New Era Brings Familiar Challenges for Boards

May 07, 2017
Few would argue that the pace of change in the global economy is accelerating, thanks to innovation, new technology and the rejigging of traditional geopolitical alliances. North American boards must also contend with uncertainty as the United States weighs changes to tax and trade agreements.

In this environment, the role of the board becomes even more important in rethinking the organization’s strategy and risk management, and determining whether the required talent is in place to deal with what’s next.

Heading into the 2017 proxy season, EY talked to more than 50 institutional investors, investor associations and advisors about their corporate governance views and priorities. We learned that the pressure on boards to increase gender diversity is intensifying, as is the push for them to address climate concerns, foster a corporate culture of accountability and integrity, and better communicate long-term strategy. As institutional investors seek more communication and engagement, boards may need to reassess their own composition and structure.

In our discussions, members of the investment community stressed the importance of having diversity of talent, thought and tenure on the board that evolves over time in ways consistent with strategy. They also underscored the need for a nominating process that identifies the best-qualified candidates and a robust
assessment process that challenges the board’s status quo.

Progress toward gender diversity on Canadian boards has been slow despite the Canadian Securities Administrators’ “comply or explain” disclosure rule. Our research with Catalyst Canada last year found growing frustration with this slow pace of change. Investors want to see boards develop a culture of inclusion
that brings diverse director voices to bear in board discussions.

In an era of rapid strategic and technological change, the issue of board composition is likely to expand to encompass more than just gender diversity. Boards may need to consider whether changes are necessary to address a company’s evolving oversight needs, bring fresh perspectives and foster a dynamic boardroom culture. Many boards are already asking whether they have the diversity of perspectives, skills and knowledge to navigate this complex, competitive landscape. This may result in hiring outside experts or adding directors
with specialized expertise in particular areas, such as digital, cybersecurity and environmental matters.

To better address evolving challenges, boards are also increasingly creating committees with new areas of
focus, such as technology.

The management of environmental and social risks is recognized by a growing number of investors as linked to long-term financial risks, and the urgency around climate change in particular is increasing. There’s an expectation for boards to consider climate risks and opportunities as part of their strategic and capital-allocation decisions — and develop the competency needed to do so effectively.

Last fall, the Canadian government launched the Pan-Canadian Framework on Clean Growth and Climate Change, which outlined critical steps to expand the economy while reducing greenhouse gas emissions. As the momentum to transition to a low-carbon, climate-resilient economy rapidly accelerates, it is creating both long-term risks and opportunities requiring careful board attention.

From a governance perspective, prudent oversight of climate-change risk as well as compliance and
disclosure requirements is becoming more complicated and important. Boards will have to ensure their
organization is taking a long-term view on updating business models and managing shareholder expectations
about how these factors may affect investment holdings.

Boards are encouraged not to sit idle as global policymakers roll out climate-change frameworks. Risks and
opportunities must be quantified and shared to enable governments to make and adjust policy. Boards must also strive to find a way to balance the conversations between risks they can control, such as investments in technology, versus those they cannot control, such as government policy making.

Digital transformation remains a critical strategic imperative. It is changing the risk landscape, pushing
companies to reconsider their approach to risk. To sustain growth and performance in 2017 and beyond,
companies will need to apply a more balanced, agile and integrated approach to enterprise risk management. Boards will want to confirm that management gives appropriate consideration to managing risk-return tradeoffs to drive value creation.

Boards are recognizing the importance of analytics and big data, clearer risk ownership, and more comprehensive processes and operational models in risk management. Companies, too, are focusing more
on strategic, high-value risk areas while working to better utilize risk-management programs and technology
platforms to predict and manage preventable risks.

Similarly, boards are thinking more strategically about cybersecurity – going beyond understanding what
crown jewels need to be protected to focus on company-wide needs in assessing, responding to and mitigating a full range of digital technology risks, whether driven by external or internal, corporate or non-corporate actors. Leading boards are those that recognize that preparedness can be a critical advantage in the current competitive landscape.

The current U.S. legislative and regulatory environment is incredibly dynamic and is generating expectations of significant policy change. As a result, tax is growing in prominence as a topic for boards in 2017.

U.S. policymakers have been talking about tax reform proposals for the past few months, and this issue may
advance further this year. Companies have started to prepare for changes by modeling the potential effects of some of these tax proposals on their specific situations and planning in anticipation of reform.

Tactically, Canadian boards and audit committees will need to confirm that the appropriate project management plans are in place to address regulatory changes with consideration also given to new accounting standards, including revenue recognition. Strategically, the subject of tax reform will likely be a
standing agenda item at board meetings for the rest of the year.

In the event of the rollback of shareholder rights and governance regulations, investors will be closely watching how companies respond. Boards should be aware of how their actions may have an impact on
relationships with shareholders — many of whom have positioned themselves to serve as allies to companies that seek to deliver long-term, sustainable shareholder value.

In conclusion, 2017 will continue to present many opportunities and challenges for corporate boards. By prioritizing and asking the right questions, directors can be prepared to better understand the risks, identify the opportunities and successfully fulfill their oversight role. Continued geopolitical uncertainty has had an impact on the discussions taking place at the board level, but in many ways, the topics – risk, strategy, foresight and preparedness – remain the same.

Fred Clifford is a senior partner with Ernst & Young LLP and the Canadian leader of the financial accounting and business advisory services practice. He is a board member of the Scarborough and Rouge Hospital and is active in a variety of other charities.

Source: Director Journal (May/June 2017)