Greater Focus on DE&I Accelerates NACD Programming

As Virtual NACD Summit 2020 came to a close last week, it was abundantly clear that the board’s role in overseeing diversity, equity, and inclusion (DE&I) will only continue to grow. A mainstage panel on social justice and “Expert Insights” programs on the social aspect of environmental, social, and governance (ESG) issues and DE&I itself made it clear that directors, investors, and stakeholders all have a keen interest in seeing real progress on the DE&I front.

Indeed, the topics of diversity, equity, and inclusion were not only the focus of NACD Summit sessions, but also the impetus behind a new two-year education program called NACD Accelerate. The program aims to help build the board talent pipeline, in effect creating a highly diverse new generation of board-ready directors out of high-potential and mid-career executives.

“Diversity and the broad mix of perspectives and experiences that come with it are essential for the robust, insightful discussions that drive good corporate governance,” said Peter R. Gleason, CEO of NACD, in a statement announcing the launch of NACD Accelerate. “Yet, even with recent gains, diversity is nowhere near where it needs to be in this age of modern governance. NACD believes that we must build a deeper bench of directors now and ensure that all directors are better prepared to lead companies through challenges and uncertainty.”

And this year presented challenges and uncertainty like no other, not merely because of the COVID-19 pandemic but also because of social unrest over racial injustice in the United States. Along this vein, NACD Summit’s mainstage panel titled The Intersection of the Arcs: Social Justice Movements and Corporate Oversight emphasized the importance of understanding historical context and the need for directors to consider stakeholder concerns as a business imperative. The discussion was moderated by Tina Tchen, president and CEO of nonprofit advocacy group Time’s Up, and the panel comprised Denison University Black studies associate professor Lauren Araiza; Dr. Tony Coles, cochair of the Black Economic Alliance; and Sarah Kate Ellis, president and CEO of GLAAD.

During the panel, some 80 percent of Summit attendees responded to a polling question, acknowledging that recent social movements elevated conversations on how to address systemic racism in their boardrooms. One panelist advised directors to be true stewards of the companies they serve and challenged them to take a deeper look into their organizations’ current practices. A framework for considering diversity—”people, purchasing, and philanthropy,” developed by the Black Corporate Directors Conference—was cited as a good starting point for those boards who are early in their journeys toward creating more inclusive corporate cultures. And it was noted that operational changes, such as examining and setting goals around supplier diversity and aligning diversity objectives with executive compensation, can help make management more accountable. The gist of the panel? Resulting pressures from and implications of social justice movements need to be recognized by boards as more than reputational risks—they affect the company’s talent pipeline, productivity, ability to innovate, and, ultimately, the bottom line. 

While it has been greatly accepted in recent years that having diverse teams leads to better business results, this was underscored in the “Expert Insights” panel on DE&I, moderated by Anna Catalano, director at Kraton Corp., which comprised speakers Terri Cooper, chief inclusion officer at Deloitte; Stephanie Creary, assistant professor of management at The Wharton School, University of Pennsylvania; and Denice Torres, CEO of The Ignited Company. This panel discussion focused on how recruiting for and otherwise uplifting diversity is only the first step in a much longer journey. Boards must ensure that the companies they serve foster an inclusive and equitable culture to allow for those diverse voices to be heard and respected. As one panelist stated, “Diversity is being invited to the party, equity is playing music, and inclusion is being asked to dance.”

The board should ask itself, What is the partnership between the three terms? What is the corporation’s story if it is diverse but not inclusive? Organizations need all three elements to capitalize on the advantages of having a diverse workforce.

Finally, the session on “Understanding the Board’s Role in the ‘S’ of ESG” provided context for the discussion of diversity and inclusion by looking at the many social issues that have arisen in 2020. Between the pandemic and the renewed vigor of social justice movements, the social aspect of ESG issues has, due to recent events, risen to the top of boardroom agendas. For instance, after the mass move to remote work spurred by the declaration of the pandemic in March, stakeholder performance and health-and-safety considerations became front and center for both board and management teams.

The convergence of these issues led to one key takeaway from the panel for director attendees: Do not be merely performative. Instead, dig down when you see troubling patterns in data related to, for example, employee retention, pay equality, and who is being promoted—all areas that can reveal whether a company is, in fact, making progress. Stakeholders and investors alike will be asking related questions and boards must be prepared to address them with transparency and authenticity. The “S” of ESG can no longer be ignored in the boardroom.

NACD: Tools and resources to help guide you in unpredictable times.

