New NACD Survey Highlights Strategy and Risk Challenges Facing Directors and Boards

As always, the recently released Public Company Governance Survey by the (US) National Association of Corporate Directors is a thought-provoking read.

Given Britten Coyne Partners’ focus on helping clients better anticipate, more accurately assess, and adapt in time to emerging threats (whether they are called strategic, disruptive, or existential risks), a few findings stood out.

(1) “Sixty-eight percent of directors report that their company can no longer count on extending its historical strategy over the next five years.” One hopes that this conclusion resulted from constructive board engagement with their management team in previous years, that challenged the continuing validity of the assumptions underlying current strategy, and thus triggered a deeper search for possible new threats and opportunities that has subsequently driven the design of new strategies and risk management processes.

(2) “Directors identified growing business model disruptions (52%) and a slowing global economy (51%) as the top trends most likely to impact their organizations over the next 12 months.” In our experience, it was possible to anticipate and assess these emerging threats long before now, and thus to time the exercise of options to adapt in time to the dangers posed by these and other emerging threats. Companies that are just now starting this process will likely struggle as the time before developing threats reach a critical threshold may be shorter than the time required to effectively adapt to them. In our work with clients, we call this the "Safety Margin."

(3) “Boards hear about risk largely from the CEO and CFO.” However, “just 56% of directors believe the risk information they receive allows their board to draw the right conclusions…Information asymmetry – the gap between what the board knows and what management knows – remains a challenge for boards.” For this very reason — and the risk blindness information asymmetry can cause — we help clients to put in place strategic risk management and governance processes that explicitly incorporate a variety of different internal and external perspectives to improve forecasting accuracy.

(4) The NACD notes that, “backward-looking risk information or information that is focused on well-known risks must be balanced with forward-looking risk reports that allow directors to peek around corners to understand emerging threats.” This aligns not only with our own experience, but also with findings from a recent EY survey of directors and CEOs, which found that “current Enterprise Risk Management processes are considered effective in assessing traditional risks, but not as effective in assessing and managing emerging and atypical risks. To address this issue, leading boards are integrating external perspectives and independent data into their [risk management processes] to expand their scope, promote fresh thinking, and challenge internal biases.”

(5) It was worrying to see in the NACD survey that over the next year, “61% of directors want to improve their board’s core oversight over strategy development, and 63% want to improve it over strategy execution.” In light of the consensus at the recently concluded World Economic Forum that we are entering a period of much higher uncertainty than has been the case over the past decade, many directors must wish that the enhanced oversight processes they desire were already in place.

(6) Finally, the NACD report also noted that, “board leaders can drive strategic board renewal by ensuring that the skills of directors in the boardroom correspond to the evolving needs of the organization.” For this reason, board members reported that director education was one of the top areas where additional time needed to be spent. In addition to consulting, Britten Coyne provides clients with a range of education offerings to help them substantially improve their capacity for anticipating, assessing, and adapting to emerging threats.

In sum, our overall conclusion after reading the NACD survey is that most directors have sensed that disruptive changes in technology, the environment, the economy, national security, society, politics, and financial markets are interacting to create more complexity, more uncertainty, and a far different set of challenges than their boards have faced in the past decade.

As the pace of these changes continues to accelerate, boards must strengthen directors' strategic risk management skills while simultaneously improving their organizations' governance and management processes if they are to successfully anticipate, assess, and adapt to the new threats they will face in the 2020s.

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