For corporate directors, the new year is never a case of “out with the old and in with the new.” Last year’s risks, liabilities and duties don’t lapse. Instead, new issues come to the fore while old ones evolve into different and sometimes even more complex challenges.
Last year’s headline board issues — particularly governing through the NAFTA re-negotiations and overseeing corporate culture in the era of #MeToo — are as pressing as ever but, if anything, they are more multifaceted and are joined by other, equally important challenges.
And so it is that evolved risks from this past year and new and developing challenges will combine to dominate board agendas in the coming year.
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Managing political risk
There are four general elections in Canada scheduled for the coming year — three provincial polls and the federal vote in October. The fate of significant policy measures, most notably carbon taxation, lies in the outcomes of some of these. The NAFTA risk identified last year has morphed into a “meta-risk,” encompassing uncertain congressional approval and a trade diversification strategy suffering from a fraught political relationship with China.
When Canadian directors were asked in an ICD Director Lens survey before Christmas, almost half of respondents stated they felt that Canadian political stability will worsen over the next 2-5 years. The extreme pivoting within U.S. politics and the uncertain fate of Brexit will only add to this feeling of instability in 2019.
Overseeing corporate culture
For a number of firms last year, the Peter Drucker adage that “culture eats strategy for breakfast” could not have been more true. For some, bad culture simply ate through their organization altogether.
Just over a year ago infuriating stories of workplace sexual misconduct began to dominate global headlines. It became clear that boards of all organizations had an obligation to oversee healthy cultures and some were failing to do so. In fall 2017, 43 per cent of Canada’s directors identified harassment as a rising risk for their organization. A year later that number jumped to 60 per cent.
If last year was about coming to terms with their responsibilities, the focus for boards in 2019 will be on developing reporting and other mechanisms to better understand how they can enable fair and safe workplace cultures.
Culture is only one of a number of human capital issues on the minds of directors. For example, 71 per cent of Canada’s directors surveyed say their boards have discussed or have developed a strategy to address workplace health and wellness, including mental health and almost half had done so in relation to the implications of legal cannabis. Expect this trend to continue into 2019.
But boards will need to think about other human capital issues this year (and for the foreseeable future) as more companies look to strengthen their competitiveness through automation and AI implementation. Some 80 per cent of directors surveyed say their boards have discussed or taken action on applying advanced technology in their organization, including automating current functions but only forty-five per cent say they’ve planned or discussed retraining their workforce. This is a significant gap that directors and their management teams should start addressing in the coming year.
Not long ago, most boards viewed activist investors as interlopers out to make a quick buck. While in some cases that may still be true, many directors are now recognizing that activist voices can be a helpful strategic input.
Engaging with shareholders — and not only activists — will be a key theme in 2019. In fact, almost 90 per cent of directors surveyed believe that direct engagement with investors helps to build mutual trust and credibility. The advantages to boards are clear: Engagement allows directors to understand what opportunities their investors see in their stock, and to discuss sometimes contentious governance issues such as compensation or board composition decisions before they become true pain points.
As the boards of companies such as HBC, Crescent Point and Detour Gold discovered over the past few months, failing to prioritize transparent, progressive dialogue between directors and shareholders can have disagreeable consequences.
…and not just with investors
This year, proposed corporate governance rule changes in Australia that would have obligated public issuers to hold a “social license to operate” were met with fierce opposition from many market participants. The Australian Securities Exchange backed off but the proposal was more than just a one-off trial balloon. Elizabeth Warren’s Accountable Capitalism Act in the U.S. also made headlines and however one views the Trans Mountain saga, it was certainly a failure to achieve “social license” for that project that has gotten us into this situation.
In Canada, directors owe their duty to the corporation, which opens the door for boards to consider the impact of their decisions on other company stakeholders such as employees, the environment, Indigenous peoples, and others. Seventy-nine per cent of Canadian directors surveyed by the ICD this fall agree that a social license to operate is necessary for conducting business so expect boards to make the effort to better understand the priorities and concerns of an array of potentially impacted stakeholders.
Of course, these are not the only concerns for directors in 2019. Cybersecurity, evolutions in audit practices, diversity and composition all remain relevant and critical, which is a reminder that the challenges facing Canadian business are growing in scale and in complexity. Effective boards that apply hindsight, oversight and foresight are the best assets for companies navigating through the risks and opportunities of the new year.
Rahul Bhardwaj is President and CEO of the Institute of Corporate Directors.