Risk mania has taken over the corporate governance discussion today but defining risk and figuring out how to deal with it can be dizzying for boards.
Dinesh Paliwal, the chief executive officer of Harman, a wholly owned subsidiary of Samsung Electronics Co., who serves on the boards of Bristol-Myers Squibb, Nestlé and Raytheon Company, has a simple definition that guides his work. Risk, he says, comes down to two core considerations — “performance and reputation.”
And at the top of the list of risk factors is environmental, social and governance issues (ESG), he stresses.
“The imperative to embrace high ESG standards and practices across a business is a shift that I wholeheartedly support and one that I think modern boards must keep in mind while making each and every decision,” he says. “Failing to do so could present the largest corporate risk of all.”
The following is a Q&A with Paliwal, in which he discusses risk from the perspectives of both a chief executive and director.
How would you define risk today, and what do you see as the biggest risk factor boards need to monitor?
There are multiple layers to corporate risk, all of which relate back to two core considerations: performance and reputation. In order to insulate risk when it comes to performance, companies must determine the material factors that have the greatest potential to impact their bottom line and guard against potential threats. Those risks might concern supply chain, operations, regulation or safety, just to name a few.
It's easy to see how risks related to performance also have the ability to impact a company's reputation amongst various stakeholders, including customers and employees, and vice versa. I saw a recent study from Axios, which laid out a framework to evaluate the overall reputation of an organization, and it resonated with me. It concluded that, in order to win over modern customers, executives must uphold three primary guideposts: character, affinity and trajectory. To build an organization that stakeholders can rally behind, leaders must communicate a clear vision, deliver consistent growth and constantly innovate — all initiatives that often begin in the boardroom.
How important is board governance and structure in evaluating risk?
I believe the greatest risk to any board is having too little expertise in the boardroom. Board composition is an incredibly important part of this equation. Diverse boards comprised of individuals with varied industry experience and unique personal perspectives excel at anticipating and addressing issues before they arise.
For instance, I bring my tech experience and engineering background to the boards of three large international companies — Nestlé, Bristol-Myers Squibb and Raytheon. While most people don't think of tech when they hear the names Nestlé and Bristol-Myers Squibb, my place on these boards demonstrates the modern reality that technology impacts all industries — whether through 5G, artificial intelligence and machine learning, data science, cybersecurity, automation or other tech developments that are on the cusp of transformation. Further, my own experiences, in living and working in six countries on four continents, required a broadening of my perspectives by actively seeking out and listening to the opinions of others who have different skill sets and backgrounds from my own.
The skills that are most crucial for any board change over time and should be constantly evaluated. When I took on the role of Harman CEO in 2007, for example, I knew that we needed to refresh the perspectives on the board, immediately and continuously. Before I joined, the board was composed of many friends and family of the former chairman. I knew that to effectively grow Harman, more global-minded and experienced board members would be needed to help guide Harman through a multi-year transformation from a hardware and components supplier to a software and digital experiences powerhouse.
One of my first acts as chairman and CEO was to bring in more diversity to the board with individuals representing different industries, functions, geographies and gender. I systematically and strategically reconstituted the board with leaders who were hungry for innovation and were unafraid to challenge me when necessary.
Can you share how you view ESG from a risk perspective?
Anything that has a material impact on a company's bottom line is a risk, and issues related to ESG are at the top of the list today. While this definition plays into boards' traditional fiduciary obligation to shareholders, that is no longer the only consideration. In the fall of 2019, I pledged support to the Business Roundtable's (BRT) new statement on the purpose of a corporation. This action, which was signed by more than 200 fellow CEOs, broadened the definition of the relevant stakeholders in today's modern business environment and how those stakeholders impact material risks.
The BRT addressed the need for a more inclusive definition of stakeholders. While investors and shareholders had previously been considered the primary and sometimes exclusive concern of a corporation, the new position places equal weight on creating value for customers, investing in employees, fostering diversity and inclusion, dealing fairly and ethically with suppliers, supporting the communities in which we work, and protecting the environment.
What does the “S” for social in ESG encompass and what have you focused on in particular in your work as an executive and as a board member when it comes to social risks?
The social factors encompassed by effective ESG practices include everything from good corporate citizenship to upholding a code of conduct and ethics to providing a safe and pleasant workplace.
The onus is on executives and boards to lead from the front when it comes to social integrity. By creating awareness and establishing guiding principles, we rally the entire employee base around a deeper mission. For me, it's nothing new to be committed to a larger purpose and to weigh economic, social, and environmental wellbeing alongside financial performance to assess corporate value. However, awareness is already growing in mainstream circles today, in direct response to a consumer public that is more socially conscious than ever before.
