March 16, 2017 Is Your Board Prepared for Disruption?

By Bob McCutcheon and Tom Waller

Industrial products (IP) companies are facing tremendous challenges: massive shifts in global economic power and demographics, accelerating urbanization, climate change, resource scarcity, political uncertainty, and technological disruption. Companies and boards are responding by moving ahead with digitizing their traditional products, adopting new business models, and tapping into emerging technology to not only respond to customer needs, but also to optimize operations. To help deal with this level of disruption, companies need boards of directors that have a broad, global outlook, an understanding of technology, and specific and critical business skills (such as finance and HR).

A good way to begin to assess board readiness to deal with disruption is to ask two basic questions: Does our board have the right mix of expertise, experience, and diversity? If not, what can we do to refresh the board so that we can be more agile and flexible in our thinking? Below are some ideas of how to move ahead with refreshing your board:

Take a strategic approach and hire directors with the skills and experience to oversee the risks and opportunities of a transforming industry, which could include these attributes:

• Experience dealing with global markets since business is increasingly global
• Experience operating in both downturns and expansionary periods to deal with volatility
• Expertise in software and information and communications technology to enhance connectivity
• Knowledgeable about disruptive technologies to help with adoption of innovations
• Innovative and forward-thinking to deal with new problems and products
• Expertise in cybersecurity to help counter hacking and cyber theft
• Possess strong relationships with venture capital and private equity that can fund potential growth opportunities

Focus on diversity – of gender, ethnicity, race, experience, and skills – in thinking about board composition. It’s not easy to find people with the skills mentioned above – and they are in high demand across all industries. So manufacturers have to broaden their talent pool to search for the right skillsets. Typically, companies have looked to CEOs and CFOs to fill their ranks. But perhaps companies should consider other executives like chief innovation officers, chief information officers, and chief commercial officers, especially given the importance of technology and innovation, as well as looking within the military and large not-for-profits. They could also use executive search firms to find applicants, rather than relying on their own contacts, a practice that may not help you broaden your search for diverse talent.

Consider mandatory retirement and term limits to allow boards to be refreshed more frequently. Mandatory retirement, which is a widely held view commonly used by boards, will enable IP companies to alter the composition of their boards in keeping with new and changing needs. Currently, 67% of the industrial products peer group use the practice of mandatory retirement, compared to 73% of the S&P 500. On the other hand, the industrial products peer group is far ahead of its S&P 500 peers with 19% of companies adopting term limits compared to only 3% for the S&P 500. These percentages are still quite low, but we expect that to change, since many investors view term limits as a useful tool to refresh boards.

Look at board leadership structure as a way to inject new energy into a board. Typically, this means splitting the roles of the chair and CEO. This is currently a heavily underutilized strategy among our industrial products peer group: 70% have a combined chair and CEO role compared to 52% of its S&P 500 peers. This may become a bigger issue for institutional investors. Although it’s not always the case, companies that have an independent lead director may help satisfy proxy advisory firms and corporate governance advocates that typically support having an independent board chair.

For more discussion of how boards can function in today’s challenging environment, read our report on board composition.

Reprintedwith permission from PwC US Blogs.

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