Guiding principles for today’s boards of directors

Change has been the one constant for companies since 2020, and the wave of new developments is challenging corporate boards to consider a fresh approach.

The Future of the American Board, a new report from the National Association of Corporate Directors (NACD), offers a framework for boards looking for answers. Sue Cole, chair of the NACD, joins the Journal of Accountancy podcast to discuss how the NACD’s framework can be a resource for boards tasked with navigating an ever-changing corporate landscape.

What you’ll learn from this episode:

• How asking the right questions can steer boards of all shapes and sizes toward their goals.
• Why today’s boards must adapt and be agile in a world that demands more than financial results.
• The importance of continuous improvement, anchored by a well-defined corporate purpose.
• Why the report didn’t set specific age or term limits for board members.
• An example of how one of the report’s 10 guiding principles can be put into practice.

Play the episode below or read the edited transcript:

— To comment on this episode or to suggest an idea for another episode, contact Neil Amato at Neil.Amato@aicpa-cima.com.

Transcript:

Neil Amato: Welcome to the Journal of Accountancy podcast. This is Neil Amato. The National Association of Corporate Directors, or NACD, has recently released a report designed to help boards perform better in a high-volatility economic environment. NACD Chair Sue Cole is joining me to discuss their report on today’s episode. First, Sue, welcome to the Journal of Accountancy podcast.

Sue Cole: Thank you, Neil, and thanks for your interest in this report.

Amato: Sue, the NACD has put out a new report. It’s called The Future of the American Board. What are the main points of emphasis you think in the report, and why is now the time to have this report?

Cole: Let’s talk about the now. The world has changed radically over the last two, two-and-a-half years. We’ve seen a disruption in the supply chain. We’ve seen inflation at levels that are incredibly high. We’ve seen a massive change in the labor force and how talent is structured. All of these changes have come at a time that caused us to ask the question, what can we do different in the boardroom to guide leaders into the future?

The commission was comprised of very seasoned directors from both public and private companies, as well as from notable governance practitioners from the investor field, from regulatory, as well as academic. We all wanted this report to be pragmatic, something that directors could use now and in the future to guide and direct. What we did was we took the principles that had been developed in 2008 following the financial crisis. We studied those principles. We added to them.

One of the most important things we did, I believe, was to add the implications of each principle and also state questions that directors could use in the boardroom to spur discussion about these various issues. I feel like that when boards use these questions, different companies and different boards will definitely come out and draw different conclusions from the questions.

That’s important because today’s work is no longer check the block and have a checklist of things that can be done. The questions will spur discussion about what makes sense for this particular company and what they need to do in terms of leading as a result of these changing conditions in the world.

Amato: To me, there was plenty of talk even in 2018, 2019 about volatility in the business environment. But, obviously, then along came 2020, which no one really could have been prepared for. How does the report guide boards in being more prepared for those events that lead to major upheaval?

Cole: You’re right. I don’t think anyone was prepared for the kinds of things that we saw at the beginning of 2020. There have been so many changes. We want to win. It’s important to win to make companies sustainable into the future. The stakes are high. These things are in motion. We couldn’t predict ultimate impact, but we did recognize that boards had to adapt and they had to be agile. We also knew that they were going to have more scrutiny, and that scrutiny would intensify as decisions were made on both the indirect as well as direct basis.

Today, it’s not just about the financial results. It’s about delivering outcomes to all stakeholders, demanding a new set of prefinancial metrics and reporting expectations. Now, board stewardship is not just about the financial results, but it’s also got to include environmental, social, talent, and culture issues that directly link to sustainable performance and cannot be ignored. Because what you see is the potential of risk to reputational damage, to the loss of customers, to investors, and to employees is just too great.

Amato: Hearing about all that, it seems that one of the key themes just in this whole topic about boards is that work on the corporate board is not getting any easier. What are the areas in which board members are seeking new knowledge or guidance?

Cole: You’re right. The work has become more complex and more demanding than ever. I personally don’t believe, nor did our commission believe, that we could be prescriptive in what had to be done. That’s why we pose the questions that boards could ask to tailor their own answers to these questions. It’s not business as usual, and one size does not fit all.

What we have to do is have a continuous improvement mindset that, again, does not involve checking blocks on a checklist, but making sure we’re tailoring the answers to fit the company. It’s about corporate purpose. It’s about what the company is trying to do, the value that they are adding. There were the issues that the committee had the most discussion about that included strategy, risk, culture, and talent. All of these issues are important to every single boardroom. We think that the work that we did in this report will help answer questions there.

Amato: You mentioned that phrase, “corporate purpose,” in that last answer, and that’s one of the report’s principles, I guess actually the first one listed. What does that phrase, “corporate purpose,” mean to you?

Cole: Corporate purpose to me is the company’s reason for being. It’s a problem the company solves or the need that it fills. When you fully understand the corporate purpose, then it will inform decisions around strategy and risk. The boards have got to watch out for the disconnects that can occur between intention and execution in fulfilling the purpose of a company.

In my opinion, the purpose takes a long-term view of success and keeps governance focused on culture and talent over short-term gains. The board has full control over defining what long-term purpose means to them.

Amato: Now, overall, in the report, there are 10 principles listed. I don’t know if you want to go through all of them, but would you like to address some of the principles and why you think they’re important?

Cole: Let’s not go through all 10 because I really want people to read this report and get out of it what is it important for them. Let’s talk about the example of renomination of directors. We’ve got to make sure that board composition is aligned with the changing business needs of the company. We have to rethink what’s appropriate in terms of age or term limits.

In the report, we did not say there should be an age limit of X or term limits of Y because we think that’s really important for each board to decide what makes sense for them. But what we did say is every individual board members should be reevaluated and not just expected to be reelected.

It’s important to know that that person continues to add value in the boardroom and what they’re doing is in line with what the company needs in terms of its future and its strategy. I think what we’re advising is that board members are not automatically reelected, but there’s a great deal of thought put into what the company needs in terms of the future.

Amato: As you said, you want people to read the report. We will include that report link in the show notes for this episode. Sue, we really appreciate you being on today. Anything you’d like to add in closing?

Cole: The only thing I would add is I believe this work is really important for the sustainability of companies and their success over time. I do hope people will read it, and we’ll use the questions to tailor what they need to do in the boardroom. As I said before, one size doesn’t fit all. This will take a great deal of discussion on the part of directors. But I think it will be really worthwhile to do this.

Amato: Again, that was Sue Cole. We appreciate her being on the podcast. This is Neil Amato, your host. Thank you for listening.