Regulatory and Cybersecurity Responsibilities Intersect for Boards

Cybersecurity is a recurring and critical board agenda item for good reason. Related reputational, regulatory, and business impact risks—all of which are likely to have economic consequences, potentially resulting in regulatory fines, lawsuits, and decreasing stock prices—are just a few key concerns for companies and their leaders. The failure of an organization and its board to fulfill their cybersecurity responsibilities can even create existential risk.

Given the global business environment, the interconnectedness of today’s technology, and corresponding cyber threats, it is vital that boards keep current on news cycle headlines, trending cyber risks, and global regulatory cybersecurity requirements, expectations, and best practices.  

Regulatory Responsibilities

Director responsibilities with regard to cybersecurity oversight stem from a general obligation or fiduciary duty of care to oversee risk and, in many cases, are more specifically prescribed by regulatory requirements, strong recommendations, and expectations. Below are examples of such global regulatory responsibilities required by regulatory or law-making bodies in the respective countries in which companies do business.

The boards of certain organizations are required to approve information security or cybersecurity policies in a variety of jurisdictions around the world, including for financial services companies in the United States, Bermuda, Israel, Malaysia, and India. The board is also required to be the point of escalation for material cybersecurity risk, data breaches, or incident responses in those same jurisdictions.
In the United Kingdom, a director has a duty to exercise reasonable care, skill, and diligence in the conduct of their role, including for cybersecurity.
In Denmark, board members at insurance companies are required to complete a basic course on cybersecurity no later than 12 months after joining a board.
In Singapore, the board is expected to be regularly apprised of salient cyber-risk developments so as to equip itself with the requisite knowledge to competently exercise its oversight function.
In Australia, the board is responsible for ensuring that the entity it serves maintains its information security practices and for maintaining information security in a manner commensurate with the size and extent of threats to its information assets.

The Perils of Responsibilities Unfulfilled

A failure of the board to properly understand and effectively mitigate cyber risks that results in a cyber incident or damage to the company (reputational or otherwise) may amount to a breach of director duties, exposing directors to personal liability in certain jurisdictions such as the United Arab Emirates, Argentina, Malaysia, and Israel.

Under Europe’s General Data Protection Regulation (GDPR), companies have an obligation to reasonably safeguard data whether in electronic or paper form. Violations of this requirement due to a cyber incident or other factors can result in fines of up to 20 million euros or four percent of a company’s total worldwide annual turnover from the preceding financial year. The GDPR imposes fines for noncompliance only on legal entities, not individual managers. However, based on German procedural laws implementing GDPR locally, the fine is imposed on responsible individuals, which can include a corporate director, rather than the legal entity.

In France and Singapore, criminal sanctions of up to five and two years of imprisonment, respectively, may be applied against an individual responsible, including a corporate director.

Board Best Practices

The board plays an important role in helping the company it serves balance and oversee security risk appetite, risk mitigation strategy, and strategic business objectives. 

To avoid the perils of unfulfilled director responsibilities in relation to cybersecurity oversight, the board should consider the following tips:

Formally approve on an annual basis and in documented minutes the company’s information security program, including policy.
Try to recruit a cyber expert to the board in line with the US Securities and Exchange Commission’s suggestions from its guidance around cybersecurity disclosures.
Require regular (ideally quarterly at a minimum) reporting from management on cybersecurity and information security material risks and events, and how the leadership team is implementing the strategy for management of those risks and the treatment of those events.
Designate a board committee that will be responsible for regular oversight of cybersecurity activities (unless it is determined that cybersecurity will remain a full-board issue).
Stay current on the regulatory security landscape and your company’s compliance status and strategic approach with at least an annual briefing from internal legal counsel.
Understand what the company’s cyber insurance covers (e.g. does it include fines and penalties?).
Periodically practice the company’s documented incident response plan.
Understand the company’s plans for expanding or contracting business operations in geographic regions that are considered nation-state adversaries or otherwise present cybersecurity legal or operational high-risk challenges.
Ask about the company’s current and planned cybersecurity resources in an effort to ensure that the company is adequately staffed from numbers and expertise perspectives.
Require periodic updates from the company’s internal audit group on cybersecurity audit material findings and cyber program effectiveness.

Lucy Fato is executive vice president, general counsel, and global head of communications and government affairs of AIG and Nubiaa Shabaka is chief cybersecurity and privacy legal officer and associate general counsel of AIG.

NACD: Tools and resources to help guide you in unpredictable times.

A Methodical and Scientific Approach to Professional Development Coaching

Career Partners International has partnered with LeaderAmp to design PowerAmp Coaching.  PowerAmp Coaching is the world’s first professional development coaching program delivered by trained coaches augmented by rigorously created Artificial Intelligence.  This combination of professional coaching paired with technology gives organizations the power to provide coaching at a previously unthought of scale and significantly enhanced ROI.