Leaders may set a company's culture, but it's up to employees to live and perpetuate it. That's why as both a CEO and board member, I've focused on uncovering the authentic corporate culture of each organization I've worked with. Upon joining Harman, for example, I saw that employees were eager to help develop and pioneer new technologies, and so I sought to empower them in a way that would accelerate innovation and offer opportunities for individual career growth. I created pathways for engineers to grow as managers. I broke down silos and flattened the hierarchy to encourage transparency, broaden empowerment, accelerate decision making and make sure that every single one of our 30,000+ employees understands our strategy and their role in it. I also put diversity and inclusion at the top of the agenda, by recruiting executives from other countries, increasing the number of women in leadership positions and investing in learning and development programs. While the job is never done, I'm proud of how far we have come in establishing a culture of open communication and collaboration that thrives today.
Are there different ways you approach risk and ESG on the different boards you sit on? Can you provide insights on how you approach it at Nestlé, Raytheon and Bristol-Myers Squibb?
Each industry has different material risks that are at the top of their ESG agenda and require custom-tailored solutions. For instance, as a food and drink company, Nestlé is focused on promoting recycling and developing sustainable packaging, which is why the company has been systematically reducing the weight of its packaging for decades, with a reduction of over 500 million kg to date. This not only reduces the amount of waste that ends up in landfills, it cuts down on the cost of materials and shipping and educates consumers about the importance of reducing, reusing and recycling waste in order to attain a more sustainable future.
At Raytheon, the geopolitical climate has a clear impact on performance. To improve risk visibility, Raytheon launched an ambitious enterprise risk management program designed to identify, internally communicate and address potential risks before they arise. This program, in conjunction with regular employee workshops and a formal risk board, reduces the time it takes to complete monthly risk reporting by an impressive 76%.
Bristol-Myers Squibb must constantly protect their customers by providing the highest quality products and ensuring product integrity. The company's stringent corporate policy on quality provides consumers and distributors with information necessary to ensure the safe use, transportation, storage and disposal of products by using tactics like regular audits and security technologies that combat counterfeit drugs.
How do you approach risk and ESG as the president and CEO of Harman? How does that differ from your approach and perspective as a board director?
Success requires a balance of performance, profits and purpose. To execute a successful ESG strategy, the key players at the top must evaluate the company's commitment to these factors from multiple perspectives. They must think like a CEO, a board member, an investor and an employee.
Regardless of my official title or responsibilities in any given situation, I always consider the issue at hand from multiple perspectives. When it comes to assessing risk, leaders must analyze through the lens of the experiences they've accumulated, while balancing the opinions of others who have different skill sets and backgrounds than their own. Hearing is passive but listening takes skill. Similarly, relying on your gut is effortless, but considering and weighing all outlooks — whether they're traditionally CEO or board mindsets — is challenging but incredibly rewarding.
You recently wrote about the talent war, and how you've asked your organization to “have a fresh look at our own employee value proposition. We learned many important lessons during the development process, including how to articulate values that represent a corporate culture we all want to contribute to by refining the external employer brand and creating an ongoing, transparent dialogue with employees.” What did you learn and what are some best practices boards should be focused on?
Refreshing Harman's employee value proposition was an incredibly valuable process, but let me be clear, by design it will never be complete. As we grow and change as a company, the values that are most inspirational for our employees will shift. According to Gallup, U.S. businesses are losing $1 trillion annually due to employee turnover, so it makes sense that boards are increasingly concerned with corporate culture both as a competitive advantage and as a risk.
One of the main takeaways from establishing our employee value proposition was to see how technology fuels Harman's talent strategy across borders. That's because one of the biggest challenges we face at Harman is ensuring we have the talent and leadership to realize our ambitious goals. In addition to offering constant connectivity to global colleagues through video calls and email, technology has enabled Harman to break down borders by making it easier to move people around to gain valuable global experiences.
Many companies still lack the people-centric philosophy and commitment to ongoing education that's necessary to drive employee engagement. At Harman, we use technology to put talent development at the top of our HR agenda and invest significant resources in the progress of our people. Our Hungry Tigers program combines the talents of some of our top employees to execute complex projects outside of their direct day-to-day responsibilities. This program has been so successful that we expanded it to include Hungry Cubs, aimed at reaching high-potential managers.
