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As corporations are increasingly being held accountable for their actions and those of their employees, what should board and executive leadership be focusing on.
Michael Peregrine, Partner at McDermott Will & Emery and a leading expert in corporate governance law, discusses the top trends in corporate governance and their impact on decision making. Peregrine explores issues ranging from social and economic volatility to board turnover to compliance fatigue--all of which can affect a company’s ability to maintain a competitive advantage and meet overall compliance goals.
Greg Corombos: Hi, I'm Greg Corombos. So our guest this week on Expert Insights is Michael Peregrine. He's a partner in the Chicago office of the international law firm of McDermott, Will & Emery. He joins us to discuss some twists on the top governance trends for 2020. Earlier this year, he wrote a column on the subject for Forbes magazine. And Michael, thanks so much for being with us.
Michael Peregrine: Oh, my pleasure, Greg. Thank you.
GC: Well, in the column you mentioned ten different items. And we'll get to as many as we can in our time together here, but your first recommendation is to prepare for more volatility. In other words, how social, political or economic developments could impact your business from things ranging from impeachment to trade policy. And while businesses love certainty, volatility does happen. So what's the best way to prepare for that when you're not sure what form it's going to take?
MP: Boy, keeps your head on a swivel. I think if you're a board member to anticipate the possibility that things could go a lot of different ways. Perfect example is we saw like a year ago, about this time, and I suspect that we're going to see this year again, wide swings of the stock market based on, depending on whether, you know, where the impeachment proceedings go; if things pop up again in North Korea; or if people become disenchanted or thrilled with the trade agreement. I think the important thing is to expect the unexpected, be nimble. And as I said, keep your head on a swivel if you're a board member so that you are able to respond and support management in addressing issues that come up on your business as we see these wild swings in politics and the economy and other matters that could affect the company's line of business and the competitive environment.
GC: Quick follow up on that one, generally speaking, how nimble are boards these days to respond to things like that.
MP: I think each of you prepares board members for what's coming. In other words, if you prepare and say, hey, look out for this. They're quite capable of doing what's necessary. Committing the time, preparing, sitting in a swivel chair, so to speak. But the key is letting them know. It's like anything else. If you tell me what kind of questions you're going to ask or if you tell me what questions are going to be on the test, I have a better shot of preparing for it. And I think board members, by and large, can do the job that's necessary, but you've got to tell them what's coming.
GC: Events outside your business are one challenge, of course, but so are matters within your area of focus. And another area that you mentioned in the column is the need for a closer focus on innovation. And just keeping up with it these days can be hard enough, but how do you stay on top of all the various ways that innovation can impact the business? Not just in products and services, but in all sorts of different ways?
MP: Well, I think a couple of things in that regard because you're right, there can be innovation fatigue, disruption fatigue. It's like corporate compliance to a certain extent, Greg. I think board members and executives have grown over the years. Oh boy, we're seeing this again? Or cybersecurity. This topic again? They get inundated by consultants and lawyers and reporters on these stories, and they tend to, the senses tend to get dulled about this. So again, management can play a huge role in saying, here are the things that we think are critical for you. Here's a new development. Here's a new IPO that is coming up that you need to be aware of. This is a development on the horizon that we think is particularly interesting, and do not try and do the education yourself, to rely on the management's ability to identify the kinds of disruptive trends that are going to affect the business or the kind of innovations. It's always good to be able to relate disruption and innovation to your own experience and how disruptions have affected you. But management can take a major role in saying, look, we'd like you to focus on this. Did you read about X in the newspaper today? That's not really relevant to us. Did you read about why? Let's monitor that we want you to stay on top of that.
GC: Good advice. It's interesting. You mentioned compliance fatigue a moment ago because another area that you mentioned here is compliance, getting out of the various silos of compliance and making sure all compliance efforts are integrated. So how are most businesses doing on that front? And what are the best ways to kind of blow-up those silos and make sure everybody's on the same page?
