Corporate boards are increasingly asked to perform a balancing act.
A PwC survey of 783 directors at US companies, many of them multinationals, suggests that board members are looking ahead further into the future when they plan strategy, especially regarding IT issues, because they consider technological innovation critical to their company’s long-term approach.
At the same time, boards have to respond to the demands of a rising number of activist investors, which tend to be more oriented towards short-term goals. About one-third of survey respondents said they interacted with activist investors in the past year, compared with 29% last year. And 17% said they discussed shareholder activism extensively even though they had no interaction with activist shareholders, up from 14% in 2014.
Boards are “trying to make a broader group of investors happy,” said Paula Loop, CPA, leader of PwC’s Center for Board Governance and Investor Resource Institute. “They’re not just focused on long-term investors, they’re also trying to make sure short-term investors are getting what they’re looking for.”
And the balancing act in the boardroom “will trickle down to the company, and the finance team and others will have to react,” Loop said. “What are we thinking about related to our capital expenditures, our investments, our capital allocations with a long-term perspective, but also making sure that shareholders who want higher returns are getting what they need as well.”
As boards juggle the different demands from investors, directors worry how to best do their jobs. Board diversity and talent management are important, but the six issues that have increasingly grabbed their attention are:
Performance of other board members. Dissatisfaction with their peers’ performance has increased amongst board members in the past three years. In 2015, 40% of respondents said someone on their board should be replaced, up from 31% in 2012. The top three reasons for being dissatisfied were diminished performance due to aging (19%, up from 15% in 2012), unpreparedness for meetings (15%, up from 11% in 2012), and a lack of expertise (14%, up from 13% in 2012).
Also, women serving on boards were more critical of their peers than men. Forty-two per cent of female directors, who represented 14% of the survey participants, said they believed someone on their board should be replaced compared with 39% of male directors. The gender distributions amongst survey participants and public company directors closely aligns.
CEO succession planning. Having a smooth transition when a CEO leaves is crucial to a company’s long-term success, but directors’ confidence that boards can accomplish smooth transitions took a dip. In 2015, fewer than half of respondents (48%) said they believe their board spends sufficient time on CEO succession, down from 62% the previous year. Directors are also concerned their company does not adequately prepare for an unplanned CEO exit (55% of respondents) and does not have adequate bench strength in the CEO pipeline (73%).
Board-shareholder relations. Pressure to satisfy demands by activist investors, which tend to be interested in short-term gains, is increasing on boards. To better take into account these activist investors’ demands, boards have become more willing to communicate with shareholders, even about topics boards used to consider not appropriate to discuss.
For example, 34% of respondents considered it very appropriate to talk to shareholders about board composition, up from 20% in 2013; 77% believed it was at least somewhat appropriate to discuss executive compensation with shareholders, up from 66% in 2013; and 28% viewed management performance as a very appropriate discussion topic with shareholders, up from 17% in 2013.
Strategy oversight. Especially at the largest companies, board members are thinking longer term when they discuss company strategy than they did a few years ago. In 2015, 58% of directors said they plan ahead five years or longer when they discuss strategy, up from 48% in 2011.
About 70% of respondents at the largest companies said their boards use strategic time horizons of at least five years, compared with 37% of board members at the smallest companies.
The longer-term strategic outlooks took into account long-term economic, geopolitical, and environmental trends (76%), emerging technology (71%), potentially disruptive competitor initiatives (57%), and alternative strategies to those presented by management (50%).
Fraud risk. Technological advancements have increased the ways fraud can be committed, and 45% of companies have reported in the past two years that they suffered some type of fraud. As a result, 77% of directors said they changed their approach to reduce fraud risk in 2015, up from 66% in 2012.
More directors said they discussed tone at the top (68%, up from 46% in 2012), they interacted more with managers below the executive level (57%, up from 31% in 2012), and they looked more closely at controls in place to prevent insider trading violations (44%, up from 27% in 2012).
IT issues. Issues involving technology and innovation rank high among boards’ priorities. Eighty-three per cent of board members said they are at least moderately engaged in understanding the status of major IT implementations, up from 76% in 2012, and 67% of board members said they are at least moderately engaged in understanding and overseeing the annual IT budget, up from 57% in 2012.
About half of respondents (49%) believed that the company’s IT strategy is very much aligned with the company’s overall strategy, up from 30% in 2012, and 65% of respondents said they should spend at least some more time on IT risks, including cyber-security, second behind strategic planning (66%).
Also, the frequency at which board members communicate with the company’s chief information officer has increased in the past three years. In 2015, 25% said they interact with the CIO at every formal meeting and 34% at least twice a year. In 2012, only 18% communicated with the CIO at every formal meeting and 30% at least twice annually.
—Sabine Vollmer (email@example.com) is a CGMA Magazine senior editor.