Directors & Boards recently convened The Directors Roundtables where top corporate board members and experts, put their heads together to come up with strategies and best practices for some the biggest challenges facing the nation's board rooms today. The Roundtables use hypothetical board situations as launching points for in-depth discussion among participants.
Here's an excerpt of the topics and a glimpse at the takeaways that came out of the roundtable discussions:
Transparency at the Top: Improving Board/Management Team Information Flows
Roundtable participants considered an activist investor’s case for creating value through leadership changes, improved governance and operational efficiencies at a $10 billion publicly traded industrial company. Discussions centered on potential responses, information flows and board/management team relationships.
• A gift. The activist investor’s plan is a gift to the board, whether they agree with it or not. It will typically include thoughtful hypotheses and analysis from an outside perspective. Regardless of the action taken on the plan, it provides valuable input to the board’s deliberations.
• Horizon. Boards need to understand the investment horizon of the activist investor, as it will shape how activists behave as directors.
• Positive disruption. Strong boards help companies foster a culture that embraces disruption and sees it as a positive opportunity.
• Next level. Inviting multiple management team members to present at board meetings can help succession planning and leaders develop. It ensures that the board engages with the next levels of the organization and not only with the CEO and management team.
• Informal relationships. Board members cannot neglect building informal relationships with management team members, as they are critical to building trust.
• Fresh thinking. Board diversity requirements and tenure limits can help ensure objectivity and fresh perspectives when coupled with an effective program for new director onboarding and mentoring.
The Board’s Role in Preparing For and Responding To C-Suite Sexual Harassment Allegations
Roundtable participants considered a case where allegations of sexual impropriety were made against a popular and effective CEO. The allegations were brought to the board’s attention through private conversations, rather than from an employee issuing a complaint through the company’s harassment reporting procedures.
During discussions, directors identified that it is important for the board to take steps in advance to have a plan in place for responding to situations involving sexual harassment allegations against C-Suite executives. Once a plan is in place, there are also best practices the board should follow if and when it puts the plan into action.
• Prepare in advance: There are benefits to planning ahead. Having a “harassment allegation response plan” in place before a crisis occurs involving a high-level executive allows for a quicker response — leading to better solutions, and reducing the risk of litigation.
• Review committee responsibilities and written policies. The board should decide in advance who will handle investigation decision-making when the time comes. For some boards, this will involve assigning the task to an existing committee, such as a governance committee or audit committee. For other boards, it may be appropriate to create a new committee specifically for responding to issues surrounding allegations of impropriety against high-level executives.
It is also advisable to review board and company policies, and revise as needed to ensure they outline investigation procedures in a clear and concise manner.
• Develop short-list of outside counsel with investigation expertise. The board should develop a short list of pre-approved outside counsel with sexual harassment investigation expertise. If the board already has a short-list of approved outside counsel, it should reevaluate the list to identify which firms have this expertise. If a new firm has to be added to the list, ask them to run a conflicts check in advance, to the extent practicable, so that they can jump into action when the time comes.
• Consider extra protections. In addition to having legally required policies and procedures in place, consider going beyond what the law requires. For example, some companies are engaging third party service providers to maintain 24-hour employee complaint hotlines.
• Set tone from the top. In addition to leading by example by not engaging in any inappropriate behavior, members of the board should use their positions to coach senior executives on how to avoid creating unintended liability. It is important that the board remind C-suite executives that reactionary behavior is discouraged, and that they must remain inclusive with respect to all employees. For example, senior executives should not exclude women from business or mentorship opportunities out of a fear of being accused of harassment — e.g. an executive who only has one-on-one meetings with men, but refuses to do so with women, creates potential discrimination liability for the company.
• Put the plan into action. When an allegation is brought to light, it is important to act swiftly. By taking the steps above, the board will be ready to put its emergency response plan into action. A first step should be to contact outside counsel and brief them on the facts so that they can start the investigation. The board should also consider whether a leave of absence for the accused, or change in reporting structure, is appropriate for the duration of the investigation.
• Communicate with those involved, and protect potential victims. From the start, when speaking with a potential victim of inappropriate behavior, or an individual reporting such conduct, demonstrate appreciation for bringing claim to light and let them know that a prompt investigation is taking place. Also, remind the individual that board and company policy prohibit retaliation against anyone who raises these types of issues. When communicatingwith the accused executive, be direct concerning the fact that the board takes the allegations seriously, but also emphasize that the investigation process was developed with due process rights in mind. After the investigation concludes, be sure to communicate the outcome with the individuals who were the subject of the investigation, so that they are not left wondering what happened. Be sure to explain any steps being taken in response, and again remind the individuals about the company’s policies prohibiting retaliation.
