on the board agenda (8x6) eversion€¦ · demands to address environmental and social issues,...

On the 2020 board agendaBoard Leadership Center (India)

February 2020

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In the last decade, India witnessed considerable changes in the corporate governance landscape. In particular, there has been higher scrutiny from the regulatory bodies, combined with mountingresponsibilities for board members, complexregulatory matters, increased due diligence as exercised by boards, digital transformation, geopolitical disruptions and much more.

Prioritising board agendas will be particularlychallenging in 2020 as the game-changing implications of technological and digital innovation, growing demands to address environmental and social issues, scrutiny of corporate culture, investor expectations for greater board engagement, diversity and long-term performance all drive a sharper focus on positioning the company for the future. Combined with concerns about the economy — mounting trade tensions,resurging debt, a looming market correction and political gridlock in a number of countries, the year ahead will require careful balancing of near-term focus, agility and long-term thinking.

Drawing on insights from our work, we put forth eight aspects for boards to consider as part of their 2020 agenda vis-à-vis the challenges that lie ahead:

Introduction

© 2020 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

1. Link boardroom discussions on strategy, risk and global disruption2. Understand how the company aligns profit and purpose3. Build talent in the boardroom around the company’s strategy and future needs4. Help set the tone and closely monitor the culture throughout the organisation 5. Approach cybersecurity and data privacy holistically — as data governance6. Make CEO succession and talent development a priority7. Have a crisis response plan in place and practice it8. Be proactive in engaging with shareholders, including activists

Trade wars, rising populism, cyberattacks on critical infrastructure, and the threat of military conflict in geopolitical hotspots — combined with an absence of global leadership and the deterioration of international governance — will continue to drive global volatility and uncertainty.

Best practices for 2020

• Companies must address the potential disruption to business models posed by accelerating advances in digital technologies such as robotic process automation, machine learning, artificial intelligence and blockchain • Management must be aided in reassessing the company’s processes for identifying the risks and opportunities posed by disruption — geopolitical, technological and digital, social and environmental — and their impact on the company’s long-term strategy• Companies must test their strategic assumptions and keep sight of how the big picture is changing: connecting the dots, thinking differently, and staying agile and alert to what’s happening in the world• Disruption, strategy and risk should be hardwired together in ongoing boardroom discussions.

1. Link boardroom discussions on strategy, risk and global disruption

In the words of Ian Bremmer, Eurasia Group’s founder andpresident, ‘[this environment] will require more investment in scenario planning and stress testing. It also means drawing up contingency plans to shorten supply chains, cutting long-term fixed costs, and limiting business exposure topolitical relationships that have considerable potential to go south.’

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“© 2020 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.© 2020 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Are the company’s risk management processes adequate to address the speed and disruptive impact of advances of artificial intelligence, robotics, machine learning and blockchain?

Are the risk management processes effective to assess the continuing validity of the key assumptions that form the basis of thecompany’s strategy and business?

Is there an effective process to monitor changes in the external environment and provide early warnings that adjustments to strategy might be necessary?

Questions for boards to consider …


While corporate growth and shareholder return still require essentials, such as managing key risks,innovating, capitalizing on new opportunities andexecuting strategy, the context for corporate performance is rapidly changing and perhaps profoundly. Mounting societal issues, such as jobs and wages, incomeinequality, climate and environmental issues, health and safety, call for greater diversity and inclusion, coupled with limited government solutions, there are heightened expectations of the corporates to help address the gaps and rethink the scope of their responsibility to society. The board has an integral role to play in shaping the debate and setting the tone and expectations for linking purpose and profits; the board should be intentional about how it engages with the management on these issues.


