Where can proactive directors shine?

As the pace of change accelerates, leaders will face more challenges they must address quickly. As a director, you know you’re responsible for providing oversight to help management make decisions responsibly. With your individual expertise and the collective wisdom of your board colleagues, you provide crucial perspective, insight and guidance. You act as a catalyst for leadership when risks arise.

But the most valuable directors are proactive. Seeing potential risks and helping the organization prepare for, mitigate, or even prevent the challenges they may create is one of the most important roles you play.

According to the principles set by The Business Roundtable, “the board approves corporate strategies that are intended to build sustainable long-term value; selects a chief executive officer (CEO); oversees the CEO and senior management in operating the company’s business, including allocating capital for long-term growth and assessing and managing risks; and sets the ‘tone at the top’ for ethical conduct.”

Strong director relationships with the CEO and executive team are key to fulfilling your risk-related responsibilities. You are a sounding board that management can rely on. Should a new issue arise – fraud at the management level, for example – prior knowledge about the people and the operation can make your job easier. Tread firmly, but with empathy; you need sufficient involvement to act effectively on the company’s behalf.

Here are three areas where challenges may arise – and some ideas for proactive directors to consider.

1. Challenge: Cybersecurity threats aren’t going away.

Private companies face an increasing risk to cybersecurity, and attacks are more costly than ever. “The average cost of a data breach reached an all-time high in 2023 of USD 4.45 million,” according to IBM Security’s Cost of a Data Breach report Your organization’s data may be a tempting target for increasingly sophisticated hackers.

What are they after? Depends on your business.

• In the healthcare industry, where breaches are the most costly, stolen records can provide access to prescriptions or medical programs.
• In the financial industry, distributed denial-of-service (DDoS) attacks have disrupted stock exchanges and currency exchanges, with hackers demanding increasingly high ransom amounts to restore service.
• Manufacturing is the most commonly targeted industry; attacks disrupt production, steal intellectual property, or capture client data.

Boards must stay vigilant about this risk – it’s constantly evolving. Are robust cybersecurity measures in place to protect sensitive data and maintain stakeholder trust? Is there a cybersecurity expert on your board? Regular training updates can help directors and management recognize red flags and address issues quickly.

2. Challenge: Can you attract the right people to your boardroom?

Attracting and retaining top talent is an ongoing challenge for leaders, and the board is no exception. Natalie Smyth, principal at ClearBridge Compensation Group, notes that “the biggest challenge overall is the attraction and retention of key talent, whether it’s for the management team or the board. You’re competing with public companies that may be including equity in the compensation plan. That’s more difficult for private companies to do.”

Even if your company is attractive to quality candidates, how can you know who to target?

Many boards take the easy route: interviewing friends of existing directors or management. Avoid that trap – you’ll be adding more like-minded people who may fit culturally but may not fill gaps or elevate your game.

Diversity on the board is key – and not just demographic diversity. In Wharton@Work’s October 2023 edition, professor Mae McDonnell says, “Diversity of all kinds increases the depth and breadth of discussions and monitoring. When you have people approaching the same question from different perspectives, you’re more likely to see the problematic angles of an issue that you wouldn’t have otherwise seen. When people share backgrounds and even demographic identities, they tend to coalesce around things that they have in common instead of thinking about things from a more complex vantage.”

The NACD’s recent survey highlights the issue, particularly in private companies. Among public company respondents, 18 percent cited the lack of diverse perspectives as a “significant barrier to sustaining an effective board culture,” but in private companies it was much higher: 27 percent. “Among the private companies served by responding board members, investor-owned organization boards have some of the lowest levels of diversity with 19 percent of these board seats held by women and 16 percent held by racially or ethnically diverse directors.”

To achieve more diversity in perspectives, nominating committee members should assess board needs. Are directors diverse in gender, race, and expertise? Do they look at problems from a multi-dimensional perspective and provide pragmatic solutions? Gain agreement on gaps within the current board’s talents; identify risks that new expertise can help mitigate. Then consider outreach to experts in those fields using social media searches or recruitment firms to identify potential members with those capabilities.

3. Challenge: ESG isn’t just for large public companies.

Even if your industry or your business size doesn’t require environmental, social and governance (ESG) action and reporting, ignoring it risks important relationships. While ESG has recently become more politicized and controversial, the NACD survey reports, “55 percent of private company board respondents continue to believe that ESG programs create long-term value at their companies. However, only 30 percent of respondents say that ESG issues have increased in priority.”

Despite recent backlash about the over-use of sustainability as an investment strategy, related concerns remain. Your stakeholders – employees, investors, customers, suppliers and leaders in your community – care about the impact of their decisions on the environment; they make purchase or partnership or career decisions with diversity and equity in mind. Private companies are increasingly scrutinized for their environmental and social practices. Integrating sustainable and responsible business practices is a topic boards need to address.

Companies that see ESG as a growth priority (rather than a compliance burden) are reaping the benefits, according to a recent McKinsey survey. Impacts can include employee attraction and retention, customer purchases, and partnerships with other organizations. Have you heard about climate quitting? “In the same way that eco-conscious Gen Z consumers make purchases based on a brand’s environmental, social, and governance (ESG) claims, some Gen Zers may also make employment decisions based on their personal sustainability beliefs.”

Consider making ESG a regular agenda item at your board meetings. If you’re not sure how it affects your company, bring in an outside expert to discuss it. Even if there’s initial resistance, these conversations could lead to important action plans that may benefit your business – and the planet as well.

Risks are everywhere; we’ve highlighted three that should be on your radar.  Others include IT governance, regulatory compliance, supply chain disruptions, and artificial intelligence.  If you’re not sure which risks your board should prioritize, reach out to discuss a customized risk assessment that can help protect and enhance stakeholder and enterprise value.

Glenn Davis is a principal emeritus with Kaufman Rossin and a director in the firm’s risk advisory services department. He has served on both public and private company boards and specializes in providing compliance and consulting services to companies and their directors. He can be reached at gdavis@kaufmanrossin.com

Janet Kyle Altman is a principal and Chief Marketing Officer for Kaufman Rossin. She is past chair for several non-profit boards and certified by Wharton Executive Education in Building Exceptional Boards. She can be reached at jaltman@kaufmanrossin.com.

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