Harman recently launched the Leadership Experience Acceleration Program, an early-career rotational, designed to help our future innovators and leaders build strong networks and gain professional skill training at a variety of Harman offices around the world. We're also steadfast in our dedication to expand the Harman Women's Network, a group that educates and engages all employees  —  both women and men  —  in diversity and inclusion efforts. Today, Harman's chief financial officer and general counsel are women, as are the heads of corporate strategy, talent and engineering within our biggest business unit. It's a credit to their own achievement, but I bet each of them would agree their track was aided by strategic support, mentorship and advice across geographic boundaries, and even the technology we rely on to communicate and share ideas.
In your role as an executive and board member, you've been a vocal proponent of diversity. How does a lack of diversity become a risk issue in your mind?
Beyond the positive impact this has on corporate culture, according to McKinsey, companies in the top quartile for ethnic and racial diversity in management are 35% more likely to have financial returns above their industry average, and those in the top quartile for gender diversity are 15% more likely to have returns above average. That means that diverse teams actually perform better.
A lack of diversity can impact employee retention and productivity, thus damaging a company's bottom line. This is because innovation doesn't happen without new ideas, which tend to be more plentiful amidst a workforce that's comprised of employees from varied backgrounds. When diversity and inclusion is absent in a workplace, deliverables can be unintentionally biased, and employees operate with limited perspectives, which can lead to stunted growth. However, when diversity and inclusion initiatives are championed at the top and prioritized, final products are more likely to be thoughtful and creative. Role models come in all different packages and viewpoints and empathy can be broadened to encourage professional growth.
At the recent Harman Technology Forum, there was a strong emphasis on intelligent technologies. There has been a lot of concern about how things like artificial intelligence have impacted society today and how they will impact society into the future. Are there social-risk technological issues that have you worried and what are you doing in your work, whether in the boardroom or C-suite to deal with those?
Safety and security are always the top consideration. Safety and cybersecurity are fundamental pillars for smart mobility that must be baked into the connected experience — from the car to the office to the home to everywhere in between. Whether I'm guiding Harman product teams or evaluating strategy in my role as a director, my software philosophy is all about technology that protects our valued customers and mitigates risk for other stakeholders as well.
For example, [security is paramount when] the 5G-enabled vehicle communication technologies are poised to elevate road safety by enabling cars to communicate with their environments, including other vehicles, pedestrians, devices, traffic lights, road signs and even a smart home. Harman is also a member of the Auto-ISAC, a cyber information sharing organization. As part of the Auto-ISAC, Harman, along with automakers, technology suppliers, commercial vehicle manufactures and more, works collaboratively on cyber issues to reduce risk and become smarter and faster — together.
How does a board guide a journey toward understanding and really making an impact on ESG risk? For example, Bristol-Myers Squibb was recently named a top socially responsible dividend stock by Dividend Channel. According to Forbes, the designation signifies “a stock with above-average ‘‘DividendRank'' statistics including a strong 2.8% yield, as well as being recognized by prominent asset managers as being a socially responsible investment, through analysis of social and environmental criteria.” By contrast, Nestlé has been labeled a “plastic polluter” by Break Free From Plastic, according to MarketWatch. What role has the board played, if any, in shepherding the companies in the ESG direction? How can boards know they're making an ESG difference, getting beyond the ESG PR and hype?
This is the million-dollar question that many investment firms, independent researchers and ESG trade groups are working to solve. Because the SEC doesn't yet require companies to measure ESG factors, rating agencies like MSRI, the CDP and hundreds of others have developed their own metrics by which to measure ESG practices. I predict that, in this decade, the SEC will mandate a specific ESG measurement framework, but — in the meantime — a company's 10-K and proxy should include a robust discussion of the organization's ESG program, goals, execution and performance.
In my opinion, the best way to evaluate a company's progress on the ESG issues that are most material to their business is to use filings like 10-Ks to set ambitious performance goals and hold all stakeholders — including boards, leadership and employees — accountable for meeting them. It's also important to remember that this is a continuous process. There is no such thing as permanently achieving ESG goals. Companies who don't actively push for progress move backwards.
Looking ahead this year, what's got you the most concerned and the most excited/hopeful about when it comes to ESG?
We live in a really exciting time — we are part of a once-in-a-generation industrial transformation driven by 5G, AI, fully connected lives, advanced driver-assistance systems and soon autonomous driving. These technologies hold the promise of a more connected, sustainable world. However, they also come with foreseeable risks. Board members can and must provide management with the critical market visibility, competitive intelligence, industry knowledge and global mindset to anticipate and mitigate these risks so that the fourth industrial revolution has environmental, social and governance considerations baked into its core instead of bolted on as an afterthought.
For boards, the best way to mitigate risk is by establishing and holding themselves accountable for a clear, meaningful vision. A car's windshield is bigger than its rearview window because, while knowing what's behind you is important, the driver must know exactly where they're going in order to get there.