No ‘silver bullet’ in battle for board effectiveness

BY Richard Summerfield

Board effectiveness has been a hot topic in recent years, following the catalyst of the financial crisis. However, for companies operating in today’s business environment, there is no catch-all solution to improving board performance, according to a new report from the Investment Association and EY.

The report, entitled 'Board Effectiveness: Continuing the Journey',  attempts to bring the notion of improving board efficacy into sharper focus. It suggests there is no ‘silver bullet’ to board effectiveness, and that companies must do all they can to improve their own boards on an individual basis. One of the key findings concerns the benefits of having regular discussions about the tenure of the company’s chief executive. This, according to the report, should be carried out not only when the firm is experiencing difficulties but also when the company’s outlook is more positive.

According to Andrew Hobbs, a partner at EY in the corporate governance and public policy space, noted that “Uncertainty is a new normal for businesses as they operate in an increasingly global and competitive environment. They are also facing closer shareholder, political and regulatory scrutiny. Given this context it has never been more important to discuss board effectiveness.“ However, making a board more effective is a journey without a destination. Issues such as board succession, CEO tenure and diversity require constant focus and attention, rather than being set tasks with an end date.

Respondents to the report’s questionnaire imparted their belief that companies and their CEOs should establish expectations on a CEO’s length of tenure at the time of appointment. Furthermore, companies should endeavour to develop a strong pipeline of potential boardroom talent further down the organisation. Board readiness is a key feature to future board effectiveness.

Helena Morrissey, chair of the Investment Association, commented that “investors have a pivotal role in working with companies to improve board effectiveness. Effective boards are essential to the long-term success and sustainability of companies and ultimately of the economy as a whole. This report provides practical discussion points to companies and investors to help them enhance their capacity to ensure that boards are effective and always open to improvement.”

Report: Board effectiveness – continuing the journey

SEC - companies cannot silence whistleblowers

BY Richard Summerfield

On 1 April, the Securities and Exchange Commission (SEC) announced its first ‘enforcement action’ regarding the use of what it deemed to be restrictive language in a confidentiality agreement.

The decision handed down by the SEC found that technology and engineering firm KBR Inc had violated whistleblower protection rule 21F-17, enacted under the Dodd-Frank Act. “By requiring its employees and former employees to sign confidentiality agreements imposing prenotification requirements before contacting the SEC, KBR potentially discouraged employees from reporting securities violations to us,” said Andrew Ceresney, the SEC’s enforcement director, in a statement announcing the enforcement action.

The confidentiality agreements KBR’s employees were required to sign were discovered as a result of a lawsuit brought against the firm. In the suit, Harry Barko, a former employee of the company, accused KBR and Halliburton of inflating the cost of a military supply contract for US bases in Iraq.

As a result of the enforcement action against it, KBR agreed to pay a fine of around $130,000 to settle the SEC’S investigation and has also agreed to amend its confidentiality agreements, a step which has been welcomed by the SEC. However KBR did not admit any wrongdoing as part of the settlement. Furthermore, the company was not found to have specifically prevented an employee from reporting fraud. Indeed the firm’s use of confidentiality agreements pre-dated the enactment of the SEC’s whistleblower protection rules.

In a statement, KBR’s chief executive officer, Stuart Bradie, noted that the “SEC’s order acknowledges that it is not aware of KBR having ever prevented anyone from reporting to the SEC, nor has the company taken any action to enforce the agreement, and that is because we have never done so.” Mr Bradie added, “We are pleased to have amicably resolved this matter and look forward to putting it behind us.”

Yet with this action, and with a number of other enforcement actions imminent, the SEC has once again reiterated that it is willing to diligently implement the whistleblower protections it has at its disposal.

News: SEC: Companies Cannot Stifle Whistleblowers in Confidentiality Agreements

Optimism varies among global CEOs, but slow economic growth expected in 2015

BY Fraser Tennant

CEOs are less optimistic about the prospects for global growth than they were one year ago, according to PwC’s new Annual Global CEO Survey.

The Survey, the 18th of its kind, conducted 1322 interviews with CEOs in 77 countries during the last quarter of 2014. Its key findings include: (i) 37 percent of CEOs think that global economic growth will improve in 2015, down from 44 percent the previous year; (ii) 17 percent of CEOs believe global economic growth will decline, more than twice as many as a year ago; and (iii) 44 percent of CEOs expect economic conditions to remain constant.

Broken down regionally, CEOs in Asia Pacific were found to the most optimistic about the global economy, with 45 percent expecting improvement. In the Middle East this figure was 44 percent and in North America, 37 percent. However, only 16 percent of CEOs in Central and Eastern Europe expect economic improvement.

Despite the overall declining outlook for the global economy, CEOs are confident about the prospects for their own company - 39 percent believe their company’s revenues will grow in the next 12 months.

