What Canada’s boards will be thinking about in coming year
Turbulent times are certain to continue
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.
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.
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.
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.
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.
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.