MP: Well, it's interesting because I think that as often is the case with governance, current events tend to sharpen the parties' focus a little bit. And you know, right now as we're talking, the hot issue is the Major League Baseball scandal and the cultural and compliance issues related to that and the extraordinary compliance issues raised by who knew what, when and why, and who didn't tell what, where and why? So putting that issue aside, I think the most important thing in with respect to the kind of the compliance issue is to ask ourselves, is it working? And maybe you can look at the Astro situation and say, gee, if we had a similar situation where many of our employees or the key employees were aware of something that was potentially wrong, and didn't tell anybody about it, what does that say about our culture? What does that say about the willingness to contact compliance officers or the general counsel and ask questions? Why were the coaches who developed the scheme didn't have him and were concerned about the vague rules at the time of Major League Baseball? Why didn't they just simply ask the general counsel of the team and say, Hey, this is our interpretation. Looks like we can do this. What do you think? And when people do it, I think board members should be asking themselves if that can happen in a very sophisticated, successful, innovative business in baseball, could that happen in our organization as well? So that's kind of issue number one. I think the related issues and the one that I was focusing on in the Forbes piece was kind of moving past the traditional focus of compliance as a silo, as a kind of onto themselves within your organization, recognizing the need always for the compliance officer as well as the lawyer to have a futility bypass, pit the CEO to the board in case of a problem. But asking ourselves Chief, there are so many corporate officers who now have an impact or a touchpoint on risk. Are they talking to each other? Is it useful to our overall compliance goals? If the compliance officer deems himself or herself in a silo and is unwilling to engage with his or her fellow or risk officers for fear that that somehow takes their independence which I think is complete nonsense. We need to be encouraging a risk related officers to talk to share to coordinate. It's the old right-hand left-hand issue and in major organizations. You know, the Department of Justice has guidelines from last April, ask the question chief has the organization been evolving, innovating, taking into consideration what's going on the industry and tweaking the compliance plan as a result? I think the board should ask themselves, just generally and also in the wake of the Astros scandal. Are we up to date? Is our plans’ right hand talking with our legal left hand? Are the CISOs, are the internal auditors? Are the HR executives, are they talking? Is there a forum because they all affect risk and compliance? I think that that's going to be, I think the Astros scandal will help that discussion.
GC: And you also talk in your column about corporate accountability. It seems from your discussion of compliance that those are really almost like a hand in glove that and accountability pretty much are intertwined almost in one.
MP: I think one of the interesting things that we're seeing is the pendulum swinging back on the concept of corporations being more accountable for their actions and their employees. And I think the concept of reputational damage is becoming more clear once again, I will go to the Astros example but also to there's a foreign carmaker that sells a lot of cars in the United States is having some problems with that too. Boards have to recognize, and I think they are recognizing that the major assets of the organization is its reputation. And is it doing enough to protect that reputation from harm? Is the reputation of the Houston Astros or of this car company suffering as a result of the actions of individuals. The whole question of corporate accountability, doing the right thing, having policies and procedures that govern executive and board conduct is an issue that goes back to Sarbanes. It's an issue that remains is current in 2002 as it does today,
GC: We're talking with Michael Peregrine. His column on a twist on top ten governance trends for 2020 was found at forbes.com, came out on January 2. And, Michael, the complexion of boards themselves is also a point of focus in a number of these that you mentioned in the column. You highlight retooling structure and process and you mentioned changes that need to happen as high as the board of directors, what's the best way to make sure changes you make at the top accomplish what you actually need to happen and doesn't end up just being changed for the sake of change?
MP: Well, I think that the NACD did a wonderful job in highlighting in its recent Blue Ribbon Commission report the importance of boards asking themselves, hey, are our processes still working? Are we moving? Are we nimble enough? Are we capable of moving quickly enough? Or is there a decision-making process fast enough to allow us to confront what may be for many companies an entirely different operating reality? You mentioned innovation and disruption a few minutes ago, Greg, and I think that's the challenge. Boards must ask themselves, is the way we conduct our business, not just the composition of our board, but our decision-making process? Are the pressures we face from the outside and from our stakeholders? Are we able to respond to them in the same old way we've done for a long time? And my suggestion is as NACD is proposing, boy you gotta kick the tires and say, can we do something a little faster? Have we picked up barnacles on our decision-making process? Are we doing things the old way just out of laziness? How would we address it? Do we need to modernize our expertise and our behaviors in order to address the challenges to competitiveness that we face? So I think like the old saying is every five years, you really need to look at your corporate structure and see if it works. I think as NACD has suggested, given the significant changes in the operating reality of many companies right now, you have to ask, are our processes still working? Is it really reasonable for us to expect that it's going to take three months from start to finish to get ideas socialized within the board in time to vote? Or do we need to have a system where we can move and consider issues faster, and we can take action faster? I think that's the concern.