“The world is facing significant challenges: economically, politically and socially," said Dennis M. Nally, chairman of PricewaterhouseCoopers International. “CEOs overall remain cautious in their near-term outlook for the worldwide economy, as well as for growth prospects for their own companies.

“While some mature markets like the US appear to be rebounding, others like the Eurozone continue to struggle. CEO confidence is down notably in oil-producing nations around the world as a result of plummeting crude oil prices. Russia CEOs, for example, were the most confident in last year's survey, but are the least confident this year.

“Finding the right strategic balance to sustain growth in this changing marketplace remains a challenge.”

Other concerns highlighted by CEOs include: the availability of key skills; over-regulation; fiscal deficits and debt burdens; geopolitical uncertainty; increasing taxes; cyber threats and the lack of data security; social instability; shifting consumer patterns; and the speed of technological change.

Report: A marketplace without boundaries? Responding to disruption

Collaboration and board engagement leads to business sustainability claims new research

BY Fraser Tennant

Companies that embrace collaboration and foster board engagement have a greater chance of achieving business sustainability, according to a new global research study.

The study, carried out for a sixth consecutive year by MIT Sloan Management Review (MIT SMR), the Boston Consulting Group (BCG) and the UN Global Compact, surveyed more than 3,795 executives and managers from 113 countries about the sustainability challenges they faced.

 “While collaboration is not yet the norm, among those who are doing it, we are increasingly seeing a focus on transformational, strategic results”, said David Kiron, executive editor of MIT SMR and co-author of the study. “More than half of reported collaborations aspire to fundamentally change the market in which the business operates, so sustainability efforts are much less likely to be discrete projects and much more likely to engage a company’s entire ecosystem—from suppliers and customers to governments and academic institutions.”

The study’s key findings include: (i) 61 percent of executives whose companies participated in sustainability-related partnerships view these collaborations as quite or very successful; and (ii) 90 percent of respondents recognise the importance of sustainability collaboration but only 47 percent reported that their companies are actively collaborating.

Focusing on board engagement as a driver of sustainability success, the study found that 86 percent of respondents felt that company boards should play a significant role in driving their company’s sustainability efforts. However, just 42 percent considered their own boards to be at least moderately engaged with the sustainability agenda.

“We identified several ways to overcome the barriers to board participation," said co-author Knut Haanaes, a Geneva-based senior partner at BCG. “They include establishing a broader vision of the board as steward of all stakeholders and managers of risk versus the traditional maximising only of shareholder financial value.”

Summing up the findings of the study, co-author Georg Kell, executive director of the UN Global Compact, said: “With commercial activities and investments reaching every corner of the earth, companies increasingly face complex uncertainties and risks related to social, environmental, and governance issues. Companies are starting to see that when they provide a collective voice, share risks, and pool resources, they can deliver transformative solutions that benefit both business and society.”

Report: Joining Forces: Collaboration and Leadership for Sustainability

2015 to bring uncertainty and optimism for largest UK companies suggests Deloitte survey

BY Fraser Tennant

Uncertainty over domestic policy as well as foreign economic and geopolitical risks are the biggest challenges facing the UK’s largest companies in 2015, according to a survey of chief financial officers (CFOs) carried out by Deloitte.

The survey, which features the views of 119 CFOs of FTSE 350 and other large private UK companies, also shows that, despite uncertainties, CFOs are confident as to the prospects for UK growth and business investment in 2015, with their businesses expected to see earnings rise by 2.9 percent. 

Carried out between 27 November and 15 December, Deloitte’s Q4 2014 CFO Survey highlights that: (i) 56 percent of CFOs say that now is a good time to take greater risk onto their balance sheets, down from a record reading of 71 percent in Q3 2014 but still well above the long-term average; (ii) 60 percent of CFOs enter 2015 with above normal, high or very high levels of uncertainty facing their businesses, up from a low of 49 percent in Q2 2014 but at the same level seen 12 months ago; and (iii) 88 percent of CFOs rate the UK as a “good” or “excellent” place to do business, with a quarter placing it in the top-tier of industrialised economies.

“The central challenges facing the UK’s largest companies as they enter 2015 are policy uncertainty at home and economic and geopolitical risks overseas," said Ian Stewart, chief economist at Deloitte. “Rising levels of uncertainty have caused a weakening of corporate risk appetite which, nonetheless, remains well above the long-term average.

“Concerns about policy change after May’s General Election have risen significantly and this is seen as the biggest risk facing UK business in 2015.  Deflation and weakness in the euro area is a growing concern and is now the second greatest business risk, followed by a UK referendum on EU membership and by emerging market weakness.

“This marks a big shift in thinking. Going into each year, from 2008 to 2013, CFOs’ main concern was the state of the UK economy. Now the risks are seen as lying elsewhere.” 

The Deloitte Q4 2014 CFO Survey is the 30th quarterly analysis of CFOs of major UK companies. It is the only survey concerning valuations, risk and financing which seeks the views of major financial players in the UK.

Report: The Deloitte CFO Survey: 2014 Q4