Issue link: https://digital.shearman.com/i/1512772
Shearman & Sterling LLP Evolving Notions of Board Effectiveness | 22 DEVELOPMENTS CHALLENGING BOARD EFFECTIVENESS Current developments facing public companies are presenting meaningful challenges to traditional approaches to board effectiveness. We examine a few of these developments, how they are impacting boards and how they may force an evolution of best practices for board effectiveness. 1. Challenge Critical Issues Involving Increasingly Complex Subject Matter Boards today are being faced with increasingly complex risks and opportunities that may dramatically impact their companies' businesses and the competitive and regulatory landscape. The pace of technological development continues to raise new considerations for boards to contend with, including evolving cybersecurity threats, risks and opportunities from artificial intelligence and the impact of social media on advertising and public perceptions of corporate behavior. At the same time, the uncertain impacts of climate change are forcing companies and boards to evaluate and prepare for physical and transition risks in their own and adjacent industries and requiring boards to wrestle with how to build a sustainable future while reducing emissions in line with established targets. Globalization of industries and the interconnection of international markets are presenting increasing challenges such as the impact of the COVID-19 pandemic (and potential similar pandemic risks in the future), war or political upheaval and economic turmoil in other markets and consequent economic impacts and supply chain dependency and disruption issues. These are of course just a few examples of the increasingly complex issues facing corporate boards as they navigate the currents of rapid change. Many of these challenges are complicated by political dimensions and the possibility of legislative or regulatory responses that may also impact the business. Responding to these challenges requires an informed and analytical board that either has the expertise, whether through its own members' experience or relies on management or other experts, to enable it to properly evaluate the risks, opportunities and challenges for a company and appropriately set a course for the most resilient future. Also, complex issues arise quickly and often require immediate action, which puts a premium on advance preparation to enable the board to adapt quickly to rapid developments and chart a course of action. All of this is unfolding against a backdrop of increasing SEC interest in having companies include specific disclosures in public reporting about board expertise in particular disciplines and the process used by the board and management to oversee and manage the risks relating to specific issues such as climate change and cybersecurity. This has put pressure on boards to reconsider their skillsets, even if it is completely unrealistic to assume a reasonably sized board can have a resident expert in every emerging issue facing companies today. Board Effectiveness Implications • Board Leadership and Composition • Boards need to be forward looking when evaluating the optimal skill sets for the board, considering how certain backgrounds and skillsets might make some of the anticipated challenges easier to respond to. Board chairs and lead directors need to drive agenda focus on key emerging risks and opportunities and find ways to prepare the board to address them before the crunch arrives. • Operational Implications • Boards need to ensure that they are receiving appropriate and effective communications about complex issues that must be considered, including concise and complete explanations of the issues, executive summaries that condense the meaningful concepts into a digestible basis for discussion and put them in context and, where appropriate, advice from outside experts. • Performance Evaluation and Improvement • Board continuing education may need to be a more demanding and specific regimen of online and in-person learning that keeps directors up to speed on the most important areas of complexity facing a company.