GUESTS:
TK Kerstetter, host of Inside America’s Boardrooms and (coming in 2020) Inside Europe’s Boardrooms and Inside Australia’s Boardrooms
HOSTS:
Dottie Schindlinger, VP of Thought Leadership, Diligent; Meghan Day, Director of Directors’ Experience, Diligent
In this Episode:
- What were the top governance moments of 2019? WeWork and Theranos make an appearance—could we be seeing the end of “founder knows best”?—as does Boeing’s 737 Max and the importance of challenging assumptions.
- How are perspectives on purpose and ESG evolving? Blackrock’s CEO letter is inspiring 41% of U.S. directors and 65% of non-U.S. directors to take more action, according to Diligent Institute research. Yet the actual impact is TBD.
- What topics will ascend on board agendas in 2020? Predictions include climate change, committees, and geopolitical uncertainty, including Brexit and the U.S. elections.
Summary:
The “Larry letter” on corporate purpose. A Listeria-initiated court decision that’s raising the bar for risk management across industries. “Cousin Greg” and a possible WeWork movie bringing corporate boards into pop culture. In the words of Schindlinger, “2019 was a governance year for the record books.”
It’s time to look back—and look ahead. In this special holiday episode, Schindlinger and Day are joined by TK Kerstetter, host of Inside America’s Boardrooms, for 2019 highlights and predictions.
1. What were the top governance moments of 2019?
The evolving story of the Boeing 737 Max disaster ranks high on the list. Referencing governance discussions from the Salzburg Global Seminar, Schindlinger talks about how Boeing leadership assumed safety, “but it was always about workers’ safety and not about the safety and quality of the products,” she points out. “That was literally never in question.”
Furthermore, “There was a lot of conversation about speed to market: How quickly can we get this out? How quickly can we beat our competitors and make sure we get those key contracts that will corner the marketplace?” Such a “safety-is-a-given” culture resulted in engineers’ red flags being disregarded or buried—until it was too late.
“[The Boeing 737 Max disaster] raises a lot of questions about how boards can do a better job of questioning assumptions, particularly when there are these sacred cows.”
– Dottie Schindlinger, VP of Thought Leadership, Diligent
“It’s such an important lesson in terms of the connection between corporate culture and boardroom culture, making sure there are enough questions being asked at the right moments in the right way to make sure assumptions are being challenged so that things can go well,” Schindlinger says.
Another highlight from 2019: CEOs behaving badly—and what this means for boards. For Schindlinger, the implosion of WeWork reminds her of her Episode 12 interview with Jennifer Chapman on the traits of narcissistic CEOs. “It was almost word for word out of her research.” Day extends the conversation to Uber and Facebook. With supervoting and dual class structures, are boards providing too much power to one person? Will we be seeing the end of—or at least changes around—“founder knows best?”
For Kerstetter, a 2019 development that didn’t get enough publicity was a recent decision by the Delaware Supreme Court. They raised the bar of board responsibility beyond the Caremark Doctrine, which requires directors to make more informed decisions. In the case, Listeria-tainted ice cream manufactured by Blue Bell Creameries killed three people.
Even though Blue Bell’s board had a risk management process in place, the court determined that this was not sufficient and established a new standard for board responsibility for the safety of the products a company manufactures.
“It’s not just good enough to have a policy in place if you’re not going to actively check upon and participate in that policy. This said, to directors you can’t just go through the motions. You have to be an active participant, and there is a bar for failure to monitor.”
– TK Kerstetter, host of Inside America’s Boardrooms
2. How are perspectives on purpose and ESG evolving?
Risk management is good for business. When the Diligent Institute looked at 14 companies that had experienced an incident, they were 35% underperforming against industry averages a year later, with $490 billion in shareholder value lost across the group.
The needle is moving on ESG and business value as well. 2019 was the year of the “purpose letter” by Blackrock CEO Larry Fink, which prompted a Business Roundtable position, signed by hundreds of CEOs, committing to the big picture of sustainability.
How is this commitment playing out in practice? According to Diligent Institute research, 81% of U.S. directors and 92% of non-U.S. directors agree with the objectives of the “Larry letter.” Yet only 41% of U.S. directors and 65% of non-U.S. directors say they’re inspired take more action.
Kerstetter points out that 41% and 65% are significant numbers. Many companies may think they’re already meeting sustainability and ESG objectives. And research also shows an increase in long-term planning and the rise of climate change as a board priority.
“There are some things happening that are really changing out there. It’s yet to be determined what this means from a business operations standpoint,” says Schindlinger.
“The test [of purpose/ESG goals] is going to come in a down cycle when companies aren’t keeping pace with their competitors. Can a CEO say that profits aren’t the most important thing?”
– TK Kerstetter, host of Inside America’s Boardrooms
3. What topics will ascend on board agendas in 2020?
As areas like safety, compliance, cyber, public policy, risk and more get more complicated—and mission-critical—expect boards to create more committees to tackle them, Kerstetter predicts. Likewise, environmental concerns will to rise to the fore. In a 2019 World Economic Forum report asking about risk, climate change was the top concern, bypassing issues like cybersecurity and terrorism for the first time.
“It impacts every part of the business: supply chain, workforce, the availability of goods,” says Schindlinger. “Everything is being impacted by changes in the planet.”
Kerstetter cites political uncertainty as another thing to watch. “That speaks volumes on why Larry Fink put out his letter and gave it that theme. He sort of feels that governments aren’t doing it so it’s up to the people and businesses,” he says.
“In light of the political climate, I think there’s a groundswell of employees willing to speak out if their organization is going against their personal views.”
– Meghan Day, Director of Directors’ Experience, Diligent
As people from Hong Kong to Google headquarters make their beliefs known, look for the possibility of increased employee representation on boards. For instance, Microsoft shareholders just voted on a resolution to add an employee to its board. “It was shot down, but I think we’re going to start to see more and more of that,” Day says.
“Expect to see a lot of things changing in 2020,” Schindlinger adds.
Also in this episode: Schindlinger and Day talk “Succession”—“Is this the first time a proxy battle has played out over an episode of television?” Day wonders. Kersetter gives his holiday reading recommendations: the 2019 research by the Diligent Institute. “Well founded, good reports. Definitely worth a read.”