While other programs may offer individual content and some form of guided development, none can match this level of scientific rigor and targeted development.  Many forms of coaching can provide participants with an experience that “feels” positive.  PowerAmp Coaching takes this to the next level by increasing engagement, measuring improvement, and providing transparent progress tracking to the client organization driving continued advances across the workforce.

One of the many unique elements of PowerAmp Coaching is the Time Trial.  Designed to identify those with the highest potential for coaching success, the Time Trial not only ensures the best application of development investments, it also uncovers hidden talent and organizational enrichment priorities.  Through brief assessments and AI guided prompts, participants will take part in self-guided development, demonstrating commitment to a coaching engagement.  By focusing efforts on those who are most prepared for and receptive to coaching, organizations can ensure that funds invested in development are being optimally allocated and motivated individuals are being appropriately engaged.

After successfully completing the Time Trial, the unique journey into modern development begins.  Participants are assigned a trusted CPI coach and complete computer adaptive self and 360-assessments to establish a baseline.  These proprietary and scientifically validated assessments, developed by LeaderAmp, measure each participant in 18 unique dimensions.  By focusing on the dimensions that each participant or organization has deemed most critical, coaches are able to ensure targeted development and progress.  Throughout the process Artificial Intelligence works in tandem with the coaches to track the emotional experience of participants, ensuring assignments are neither too challenging nor too simple, keeping participants in a growth mindset.

With over 50 Member Firms and 300 locations around the globe, CPI is uniquely positioned to deliver coaching to national, multi-national, and international organizations with a proven and uniform approach.  CPI’s experienced and credentialed coaches amplified by LeaderAmp’s scientifically developed content create greater levels of scalability, bringing access to quality coaching to all levels within the organization.  With artificial intelligence and modern engagement techniques, PowerAmp Coaching democratizes the professional development field and creates stronger leaders and employees.  Whether supporting high-level individual contributors, guiding new leaders, identifying diverse pools of talent, expediting change management, or solving for other complex issues, PowerAmp Coaching provides innovation and intimacy driving sustainable results.  
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Targeted Professional Development and Coaching Excels Teams to Success

Unprecedented, chaotic, new-normal, turbulent, challenging, these are just some of the descriptors of today’s business environment.  Clearly, 2020 has brought new levels of complexity to the working world. Organizations are asking more and more of their employees, leaders, and managers; many of whom will rise to the occasion, but so many may not be equipped to do so.  In conjunction with LeaderAmp, Career Partners International is pleased to introduce PowerAmp Coaching, an industry first professional development and coaching solution designed to deliver measurable results, with a scalable model, and a greatly enhanced ROI.

Executives have long experienced the benefit of professional coaches.  Great coaches have the ability to provide insightful, meaningful, and actionable advice and guidance.  They address specific opportunities for improvement in an individual, rather than the more general recommendations offered through training or study.  Historically, coaching has been limited to the upper echelon of organizations due to its complexity and costs.  PowerAmp Coaching’s unique application of Artificial Intelligence within the coaching solution allows for increased transparency and endless scalability.  Organizations can provide coaching to whole teams of participants ranging from hi-potential individual contributors, to new managers, to experienced leaders, and more.  Each participant will benefit from a consistent process augmented by technology with measurable results while receiving personalized coaching resulting in measured improvements.

Group training sessions and online courses are valuable in delivering large numbers of participants the same guidance and messaging.  Coaching is unique in that it targets an individual’s areas of improvement and, when implemented at scale, leads to lasting improvement across the organization.  PowerAmp Coaching is designed to eliminate the risk from coaching by first identifying those with the most potential to gain from the program, then by maintaining constant communications with participants to ensure they are practicing between sessions.  Amplified by LeaderAmp, PowerAmp Coaching utilizes Artificial Intelligence to prompt actions and to quickly interpret engagement levels.  With this capability and high levels of engagement coaching becomes more expeditious and effective.

PowerAmp Coaching creates the biggest impact when applied to organizations’ most difficult problems.  With state-of-the-art assessments, scientifically designed to be accurate and precise, organizations measure participants’ starting points across 18 dimensions.   Participants can then focus on the skills that are most in need of development.  The effects of the coaching engagement are then measured to determine real progress made from start to completion.  PowerAmp Coaching makes professional development and coaching accessible to all levels of an organization with the transparency and targeted growth that proves the ROI of each coaching relationship.
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Career Partners International Launches PowerAmp™ Coaching – Industry Leading Professional Development Solution

Career Partners International (CPI) is pleased to announce the launch of PowerAmp Coaching, the world’s first professional development coaching program delivered by trained professional coaches amplified by scientifically created artificial intelligence.  This combination gives organizations the power to provide the benefits of coaching to otherwise unreachable populations all while minimizing risk and ensuring a solid return on investment.

