Prioritizing board agendas for 2020 will require a balance of near-term focus, agility and long-term thinking. Based on our work with directors and business leaders, we’ve identified key issues for boards to consider as they refine their agendas to respond to the risks and opportunities in the year ahead. Below we highlight three areas for board focus.
Link boardroom discussions on strategy, risk and global disruption. Trade wars, Brexit, rising populism, cyberattacks on critical infrastructure, and the threat of military conflict in geopolitical hotspots — combined with an absence of global leadership and the deterioration of international governance — will continue to drive global volatility and uncertainty. As Eurasia Group’s Ian Bremmer noted, this environment “will require more investment in scenario planning and stress testing. It also means drawing up contingency plans to shorten supply chains, cutting long-term fixed costs and limiting business exposure to political relationships that have considerable potential to go south.”
Companies also need to address the potential disruption to business models posed by advances in digital technologies such as robotic process automation, machine learning and artificial intelligence. Are the company’s risk management processes adequate to address the speed and disruptive impact of these advances, and to assess the continuing validity of the assumptions that form the basis of the company’s strategy and business model?
Help management reassess the company’s processes for identifying risks and opportunities posed by disruption — geopolitical, technological and digital, social, and environmental — and their impact on long-term strategy. Is there an effective process to monitor changes in the external environment and provide early warning that strategy adjustments may be necessary? Help the company test strategic assumptions and keep sight of how the big picture is changing. Disruption, strategy and risk should be hardwired together in boardroom discussions.
Build boardroom talent around the company’s strategy and future needs. Boards are increasingly focused on aligning board composition with the company’s strategy, today and long term. Boardroom talent and diversity are also front and center for investors, regulators, and other stakeholders. That said, the world is changing markedly faster than boards.
According to Spencer Stuart’s 2019 U.S. Board Index, board turnover among S&P 500 companies remains low (0.88 new directors per board annually). Average director tenure (eight years) has changed little, while average director age rose slightly in the last decade (to 62.7). Progress on board diversity is constant but there is still a long way to go — 26% of S&P 500 directors are women, and 19% of directors in the top 200 of these companies are African American, Latino or Asian.
The increased level of investor engagement on this topic highlights frustration over the slow pace of change in boardrooms, and points to the central challenge with board composition: a changing business and risk landscape. Addressing competitive threats and business model disruption, technology innovations and digital changes, cyber risk and global volatility requires a proactive approach to board building and board diversity — of skills, experience, gender and race/ethnicity. As part of its Boardroom Accountability Project 3.0, the Office of the New York City Comptroller sent letters to 56 S&P 500 companies requesting that they “adopt a diversity search policy requiring that the initial lists of candidates from which new management-supported director nominees and chief executive officers are chosen include qualified female and racially/ethnically diverse candidates.”
Board composition and diversity should be a key area of board focus in 2020, as a topic for communications with the company’s institutional investors, enhanced disclosure in the company’s proxy, and positioning the board strategically for the future.
Understand how the company aligns profit and purpose. Corporate growth and shareholder return still require the essentials — managing key risks, innovating, capitalizing on new opportunities, and executing on strategy — but the context for corporate performance is changing quickly, and perhaps profoundly. Mounting societal issues — including jobs and wages, income inequality, climate and environmental issues, health and safety, and calls for greater diversity and inclusion, coupled with limited government solutions — continue to heighten expectations for corporations to help address gaps and rethink their responsibility to society.
Institutional investors have emphasized their expectations for companies to explain how they are addressing environmental, social and governance issues (ESG) in the context of long-term value creation. Employee and consumer activism on ESG is in its early stages but growing, and we continue to see shareholder proposals on these issues — particularly the “E” and the “S.” Echoing BlackRock CEO Laurence Fink’s focus on “linking purpose and profits,” the Business Roundtable (BRT) issued its “Statement on the Purpose of a Corporation,” with signatory CEOs committed “to lead their companies to benefit all stakeholders — customers, employees, suppliers, communities and shareholders.”
Regardless of whether they support the BRT statement, companies are likely to face increasing pressure to have a statement of purpose articulating their commitments to stakeholders and how stakeholder considerations factor into efforts to create long-term value. Boards play a key role in shaping the debate and setting the tone and expectations for linking purpose and profit. As stakeholder expectations for transparency and disclosure regarding these issues mount, boards should be intentional about how they engage with management on these issues.
For the complete list of topics for board agendas, as well as items for audit and nominating and governance committees to consider as they refine their 2020 agendas, visit kpmg.com/us/blc.
Patrick A. Lee is a Senior Advisor to the KPMG Board Leadership Center.