What Canada’s boards will be think­ing about in com­ing year

Tur­bu­lent times are cer­tain to con­tinue

National Post (Latest Edition) - - FINANCIAL POST - Rahul K. Bhardwa j Fi­nan­cial Post Rahul K. Bhard­waj is pres­i­dent and CEO of the In­sti­tute of Cor­po­rate Di­rec­tors.

If these were or­di­nary times, Canada’s boards of di­rec­tors might be for­given for feel­ing rel­a­tively com­fort­able head­ing into 2018. Af­ter all, dur­ing our sesqui­cen­ten­nial, the mar­kets out­per­formed ex­pec­ta­tions and we led the G7 in eco­nomic growth. But, of course, these times are any­thing but or­di­nary. The trade deals we have come to rely on, for ex­am­ple, are in flux and tech­no­log­i­cal ad­vance­ment is chang­ing how com­pa­nies op­er­ate and cre­ate value.

The com­ing year is likely to be equally as tur­bu­lent, and a suite of gov­er­nance chal­lenges has emerged that will dom­i­nate the agen­das of many boards in 2018.

BOARD OVER­SIGHT OF COR­PO­RATE CUL­TURE

Last Jan­uary, who would have thought that ad­dress­ing cor­po­rate cul­ture would be a top ac­tion item for di­rec­tors.

The past num­ber of weeks have shone a light on cul­tures where ha­rass­ment and bul­ly­ing un­der­mine the trust that stake­hold­ers, in­clud­ing in­vestors, em­ploy­ees and cus­tomers place in cor­po­rate lead­er­ship. Di­rec­tors can ex­pect more ques­tions about the ap­pro­pri­ate role of the board in over­see­ing work­place cul­ture. In a world of in­stant com­mu­ni­ca­tion, bad cul­tures can de­stroy brands and rep­u­ta­tions; boards will need to fo­cus on how cor- po­rate cul­ture fits into their risk- man­age­ment f rame­works.

A re­cent sur­vey of In­sti­tute of Cor­po­rate Di­rec­tors mem­bers in­di­cates that 56 per cent of di­rec­tors say their strate­gic work­load has in­creased. Given this, 2018 is a good time to re­flect on how Peter Drucker’s adage that “cul­ture eats strat­egy for break­fast” can serve to un­der­mine all that ex­tra ef­fort.

DI­VER­SITY — AND NOT JUST THE KIND YOU’RE THINK­ING OF

The con­ver­sa­tions around gen­der di­ver­sity con­tin­ued to build mo­men­tum in 2017, even if the at­ten­dant re­sults were less im­pres­sive. In 2018 though, this dis­cus­sion will be­come even more ur­gent as proxy ad­vi­sory firms like ISS and Glass Lewis have in­cluded gen­der di­ver­sity in their vot­ing guide­lines. Start­ing in 2019, di­rec­tors on boards with no women may start to re­ceive neg­a­tive votes.

Boards will also need to start look­ing at di­ver­sity through a broader lens. Changes pro­posed to the Canada Busi­ness Cor­po­ra­tions Act will re­quire dis­clo­sure of di­ver­sity poli­cies that en­com­pass eth­nic­ity, In­dige­nous sta­tus, dis­abil­ity and oth­ers. The im­por­tance of broader di­ver­sity aligns with what di­rec­tors be­lieve will re­in­force com­pet­i­tive­ness: 82 per cent be­lieve that di­ver­sity at se­nior lev­els will en­cour­age in­no­va­tion.

NAFTA

The on­go­ing drama of the NAFTA rene­go­ti­a­tion is also a gov­er­nance chal­lenge for di­rec­tors look­ing to cocre­ate strat­egy in an un­cer­tain en­vi­ron­ment. While less than half of ICD mem­bers are con­fi­dent that the con­ti­nen­tal trade deal will be suc­cess­fully rene­go­ti­ated, 76 per cent are con­fi­dent that Canada can be suc­cess­ful out­side of the ar­range­ment. For this to be true though, di­rec­tors will need to be cre­ative in their strate­gic ap­proaches and open- minded to new risks and op­por­tu­ni­ties in 2018.

SHARE­HOLDER DEMOC­RACY

The very means by which cor­po­rate boards are elected will be an area of fo­cus in 2018. Last year two Cana­dian bank boards of­fered s hare­hold­ers a vote on whether to al­low greater ac­cess to the proxy. Only one of these was suc­cess­ful but other boards will surely feel pres­sure to fol­low suit. Re­gard­less of the up­take on proxy ac­cess, changes to the Canada Busi­ness Cor­po­ra­tions Act mean that boards of all fed­er­ally- in­cor­po­rated pub­lic com­pa­nies will be sub­ject to ma­jor­ity vot­ing, giv­ing share­hold­ers a big­ger stick with which to ex­press any dis­plea­sure they may have with di­rec­tors.

SUS­TAIN­ABIL­ITY DIS­CLO­SURE

Even with the U. S. leav­ing the Paris Agree­ment, don’t ex­pect talks on cli­mate change dis­clo­sure to wane in 2018. In Canada, reg­u­la­tors are look­ing into whether en­hanced dis­clo­sure is re­quired and large in­sti­tu­tional in­vestors are strongly en­cour­ag­ing is­suers to re­port on these risks.

Last year, ma­jor oil firms saw share­holder pro­pos­als re­quir­ing them to dis­close their cli­mate change risks and the global trend is to­ward more — not less — trans­parency around cli- mate dis­clo­sure. Given this, di­rec­tors will need to demon­strate that their or­ga­ni­za­tions un­der­stand and have planned for the chal­lenges posed by cli­mate change.

ICD re­search shows that, so far, 31 per cent of boards have fac­tored cli­mate change into their strate­gic plan­ning. Ex­pect this num­ber to go up as out­side pres­sure from share­hold­ers and reg­u­la­tors builds.

TECH­NOL­OGY

The com­ing year will also see more tech­no­log­i­cal break­throughs and the con­tin­ued dis­rup­tion of tra­di­tional in­dus­tries. Cy­ber­se­cu­rity con­cerns, the evo­lu­tion of ar­ti­fi­cial in­tel­li­gence, dis­placed work­forces and blockchain are all re­mak­ing the world. Boards will need to be ag­ile in the face of this con­tin­u­ous dis­rup­tion. Di­rec­tors will need to demon­strate lead­er­ship to en­sure their firms cap­i­tal­ize on in­no­va­tion. The fail­ure to do so would be dev­as­tat­ing: 42 per cent of ICD mem­bers say that with­out sig­nif­i­cant in­no­va­tion, their or­ga­ni­za­tions would de­cline or no longer be vi­able in the next 10 years.

While it is im­pos­si­ble to pre­dict with com­plete pre­ci­sion what a new year may bring (who could have fore­seen the events of 2017?), ac­cel­er­ated change and dis­rup­tion are the new nor­mal. In the face of a more com­plex en­vi­ron­ment, the need for di­rec­tors to be knowl­edge­able, en­gaged, eth­i­cal and pre­pared has be­come, and will con­tinue to be, all the more crit­i­cal.

SEAN KILPATRICK / THE CANA­DIAN PRESS FILES

Mex­ico’s Econ­omy Sec­re­tary Ilde­fonso Gua­jardo Vil­lar­real, left, For­eign Af­fairs Min­is­ter Chrys­tia Free­land and U. S. trade rep­re­sen­ta­tive Robert E. Lighthizer. The NAFTA rene­go­ti­a­tion is also a gov­er­nance chal­lenge for di­rec­tors.

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