CPI has launched this program in conjunction with LeaderAmp, founded by Dr. Matt Barney, Organizational Psychologist.  In Dr. Barney’s previous work as the head of learning and development in major organizations around the globe he identified three key obstacles to successful coaching engagements.  First was the inability to view and measure progress in real time.  Second was the difficulty in predetermining which participants would succeed in coaching.  Third was the limitation of delivering coaching to those only at the highest levels of major corporations.

PowerAmp Coaching combines the expertise of proven coaches with the tracking and guidance of custom-built and validated artificial intelligence.  This unique solution starts by identifying those in the organization who will most benefit from coaching then quickly identifies areas for improvement based on proprietary, peer-reviewed, and validated assessments.  With these highly accurate and precise tools, organizations and coaches can see which participants are on track and which need more support.   By partnering with AI and utilizing consolidated project management tools, coaches provide greater levels of support to more participants, opening the possibility of coaching to more employees than ever before.

“In my nearly 30 years in Human Resources and Learning & Development, I have not seen a coaching program so rooted in sound science.  Coupling CPI’s excellent coaching capabilities with LeaderAmp’s scientific approach and participant guidance bring previously unheard-of possibilities to the world of Professional Development,” states Bill Kellner, CEO of Career Partners International.

With over 50 Member Firms and 300 locations around the globe CPI is uniquely positioned to deliver coaching to national, multi-national, and international organizations with a proven and uniform approach.  PowerAmp Coaching combines this coaching presence with scientifically sound and proven technology to deliver measurable results to employees at all levels and in all corners of the world.  PowerAmp Coaching solves what have historically been the most difficult employee development problems faced by virtually all organizations.
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Bank Board Members Address COVID-19 in Compensation Design

Do banking industry board members plan to adjust 2020 annual incentive plans to address COVID-19’s impact? At an NACD and Compensation Advisory Partners (CAP) virtual roundtable hosted on September 30 and titled “Compensation Strategy for an Unpredictable Future in the Banking Industry,” 52 percent of attendees in response to a poll said that they’d exercise discretion.

Meanwhile, 22 percent said that they’d adjust performance goals to reflect that COVID-19 made goals unattainable, 26 percent said they plan to make no adjustments, and not a single attendee responded that they’d exclude the pandemic’s impact from performance calculations.

As moderators Kelly Malafis, founding partner at CAP, and Eric Hosken, a partner at the firm, laid out in the discussion, incentive plans set in the first quarter of this year are not necessarily realistic anymore given all that has transpired since the pandemic was declared in March.

“We’re using a lot of upward discretion,” one attendee said. “We’re looking at metrics that maybe weren’t on the annual plan, the net interest margin compared to peers and performance in the Paycheck Protection Program. We’ve come up with three to four harder metrics even though they’re not in our plan and laid those over the individual’s [plan].”

Another attendee remarked on the impact of the adoption of the Current Expected Credit Losses (CECL) standard, which came into force this year. The standard requires financial institutions to proactively predict the losses they expect to incur over a loan’s lifetime. “CECL clearly impacted how we look at our financials this year. CECL has been treated differently by different banks, so the relative comparison is hurt. We’ve used discretion in setting up a scorecard—a resilient scorecard with pillars of financial, strategic and operational, risk and regulatory, and culture and talent, and [will score] one through five whether each point under those pillars is reached. We tried to create some degree of objectivity even though previous metrics had not been reachable. We also needed to determine what a capped amount for 2020 is.”

Overall, Malafis said, “You want to keep management engaged, but it won’t be at or above the target bonus—but it may not be a zero year. In a few cases, the performance is there to even support an above-target payout.”

Outstanding Performance Stock Units

A polling question asked attendees how the compensation committee will respond if their outstanding performance stock units (PSUs) have been impacted, and the majority, at 57 percent, said that they would make no adjustments. Other popular polling answers to the same question included that the committee will respond by adjusting performance goals or metrics to reflect COVID’s impact and the low-interest rate environment (21%), exercising discretion to adjust PSU payouts independent of calculated PSU awards (14%), and eliminating 2020 performance from the calculation (7%). No respondents said that they’d use pre-CECL methodology or net charge offs in place of provision.

Some respondents who answered that no adjustments would be made were concerned about accounting issues, such as the potential reversal of PSUs back into income.

