Governance Leaders Discuss Diversity, Innovation as They Look to 2022

Reflecting on the past year and preparing for a new one filled with novel challenges regarding strategy; innovation; diversity, equity, and inclusion; and more, NACD gathered directors and governance experts last month to discuss the topics that are top of mind for boards.

The panel comprised Stephen Brown, senior advisor to the KPMG Board Leadership Center; Dorlisa K. Flur, a director at Sally Beauty Holdings; Claudia Fan Munce, a director at Best Buy Co., Bank of the West, Corelogic, the NACD Northern California Chapter, and Parity.org; Dan Mayfield, a partner at Farient Advisors; and Warren de Wied, a partner at Fried Frank.

Highlights from the Leading Minds of Governance virtual panel, moderated by NACD director of partner relations Lindsey Baker, are included below:

How can a board rethink its director recruitment strategy to attract the right mix of skills and diversity?

Dorlisa K. Flur: If I look at my public boards, there are two extremes to how we approach board recruitment. One uses what I would describe as an evergreen personal network. There’s a constant flow of names coming from board members, executives, professional services firms, etc. We’re always screening referrals and keeping a list based on expertise for when we have an opening.

The other extreme is using an industrialized search process, whether a search firm is involved or not. This approach starts with a multi-year view of board succession and defines the skills-based criteria that will be needed. Then we go out into the world looking for individuals that fit the immediate [specifications]. Either of these extremes requires the board of directors to have the intent to broaden the pool of candidates. It is easier to go out and find people that look like you. One of my boards officially adopted the Rooney rule to ensure we didn’t stop there.

Ultimately, building a diverse board requires looking at different talent pools. This requires you to seek out diverse registries online, feeders from universities or businesses that have a track record in developing diverse talent, search firms with broader reach, etc. Then—I can’t underscore this enough—there must be a welcoming environment when they join the board. Otherwise, it doesn’t matter what you’ve done [during recruitment].

What sorts of steps can a board take to help change diversity both on the board as well as beyond the board?

Claudia Fan Munce: There is a group dynamic aspect to it, but what we’re looking at is the individual courage to try to influence that group dynamic. I think that a diverse board is almost a chicken-and-egg situation. If you have a diverse board, chances are you’ll have a very open, very welcoming environment. Boards need to appreciate that this is about us helping the company and that diverse perspectives are what we bring as a value-add as diverse board members.

I’m Chinese; I grew up in Brazil. Asking “dumb questions” was never really something that I was afraid of.... If you start with yourself and are able to reach across the table to ask questions about somebody’s comment, you start building that group dynamic that becomes very valuable, and you will see the pile-on effect.

One thing that is amazing is the caliber of people that you see around the boardroom table. It can become intimidating—you read [someone else’s] bio and think, “Wow, he is from that industry; should I even be making a comment about that when we have such an expert on the other side of the table?” You really have to take it on yourself that the reason you’re there is to help bring a level perspective and not just scan whatever is presented to you. With that, you start to develop that very open, very diverse encouragement around the table.

There’s been so much discussion around ESG [environmental, social, and governance issues] in the governance space, but there still seem to be a lot of questions. How can a board break down ESG oversight?

Stephen Brown: I call it the ESG jungle—there’s so much out there. I believe in not complicating things that are [already] complex. We have these three letters—ESG. Let’s focus on the “E” and “S”. We’ve always been focused on the “G” and a lot of times when people say “ESG,” the G is silent. The E is something that most people understand; if they didn’t understand it before they froze in Austin, Texas last year with that snowstorm, they get it now. It’s right in front of their faces. It’s the S that folks have trouble with.

To chop down the jungle, boards should know their three to five issues. What are the three to five environmental and social issues that truly, materially affect long-term enterprise value? Understand that, get alignment with the board and management on those things, and then you know where to start to drill down. But when there’s alignment on those issues, it becomes easier to hack through the jungle.

What have you found to be some of the best practices that directors can engage in to encourage innovation, and what useful tips and tricks do you have to share with us?

Dan Mayfield: The innovative boards that I work with are allocating more time to define, implement, and execute on strategy (that now includes all aspects of ESG) through collaboration with management. If you consider an agenda for most committee meetings, the committee, to cover a broad range of topics, must move through the agenda quickly, sometimes in 10- to 15-minute increments. There comes a point when directors should ask the right questions, which may include, “Are we dedicating enough time for management and the board or committee to have meaningful discussions around strategy?” at the right time. Because of the focus on talent and broad human capital needs across the organization, there is a growing imperative, especially since COVID, for more connection between board members and management on this topic. Innovative boards recognize this shift and spend more time considering the emotional, financial, and physical well-being of all employees. When I start working with boards and management, questions that I ask include: How would you describe the dynamic between leadership and the board? How are you working with management to meet the needs of the organization and ensure that there is a meaningful plan in place to attract, retain and motivate talent? What next steps should we consider to ensure that we link talent development to compensation? At the end of the day, innovative boards are asking the right questions, working more closely with management, considering talent more broadly, and working hard to align the interests of the company with the interests of all stakeholders including shareholders.

Let’s look ahead to 2022. How can directors manage all the various demands placed on them?

Warren de Wied: I’ve got a mantra. It’s not original, and it’s not terribly insightful, but think about vision and supervision. There are two fundamental parts of the job. One is setting a course for the company; the other is oversight and monitoring. If lawyers are asked to put together a summary of corporate governance requirements, they may produce 100-plus pages of materials, between summarizing New York Stock Exchange or Nasdaq rules, SEC [US Securities and Exchange Commission] requirements, proxy advisory firm policies, and policies of major institutional investors, and these regimes are evolving all the time. The list of things for which directors are expected to take responsibility grows every year. It’s easy to get lost in these things.

Looking ahead, directors will have to think a lot about political risk in the United States. We’re at a point where the divide between people on different areas of the political sphere is more palpable than ever. We have a seesawing between regulation and deregulation. Obviously, the risk goes in a more problematic direction than simply shifts in regulatory policy, but the 2022 political risks are going to escalate into 2023 and 2024. Another key area is technology. It’s a pretty significant thing that Facebook is rebranding itself and moving toward a metaverse. Today, you can attend a concert inside Fortnite. Virtual technology has potential for dramatic expansion. What does that imply for the way companies operate? For a board member, these areas—technological and political risks, along with global economic issues already under scrutiny such as supply chain and human capital challenges—are just some of the areas to focus on.