• Maintain external confidentiality. While it is important to communicate with the individuals that are part of the investigation, caution should be taken to avoid sharing details of the investigation, or investigation results, with anyone other than essential parties. For example, the board should not ask outside counsel to share copies of any report it develops with uninvolved company officials — as it may waive work-product or attorney-client privilege between outside counsel andthe board. Additionally, it is important to respect and protect the privacy of the individuals involved in the investigation.
• Remain flexible as to remedial steps. Work closely with outside counsel to determine how to act on the information generated by the investigation. Keep in mind that there is not only one outcome (termination) for employees accused of sexual impropriety. Obviously, if the results of the investigation are clear that unwanted and improper conduct occurred, immediate action should be taken. Depending on the severity of the conduct, it may even be appropriate to contact law enforcement. If the investigation is inconclusive, it may still be safest to consider a change in reporting structure and to implement additional harassment prevention training. Even if the allegations are not sustained by the investigation, it is important that any response is not carried out in a way that undermines existing protections and policies, or discourages employees from reporting wrongful misconduct in the future.
• Review process and outcome, solicit feedback, and seek to improve. After each investigation, take time to evaluate how things went. Consider what went right that can be amplified, and where any breakdowns occurred that can be improved. For example, if an allegation did not come to light through the reporting channels the company has in place — e.g. the victim only felt comfortable confiding in a friend about the details, who then “leaked” the information to the board — steps should be taken to figure out why the individual did not feel comfortable using the company’s designated reporting channels, and evaluating what can be done to remove that obstacle. Other sets of facts may suggest that workplace culture can be improved by implementing new harassment prevention training or policies, or by developing better employee monitoring and feedback so that issues come to light in a more expedient manner.
Creating an Effective Board Evaluation Process
There are several dynamics in play on the Greater Bank & Trust board that have created a poor environment for evaluating the contributions of directors, refreshing the board’s composition, and learning from the evaluation results.
The bank’s board members are mostly in their 60s and 70s. There is no one on the board familiar with cybersecurity or digital transformation, which some of the merged directors said was a factor in selling their banks (i.e., they saw big changes coming in this industry that their banks weren’t prepared for). At the last board meeting, one of the directors from a recently merged banksuggested that it might be prudent to getan outside facilitator to conduct the nextevaluation to provide the most independentand confidential assessment of the board’sand members’ contribution. The nom/gov chair countered with, “Why would we spend the money on outside advisers when we have an established process that works?” Many of the directors who favored the idea looked to the chairman and CEO hoping that he would intercede and provide further support on why an outside facilitator might be beneficial, but the CEO chose to let the nom/gov chair call the shots on the evaluation process.
• Investor pressures. Investors are placing greater emphasis on board evaluations, requesting that boards share how their board assessment process drives alignment of strategy, composition, and board priorities.
• Trouble taking action. Boards have struggled to take action on board evaluation results, a trend that PwC’s Annual Corporate Directors Survey suggests is moving in the wrong direction. In 2017, 46% of directors said that someone in their board should be replaced, while 21% said two or more members of their board should be replaced.
• Board culture. The greatest hindrance to effective evaluations today is the fact that the assessment process is uncomfortable and can pose a threat to board collegiality. Too many boards approach board evaluations as a compliance exercise — as a distraction from more important board agenda items. Without a board culture that supports healthy tension and a genuine desire to measure and improve performance, directors can expect little value out of their evaluation process.
• Making a successful evaluation. There are three important ingredients to a successful evaluation.
-- Goals and objectives. What does your board hope to accomplish with your board evaluation process? Defining your goals upfront will help your board decide the appropriate evaluation format, frequency, and facilitator.
-- Director buy-in. Commitment to the board evaluation process stems from a healthy board culture — one that balances collegiality with the willingness to challenge the viewpoints of management and fellow directors. This aspect of board culture must be clearly communicated during the onboarding process, where all incoming directors are made aware of the board’s commitment to performance measurement.
-- Strong board leadership. Board leadership (whether the board chair, lead director, or head of the nom/gov committee) should take ownership of the board evaluation process. They should not only make incoming directors aware of the board’s commitment to evaluations, but also ensure the board is using the evaluation process to drive action — and have the tough conversations when necessary.