GC: You mentioned competitive pressure there, Michael. And you mentioned that in several of the trends in the column, which should come as no surprise because they're ratcheting up. We just talked about it in terms of innovation and disruption. But how much does that pressure raise the stakes for getting so many of these and other changes, right?
MP: I think the concept is, not that getting being right is secondary, but it's how you go about the process. This is very important. Unfortunately, we still have a vibrant business judgment rule, which basically says, you know, as long as you go about it in a good faith-informed approach, you know, we're not going to blowback on the board if you make a mistake. Now, that is not to suggest a casual or ineffective approach, but it reminds directors that they're capable of taking informed risks. That risk is not necessarily bad. But when we are, we focus a lot on the process. What are the issues that are coming before the board? What kind of information are we getting to the board? What discussion is head of the board? What's the focus on how this will address the needs and interests of our shareholders? The process is almost as important as the result. And from the perspective of the business judgment rule, which is so critical to board members exercising their duties in the context of a very volatile time period, that this satisfies the business judgment rule? Or going back and saying, are we sufficiently working with the board to address and satisfy that rule? I think that's critical, and it's an important role that the general counsel can play.
GC: Michael, another issue that you talked about, and it's right along the same lines here, is the emphasis on board refreshment. For many years a lot of boards didn't change much. Maybe there wasn't as much innovation going on. There probably was, but maybe not at the pace we're seeing now. And a lot of folks thought, well, these people know what's going on. They've got great institutional memory. And so the boards remain pretty static. That doesn't seem to be the case anymore on a growing basis. So talk about what you want to look for as you turn over these seats with more frequency than we used to.
MP: Well, we take a step back, and I think it's still the case if someone said, is there a best practice with respect to turnover, with refreshment issues, director, resignation, retirement age, things of that nature? I'd say I have to say no, there isn't. But, I think one of the most important yet least publicized developments of 2019 was the Conference Board's very important survey on board turnover within the major corporations in the United States. And the answer, of course, was not as much turnover as you think. Obviously there is a balance between familiarity with the business and experience as a board member and things of that nature. But I think the Conference Board report was a tremendous message to board...said, if you think that you are achieving the goals of diversity that you're expected to achieve, think again. Because our studies show that for a vast majority of the Fortune 500 and other leading companies, the turnover rate is so slow, that we're not opening up enough slots for new blood, diversity across the spectrum. We're just not creating the openings that we need to bring in new perspectives and that's a problem. I think that it continues to be an issue for nominating committees and boards and I think they're very, they're very well to look again at the Conference Board study because It's just an important message. We often think we'd like to pat ourselves on the back that we're doing a great job on bringing on women to our board. But the reality is, we're not. And in most cases, some of the most sophisticated companies have a very good track record in this regard. Some of this, when you go down to some of the smaller companies in the Fortune 500, just as the Conference Board said, not so well. So I think it's a rededication to refreshment and asking ourselves, are spots opening up on our board on a regular basis that would give us the opportunity to bring on someone with a different perspective.
GC: Real quickly, just about out of time here, Michael, but there might not be a lot of data on this since so many businesses and corporations have been slow to go down this road. But do we see from any sort of data, what the results are as a result of having more turnover and bringing in different perspectives and that sort of thing on the boards?
MP: I think you see, a wide variety of studies, reports, and surveys that indicate the competitive and consultative advantage of diversity across the spectrum on the board. You know, I've seen one or two studies that say it doesn't make a difference. But I think the overwhelming amount of data is, it's just the smart play from a variety of perspectives. And frankly, I wouldn't expect any other result. So I do think that there's data, lots of data shows that boards are increasing the number of women on, in their midst. I'm not sure that's the sole issue though, that the broader issue is okay, fine. How many, what's the general turnover? Are we getting fresh blood on our board? The data on that needs to continue.
GC: Michael fascinating. We didn't get to all ten. But we did pretty well. We'll, I encourage folks to check out a twist on top ten governance trends for 2020 at forbes.com. It was published on January 2 of 2020. And Michael, fantastic conversation. A lot for our listeners to chew on here. We appreciate it very much.
MP: Thank you very much. Nice to talk to you.
GC: Thank you, sir. Michael Peregrine is a partner in the Chicago office of the international law firm of McDermott, Will, and Emery. I'm Greg Corombos reporting for Expert Insights.
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