“If you modify these PSUs, that would likely require disclosure of additional compensation in the proxy’s Summary Compensation Table; with annual incentives, you don’t necessarily have the same hurdles,” Hosken replied. “Companies making adjustments to PSUs—it’s hard to do. There are accounting and shareholder implications.”

Executive Retention

Hosken noted that stock prices for banks are still below pre-pandemic levels and asked, “With executive retention, are you going to have issues because the value of stock holdings are way down compared to companies in other industries?”

In the corresponding polling question, CAP asked if executive retention is currently a major concern for attendees and their boards. Almost half (52%) responded that it is not a primary concern right now, while 39 percent said it is, but no more so than last year. Nine percent replied that it is, and much more so than at the same time last year. In response, Hosken noted that these results are consistent with conventional wisdom. “Often you feel like talent will go to other banks, who are now facing the same situation. It would be more [of an issue] if there’s a concern that other businesses would recruit your talent.”

One attendee’s bank has seen two CEO departures in two years due, in part, to the coronavirus. “A variety of consultants told us it isn’t a good year to have much annual incentive compensation. At 40 percent of book value, it’s not terrible for banks we benchmark, but it’s below peers; that’s given us a lot of cover. All sorts of things seem to be going badly. But it’s tough because people worked extremely hard. In the CEO search, the response from consultants was really looking for us to focus on the long-term incentives part—it was portrayed as an industry shift toward multiple-year [incentives].”

Before and Beyond

In looking to the years ahead, the group also looked backward. One attendee asked for insight into the 2008 financial crisis and how what banks did then compares to what banks are doing now.

“The financial crisis was strange, lots of banks were subject to the [Troubled Asset Relief Program],” Hosken replied. “Pre-Provision Net Revenue was used frequently, there was a slower move into PSUs—it wasn’t heavy in the mix. They still had stock options. During the last crisis, banks were under scrutiny because they were viewed as partly responsible for the crisis—now it’s not so much about what the banks did, it’s something out of left field. I hope there’ll be more sympathy come proxy season.”

After the financial crisis, “banks asked how they could better adapt to unforeseen adverse impacts,” Malafis said. “More discretionary elements and metrics came about” as a result.

So, what changes were attendees considering at the time of the roundtable as they look toward the 2021 annual incentive design in light of COVID-19? For this polling question, respondents could select multiple answers, and 61 percent said that they would add relative measures or increase the weighting of relative measures, 33 percent would increase committee discretion, and 28 percent would consider using pre-provision performance measures, as well as wider performance ranges.

Hosken observed that a lot of compensation committees haven’t decided what they’re going to do yet. Between reflecting on 2020 and looking ahead to 2021, discretionary and wait-and-see approaches seemed to rule the day.

NACD’s Summit 2020 is going virtual with complimentary access to select programming included with your membership.

Register today for your free ticket.

NACD: Tools and resources to help guide you in unpredictable times.

Auditor Resilience Contributes to Capital Markets during the Pandemic

Capital markets are complex. Many factors contribute to their stability: public company financial performance, investor confidence, and legislative and federal government intervention, to name a few. The list is long, but one often overlooked contributor to the stability of capital markets is public-company auditors, who are demonstrating their resilience to deliver high-quality audits during the COVID-19 pandemic.

As the US Securities and Exchange Commission said of auditing in April, “the proper functioning of our capital markets depends on a regular supply of high-quality financial information that enables investors, lenders, and other stakeholders to make informed decisions.” And the proper functioning of the capital markets is an essential component of our national response to, and recovery from, COVID-19.

As public-company boards are well aware, COVID-19 is creating new and evolving risks that could require changes to the design and operation of internal controls or other processes related to financial reporting.

US public-company audit firms have vast experience with numerous accounting issues across myriad organizations. As a result, they can draw on this expertise to navigate complex accounting issues that may be new to many public companies in this crisis. For example, management is required to conduct going concern evaluations quarterly, but some companies are for the first time facing substantial doubt that they can continue to operate. Auditors serve as a vital communication link between all of the different relevant parties inside a company to make sure they are aware of their responsibilities and are performing robust going concern evaluations.

Auditors have also stepped up in other ways to address the challenges facing public companies and their boards during the pandemic. After the onset of the pandemic, auditors quickly adapted to the new normal of remote auditing while remaining laser-focused on audit quality. Audit firms quickly reinforced or instituted new policies and procedures to react to the facts on the ground. This was an essential step that contributed to the continuation of high-quality financial reporting during the immediate challenges the pandemic presented.

Auditors continue to serve as gatekeepers of the financial reporting ecosystem. They’re in regular communication with regulators, audit committees and boards, and company management, sharing information about what they’re seeing on the ground and how they are addressing those issues.

