Study: Industry Disruption Has Directors Most Concerned

The Amazon Effect, among other disruptive forces, has board members on the ropes.

By Eve Tahmincioglu

Directors of major public companies are questioning their strategic muscle in the face of industry disruptions that range from Amazon’s jump into the grocery space to Google’s self-driving car.

The top trend expected to have the greatest impact on corporations next year is “significant industry change,” according to the findings of a National Association of Corporate Directors’ (NACD) 2017–2018 NACD Public Company Governance Survey released Thursday.

“It’s not surprising given the turbulence of the environment,” says Friso Van der Oord, NACD’s director of research. “Certain boards recognize that today’s environment is really quite different than it was three or four years ago.”

Industry change was discovered to be what most kept directors up at night, but following closely behind were business-model disruption, changing global conditions and cybersecurity threats, according to the survey, which polled nearly 600 corporate directors representing 520 public companies.

Given all these disruptions, epitomized by the Amazon effect -- named for the online retailer's dominance in disparate industries -- are directors up to the task of changing with the times?

“There are always leaders and laggards,” Van der Oord explains.

Some boards, he continues, are in tune with disruption and look to industry pivots that include buying startups, or investing in new technologies, instead of hoarding cash.

Other boards, he adds, take a “review and concur mentality” when it comes to management decisions and aren’t taking the opportunity to be actively engaged.

Indeed, the NACD survey found 71% of directors indicated they need to do a better job understanding the “risks and opportunities that affect performance and drive strategic choices over the next 12 months.”

But making strategic involvement a priority may be difficult without concerted effort. According to the study, 51% of directors said they didn’t have enough time during board meeting to give strategic thinking it’s due. That’s up from 44% in the previous year.

Two other areas where directors are questioning whether their companies are ready to take on the business changes are cybersecurity and global economic conditions:

  •       Only 37% (down from 42% last year) of board respondents feel “confident or very confident” that their company is properly secured against a cyber attack.
  •       And, while changing global economic conditions and the uncertain political environment are weighing on boards’ minds, more than half of board respondents (54%) are confident or very confident that management can appropriately address growing geopolitical risks to their business, while 61% of directors have confidence that management can navigate rapidly shifting global economic conditions.

What do directors need to do?

They need to become “proactive learners,” stresses Van der Oord.

“Spend time inside your business and industry to understand the impact of those changes,” he explains. It’s not just about reading the Wall Street Journal or attending conferences, directors need to spend time on the factory floor and with R&D folks, and they also need to go abroad to see what’s happening at a company globally.

Professional development, he adds, should be a key feature of board evaluations, though that doesn’t mean directors should become experts in technology, for example. Most directors, he maintains, “have the expertise -- the skill set -- to recognize patterns and trends that most management teams may not accurately perceive. Activate that skill set.”

To see the whole study, go here.

Here are some additional key findings:

Shareholder activism exacerbates the short-term performance pressure felt by boards.

The impact of short-term performance pressure continues to be acutely felt by boards and management teams. Consistent with last year’s findings, 74% of respondents report that management’s focus on long-term strategic goals has been compromised by pressure to deliver short-term results. Respondents whose companies received a direct approach from an activist investor reported even more pressure to deliver short-term results, undermining their focus on long-term value creation.

Board understanding of corporate culture doesn’t extend beyond the tone at the top.

Eighty-seven percent of directors report that they have a good understanding of their companies’ tone at the top, but only 35% of directors say they have a good understanding of the mood in the middle, and just 18% of them indicate they have a good grasp on the health of the culture at lower levels of the organization.

Boards want to improve CEO-succession planning practices in 2018.

Fifty-eight percent of directors indicate that improving CEO-succession planning is a critical board improvement priority for 2018, up from 47% last year. There was also a large increase in discussing CEO and executive team succession with institutional investors, from 8% of boards in 2016 to 19% this year.

 

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