Directors dig in to consider, workforce, strategy and ESG
“Awareness” is the watchword among board members going into 2024. Experience has demonstrated that a reactive approach places boards at a disadvantage, potentially resulting in significant harm to their companies. However, proactively pursuing successful strategic outcomes, which can navigate the company through or around risky situations, is not an easy thing unless the board makes a commitment to include vigilance and awareness into key principles.
During a recent conversation at the National Association of Corporate Directors’ Leading Minds of Governance Event, Grant Thornton National Managing Partner for Audit Services Janet Malzone joined other featured experts to discuss the challenges that directors are thinking about today.
Over the past few years, companies experienced the ultimate unanticipated black swan event of a global pandemic and faced significant challenges coming out of the lockdown, including the Great Resignation, the continued intense competition for talent, a dramatic increase in labor costs and reshaping of how and where work gets done. But now, with the impacts of the COVID-19 lockdown behind us, stakeholders and regulators are less likely to be accommodating for lagging outcomes.
“It’s a ‘no more excuses’ environment. We are well past those events. Now the focus is firmly on ‘what are you doing today, and how are you going forward?’” Malzone said.
This trend holds true across all industries. Boards that acknowledge this shift are actively enhancing awareness and equipping their organizations to take action on today’s issues and be well prepared for the future. This proactive shift pertains to many board-level issues, including the ESG journey, workforce issues, and risk management.
Changes in the workforce: Are you aware of how shifts affect culture and corporate health?
When addressing workforce issues, boards traditionally were focused mainly on CEO succession planning. While overseeing this transition plan remains a top priority, it’s no longer the sole human resource matter discussed in the board room. Day-to-day talent development is typically the responsibility of management, but directors should be well-informed about their company’s talent approach and its links to long-term strategy.
For example, all companies want to retain their most talented and productive employees. But in many instances, these high performers are rewarded with more work. The board can encourage an approach to work/life balance that supports retention if they are aware of high turnover among these employees.
“At Grant Thornton, we tackled this issue with a group of top performers at the middle level who had among the highest hours and highest ratings but were a little low on other goals. Over the course of a year of receiving feedback and coaching to help bring them into better balance, their hours are more in line with the expected level and all other indicators are up,” Malzone said. “We are excited to offer this program to a new group this year.”
Managing risk and recognizing warning signs: Is ERM well integrated with strategy?
Companies can significantly enhance their performance and risk management simply by being aware of how well integrated their enterprise risk management (ERM) systems are with the corporate strategy.
Consider a scenario where a company has a growth strategy, to double the size of its business over five years. That means the company is going to need more headcount and new technology to support the growth, both of which introduce risks. If other barriers arise and the company can’t meet its strategic goals, what will happen? Companies that have linked ERM to strategy have improved their visibility into the “what ifs” and can react in a more timely and appropriate way.
Malzone recommends these steps:
- Ensure you understand the structure. Do you talk about strategic matters without talking about risks? Is there a risk list that doesn’t tie to strategy or is focused primarily on financial risk? If so, an ERM health check is a good idea.
- Create a risk matrix based on a refreshed risk tolerance assessment. Assess your risk appetite, and using a common language within a standard framework, define the risks that are too severe for your risk appetite, which are within your tolerance, and how they tie to your overall strategy.
- Review your board diversity and skills matrix against the risk matrix. Do you have directors who can provide expertise that matches the biggest risks spelled out in the matrix? Recent research conducted by The Conference Board indicate a decline in board members with international experience and business strategy experience from 2018 to 2021, while experience in business operations and finance increased. It’s likely that the board needs to be looking for expertise in other skill areas, such as legal, marketing, accounting/auditing, international operations, and strategic growth. Having this awareness will be helpful in succession planning.
ESG: Do you see the full picture of ESG communications?
“Boards will want to ask a lot of questions about the process for releasing ESG messages publicly. Make sure any data or statements are run through finance first.”
In the realm of ESG (environmental, social and governance) oversight, management and the board need to be confident that all public ESG-related information is linked to create a consistent message and is tied to strategy.
For example, before a company announces its commitment to zero emissions, has the board seen the strategic plan to achieve the goal — whether it’s by shutting down a plant, changing locations, or other means? Is the financial team aware of the goal and have they weighed in on how to achieve it?
“I recommend that boards make sure they are aware of the public statements surrounding ESG to ensure consistency and alignment to strategy,” Malzone said. “They will want to ask a lot of questions.”
Boards are charged with providing oversight that helps management identify and manage risks in ways that protect the company from harm. As the environment continues to stabilize in a post-pandemic world, unexpected events will still create risks that require fast, appropriate action. Directors who maintain a heightened awareness of current and emerging risks will be best positioned to provide the needed guidance.
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