To help inform public companies and other financial reporting stakeholders of the ways in which auditors are stepping up to help maintain the orderly operation of capital markets during the pandemic, the Center for Audit Quality (CAQ) recently launched the Audit in Action campaign. The campaign highlights auditors through compelling videos, blog posts, and other dynamic stories to put a face to the people who play a significant role in keeping our capital markets functioning. 

Boards can leverage such auditor expertise and innovation to help them navigate complex accounting challenges during the pandemic. To further help with such challenges, the CAQ has developed a set of resources for financial reporting stakeholders, including boards, that cover everything from going concern to non-GAAP financial measures to goodwill impairments, and more.

Auditors know the strain facing public companies during the pandemic may be far from over. Thus, they will need to remain resilient and adaptable for as long as the pandemic continues. I have confidence they will do just that.

Ultimately, it takes all stakeholders in the financial reporting ecosystem, including public-company management, audit committees, internal auditors, and external auditors, to provide high-quality financial information that contributes to market resilience during these unprecedented times.

Julie Bell Lindsay is the executive director at the Center for Audit Quality.

NACD’s Summit 2020 is going virtual with complimentary access to select programming included with your membership.

Register today for your free ticket.

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Beyond Messaging: This Is a New Era for Corporate Responsibility

At the same time that the COVID-19 pandemic has sharpened economic divides, the world is reckoning with the threats of prejudice, racism, and climate change. The role of corporations has never been more visible or important—especially as the pandemic’s economic shocks drive corporate consolidation, leading big business to dominate the economy. Increasingly, consumers, investors, the media, and potential employees are watching the ways in which corporations commit to their values. As social contexts and pandemic impacts evolve, meeting expectations for corporate social responsibility (CSR) is a moving target.

Prompted by the major anti-racism protests that erupted in the United States and filtered overseas in the early summer, corporations have been increasingly vocal about their commitment to racial diversity and inclusion. Many have committed to increasing diversity among their own ranks, and still others have tied executive pay to meeting such goals. Other companies have made spending commitments to further social justice causes; prompted by protests against police violence and racial injustice, sparked by the murder of George Floyd. For example, Bank of America Corp. recently committed $1 billion over four years to support economic initiatives focused on diversity, which has since been eclipsed by JPMorgan Chase & Co.’s pledge of $30 billion over five years to address drivers of racial wealth inequality. At the same time, corporations of all stripes have increased their messaging on social justice issues, which has struck some as simply posturing if they are devoid of concrete commitment and accountability. Indeed, activists and labor experts continue to call for the publication of diversity data in order to hold corporations accountable to their diversity pledges—calls with which few have complied.

One of the most prominent areas of changing expectations around corporate social responsibility is climate change; 2020, a year likely to be the hottest on record and to bear witness to extraordinary natural disasters, has seen a series of major corporate pledges to take more action on combating climate change. Financial institutions and investors in particular have increased their scrutiny of climate impact, aiming to both reduce the negative impact of their portfolios and increase support for sustainable businesses. Just this month, a group of thirty of the world’s largest investors, collectively managing $5 trillion, pledged to align their portfolios with the climate goals of the 2015 Paris Agreement. Major corporations have also committed to net-zero emissions goals within the next few decades. This climate consciousness has been urged by corporate giants across sectors, from Walmart and to oft-criticized energy majors such as Total and BP. While many of these pledges have been critiqued for lack of concrete follow-through or realistic plans for implementation, the increasing prevalence of climate targets is changing how corporations engage with climate change.  

With higher expectations come higher reputational risks: along with pressure from activists and consumers to improve records on social and economic goals, public scrutiny may limit the size and diversity of prospective talent pools. Oil majors, for example, have experienced difficulty attracting young graduates due to their negative climate records, and law firms that represent big oil have faced boycotts from top law school graduates. Reputational risks can also come in the form of increased data leaks or cyberattacks in efforts to expose and shame companies. Conversely, a growing number of corporate leaders are embracing heightened corporate social responsibility as a pathway to profitability. A quarter of global CEOs now strongly agree that investing in climate-friendly initiatives can lead to new business opportunity, up from 13 percent in 2010, according to a PwC survey of 1500 global CEOs. 

Government failure to address social and environmental issues is another factor changing expectations of the private sector; when regulation and governance have not risen to meet the demands of the moment, simply following the government’s lead is no longer sufficient. The fallout from the COVID-19 pandemic only increases the stakes for corporate sustainability and social responsibility. As political polarization and paralyzed governance continues to hinder many of the world’s largest economies, the private sector has more space, and faces more pressure, to lead and take action on urgent issues.

