process from the World Business Council for Sustainable Development and the Committee of Sponsoring Organizations of the Treadway Commission. 

2. Systematize decision-making on climate change across the company. Boards with an explicit mandate to oversee both climate change and public policy are best positioned to consider these issues and the overlap between them regularly and robustly. If your company does not yet formalize this responsibility within the board, it’s time to consider embedding that language in the appropriate board committee charter.

Stakeholders, including investors and regulatory bodies such as the US Securities and Exchange Commission, are increasingly holding boards accountable for perceived greenwashing. Professing to have strong climate policies while supporting lobbyist efforts to the contrary potentially opens boards and their companies to criticism and consequences.

3. Regularly conduct an audit of the company’s climate positions to ensure consistency. A growing number of investors are calling on companies to conduct internal audits, which the board should oversee, into the extent to which lobbying efforts are aligned with science-based climate policy. These audits should cover both direct lobbying with policymakers and indirect lobbying conducted on a company’s behalf by the trade associations to which it belongs. 

Boards should oversee these internal audits at regular intervals as the scope and context of climate impacts evolve, and they should systematize concrete steps and timelines to address any misalignment that the audits reveal. Amid investors’ growing interest in companies’ lobbying efforts, it is also strongly recommended that companies disclose the results of those audits as well as the steps companies plan to take to tackle any misalignment they find. 

Ultimately, this helps satisfy investors and other stakeholders and mitigate the company’s own climate-related risk exposures.

Margaret Fleming is a governance associate and Melissa Paschall is manager of governance with the Ceres Accelerator for Sustainable Capital Markets.

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Meet Your New Boss

This is an abbreviated version of a more thorough Directorship magazine article exclusively for NACD members. If you are an officer or director of a public, private, or nonprofit organization, you can become an NACD member to view the complete article and related resources.

A sea change in the relationship between investors and the companies they put money into was initiated at a Drexel University corporate governance event more than a decade ago when Vanguard CEO F. William McNabb III suggested that boards engage with investors. Since then, the symbiosis between shareholders and stakeholders has firmly taken root amid growing concerns about how companies manage and how boards oversee environmental, social, and governance (ESG) issues.

As the board’s role has grown more complex, management consultant Ram Charan has spent much of the last six decades traveling the globe to advise CEOs and boards on leadership and governance. Charan translates some of his collected wisdom into books; he has authored or coauthored more than two dozen volumes on subjects ranging from leadership to talent development.

During the pandemic, Charan, dubbed a “CEO whisperer,” stayed put for a few months in Hawaii, where his walks on the beach ultimately culminated in an idea for another book, this one to be cowritten with Dennis Carey, the vice chair at Korn Ferry with vast experience placing executives in C-suites and on boards. Carey and Charan have collaborated on two previous books.

Charan suggested a third perspective—that of the investor—and reached out to McNabb, who in 2018 stepped down as chair of Vanguard, one of the world’s largest institutional investors. Since then, McNabb has become an active independent director. He currently sits on the public company boards of UnitedHealth Group, IBM Corp., and Axiom Law, and also chairs EY’s independent audit committee.

These three extraordinarily different and ambitious men collaborated on the newly published book Talent, Strategy, Risk: How Investors and Boards Are Redefining TSR (Harvard Business Review). The slim volume is written specifically for investors and directors of private, public, and family-owned companies, and the title concept is substantially more than mere wordplay. It provides clear-eyed advice on how boards, management teams, and the investment community can more effectively navigate their sometimes conflicted roles.

In the introduction, McNabb exhorts companies—led by their boards—to focus their attention on the new TSR: “From the perspective of permanent capital and long-term value creation, we think the best way to create total shareholder return is by focusing on talent, strategy, and risk—the new TSR.”

In an interview with Directorship editor Judy Warner in mid-June, Charan and Carey (McNabb was not available) talked about their collaboration to provide directors a deeper look into their big idea.

To read the interview, see the July/August 2021 issue of Directorship magazine. Check out the full and previous issues of the magazine here.

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