In this context, seizing opportunities to raise the profile of your company’s social responsibility efforts and to mitigate future risk are increasingly crucial, and could include the following actions: 

Coordinating with industry leaders to establish and finance an annual scorecard that will serve as a public display of accountability on engagement efforts. Activists, consumers, and the media have consistently called for more transparent accountability efforts. Periodic surveys of internal staff and the general public can also provide a metric for gauging progress. 
Developing relationships with carefully vetted social and environmental nongovernmental organizations that can partner with businesses for events, talent recruitment, public statements, and more. 
Getting rid of corporate jargon like “CSR” and reframing value initiatives as “corporate conscience,” “corporate citizenship,” “sustainable commitments,” or otherwise, to more authentically convey values in company statements and websites. 
Better publicizing engagement efforts on social media to proactively build rapport with potential recruits, remaining aware of the issues that animate the next generation of talent.
Considering the ramifications and potential benefits of being a corporate pioneer versus remaining in the middle of the pack when planning strategies around value engagement. The next generation of talent and consumers value leadership on the issues that matter to them.

Karl V. Hopkins is a partner and the global chief security officer at Dentons.

NACD’s Summit 2020 is going virtual with complimentary access to select programming included with your membership.

Register today for your free ticket.

NACD: Tools and resources to help guide you in unpredictable times.

How the Compensation Committee Can Commit to a Culture of Diversity and Inclusion

The racial justice movement, the gradual shift toward increased transparency around pay equity and workforce representation, and the upcoming US presidential election have all combined to create a unique moment in time—one in which many companies are feeling renewed hope that progress with regard to racial equity is possible. However, despite years of hard work and millions of dollars spent by companies on diversity initiatives, very little has changed when it comes to Black and Hispanic representation in management over the past 30 years. The summer’s protest movement has led to a reckoning of sorts. Why has progress been so elusive? How can boards ensure they are doing all that they can to oversee a culture in which great talent can succeed, regardless of race or gender?

For many companies, the answer lies in engaging the board on talent strategy with a focus on diversity, inclusion, and equity. We are seeing a continued trend of compensation committees taking on additional responsibilities outside executive compensation, including culture, talent, and diversity. A recent study by Willis Towers Watson found that a third of the largest 100 S&P 500 companies now formally include culture, employee relations, and engagement in their compensation committee charters, and the committee’s name is sometimes amended to reflect this expansion of responsibility. Here’s how boards can set up their compensation committees—and diversity initiatives—for success.

Rethinking Process

One way to ensure the compensation committee (and in many cases the full board) is fully engaged in the oversight of progress around diversity and inclusion initiatives is to make certain that discussions of talent strategy, including the diversity of talent, take place throughout the year—including on the compensation committee. Often this discussion is relegated to a single meeting annually and is left to the chief human resources officer or chief diversity officer alone to manage and own. The involvement of the CEO and entire leadership team has been shown to significantly improve diversity outcomes for a company, especially when it comes to increasing representation at senior levels. The board can facilitate this by committing to frequent and ongoing discussions around the ways in which diverse talent is sourced, promoted, and surfaced to the board.

The Levers of Change

For many companies, the best way to measure whether efforts to create an inclusive culture and increase worker and management diversity are successful is to set long-term goals that apply to a broad population. These goals may be internally communicated or externally disclosed, as companies such as Accenture, BlackRock, and Google have done. The board should receive regular updates from management on progress against goals and should hear from management how it plans to measure and improve outcomes on a long-term basis.

A major focal point of the push for increased diversity and inclusion at companies has been the issue of accountability. How are companies and management teams to be held accountable for making a difference? Progress is often slow and difficult and lacks direct and immediate ties to the financial performance for which CEOs are responsible.

Questions have been raised regarding shareholder primacy and the importance of other stakeholders in the corporate world, most prominently with the Business Roundtable’s 2019 Statement on the Purpose of a Corporation. If corporations are truly expected to play an essential role in improving our society, compensating employees fairly while fostering diversity and inclusion as part of that mandate, a logical conclusion is that these outcomes should be encouraged through tying them to executive pay. Although only a minority (some studies report around 15 to 20 percent of the S&P 500) of companies currently include diversity metrics in their incentive plans, an unwillingness to do so may be perceived as a disconnect between what a company says is important and what it is willing to reward in practice.

If diversity incentive metrics are to be considered, an important question is whether they should be tied to short-term pay (through the annual incentive plan) or long-term pay. The vast majority of companies that use diversity incentive metrics do so through the short-term incentive plan. However, given that increased representation of diverse talent in senior roles is almost always years in the making by virtue of supporting diversity in the leadership pipeline, positioning this in both the annual and long-term plans may be more effective. This would allow executives to be rewarded in the near term for taking actions that should yield sustainable improvements in representation over time—for example, actions that will grow the pipeline of qualified, diverse talent. The ultimate success of those actions in driving improved representation should be reflected in the executive’s long-term compensation. In particular, a design in which executives may lose money if goals are not achieved, rather than simply including diversity goals in a basket of individual objectives, may go further to change behavior in ways that are sustainable and effective long term.

The role of the director has become more demanding and more complex than ever before. In addition to overseeing the company’s financial and operational performance and its obligation to create value for shareholders, the board is now tasked with a multitude of environmental and social responsibilities that challenge some of our most fundamental assumptions regarding the role of the corporation. Ensuring that diverse talent has an equal chance to thrive is a business imperative as well as the right thing to do, but making it happen takes aggressive action. As with any business imperative, the support and leadership of the board is critical to the company’s success in achieving these vital objectives.

Ani Huang is the president and CEO of the Center On Executive Compensation.

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NACD: Tools and resources to help guide you in unpredictable times.

Will There Be More ‘October Surprises’ for Boardrooms?

Surprise! The month of October in the United States is famous for them. Political candidates often save their best for last—and this year is no different, despite the surge in early voting by more than 28 million Americans, according to a Politico report. Prior to this month, as reported in our Q3 Washington Review, Congress had only passed 158 laws; now in mid-October that tally is 169 and growing. The pace is one new law per day, rather than barely one or two per week.

For directors, the most significant laws thus far this year have been the stimulus bills offering relief to businesses and individuals—especially the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Of course, the big law everyone is waiting for is the next $2 trillion-plus relief bill—and that could be on the docket soon. As of October 1, 2020, more than 1,000 bills have been introduced in US Congress mentioning coronavirus in the title, text, or summary. Of those, nine have become law, as described below. In the House of Representatives in the first half of the year, we saw the passage of six relief bills, including the $2.3 trillion CARES Act, H.R. 748, mentioned above and covered in this blog and fact sheet.

Still pending are the several hundred COVID-19 bills proposed earlier this year—including financial relief bills sponsored by Democrats and liability protection bills sponsored by Republicans. Of note is the updated H.R. 8406, the $2.2 trillion Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act, a major COVID-19 relief bill that passed the House on October 1. (For legislative history, see this summary from the House Committee on Appropriations.)

Meanwhile, states have been busy, as reported by the National Conference of State Legislatures (NCSL), who has a database on State Action on Coronavirus (COVID-19) which lists COVID-19–related bills in 37 categories, such as education, health, or transportation. To be included in this COVID-19 legislative database, a bill must include provisions related to the coronavirus. As of October 1, all 50 states had enacted coronavirus legislation; the total for COVID-19–related bills at the state level was 3,030, with 577 enacted as laws. (For more on coronavirus legislation, see the Board Implications of the CARES Act, as well as the NACD COVID-19 Resource Center.)

So far, one in three states (16) have enacted laws that limit liability for businesses during the COVID-19 crisis. Most recently, in Georgia, the state’s legislature passed GA S 359, Georgia COVID-19 Pandemic Business Safety Act, which provides for certain immunities from liability claims regarding COVID-19. The law refers not only to health-care providers but also to businesses, nonprofits, and governments. The law includes the wording of a warning sign posted outside of a business that says those who enter do so at their own risk.

COVID-19 has also been a focus for the US Securities and Exchange Commission’s June 23 CF Disclosure Guidance: Topic No. 9A regarding COVID-19 disclosures, as well as a COVID-19 roundtable held June 30, during which Commissioner Elad Roisman argued against rules that would dictate what environmental, social, and governance topics must be covered in disclosures, saying “Who is in a position to codify a list of environmental or social issues for the foreseeable future?” Commissioner Roisman, a Republican, notes that COVID-19 was not predictable, so it could not have been disclosed as a risk factor.

As far as courts go, COVID-19 has affected a variety of company stakeholders, some of whom are taking legal action. So far in 2020, more than 2,000 lawsuits have been filed in federal and state courts, says this article. For details on how customers, employees, and shareholders are suing over COVID-19, see our Q3 Washington Review report, which also covers other developments from the quarter with regards to finance and investment, environmental regulation, and diversity—in particular, a new California law mandating racial inclusion. This newly enacted AB 979 mandates inclusion of directors from “underrepresented communities” on the boards of California-based public companies.

In summary, stay alert for surprises, especially with respect to COVID-19 funding. In this volatile month, almost anything can happen.

NACD’s Summit 2020 is going virtual with complimentary access to select programming included with your membership.

Register today for your free ticket.

NACD: Tools and resources to help guide you in unpredictable times.