• With an increasing pressure from stakeholders, companies must articulate its commitment to them and should simultaneously focus on linking purpose and profits, with an added emphasis on creating value• In the wake of rising institutional investor activism, companies may need to re-think how they approach matters related to environmental, social and governance (ESG) in the context of long-term value creation

2. Understand how the company aligns profit and purposeA recent study conducted by KPMG in India states that more than one-third (36 per cent) of C- suite and board members surveyed indicated that investor pressure had increased the company’s focus on ESG. Recently in India, two ESG funds have been launched to invest in listed entities. One has been launched by Quantum Advisors and the other has been launched by Avendus Capital. Other such examples include Kotak Mutual Fund and SBI Magnum Equity ESG fund. We continue to see a number of shareholder proposals on ESG issues – particularly on the “E” and the “S” issues.

• Foregoing 'tick-box' approaches, boards must seek to increase women’s participation in meaningful leadership roles • With a lot remaining to be done on the board diversity agenda, and considering the changing face of the consumer profile, especially with millennials becoming dominant in this category, boards are beginning to witness a reduction in the average age of independent directors thereby necessitating a re-evaluation of its strategies.


Do we and the management have a clear intent of having a purpose-driven, long-term sustainable business? Is the intent aligned?

Do we understand the impact of our actions and decisions on society at large?

How can we increase our engagement with the management on societal matters of job creation and climate change?

In the wake of changing consumerprofile, will diversity on boardswitness ‘younger’ independent directorsbeing inducted?



3. Build talent in the boardroom around the company’s strategyand future needsGiven the demands of today’s business and riskenvironment, boards are increasingly focused on aligning board composition with the company’s strategy, both today and in the longer term. Talent and diversity in the boardroom are also important for investors, regulators and other stakeholders. It is clear that the world is changing faster than the boards are. In 2020, board composition and diversity will be a priority for boards, especially for communications with the company’s institutional investors, enhanced disclosure in thecompany’s proxy, and positioning the board strategically for the future.

In India, tenure-limiting mechanisms — term limits and mandatory age limits — have had limited impact; progress on board diversity is an ongoing process but there is still a long way to go.


• Keeping in mind the increased levels of investor engagement on this topic, companies need to address the central challenge with board composition: a changing business and risk landscape • Address competitive threats and business model disruption, technology innovations and digital changes, cyber risks and global volatility require a proactive approach to board building and board diversity, including skills, experience, gender and race/ethnicity • Have a strategic approach to bring in more inclusive leaders, those who can then serve as mentors to a more diverse set of professionals in the organisation and build multi-cultural competencies • Boards must invest in the right people who have access to right mentoring and coaching.


What is being done to attract, retain and promote talent?

Is diversity of skill sets, backgrounds and perspectives duly considered?

Are rewards and success measured on the basis of merit, irrespective of difference and background?

Does the leadership team and the board champion diversity; is inclusive leadership fostered at all levels?



The question ‘How safe do people feel in doing the right thing?’ has emerged as an important index for measuring and assessing the effectiveness of boards in shaping corporate culture. With multiple instances of sexual harassment, price gouging and aggressive salespractices, instances of corporate misdemeanour tend to place the board under the scanner. With each instance of corporate failure, board action or the lack of it, for better or worse, plays a critical role in driving a company’s performance and reputation. While we have witnessed boards taking a more aggressive stance towardsunderstanding, shaping and assessing corporate culture, setting the tone at the top and demonstrating zero tolerance for conduct that is inconsistent with the company’s values and ethical standards is key in making certain how a company ensures its people protection in the pursuit of delivering what is ‘right’ instead offollowing what is required.


• Boards must monitor the culture closely and see it in action; ‘tick-box’ obligations must give way to willful adherence. All available tools, such as surveys, internal audit, hotlines, social media, walking the halls and visiting facilities, must be applied• Boards must be sensitive to early warning signs that include whistle-blower complaints; in such cases, audit committees should be duly apprised followed by discussions • Boards must recognise that the tone at the top is easier to gauge than the mood in the middle and the buzz at the bottom• Boards must ensure that incentive structures align with strategy; encourage the right behaviours and take a hard look at the board’s own culture for signs of groupthink or discussions that lack independence or contrarian voices. Simply stated, focus should not only be on results but also on the behaviours driving those results • In driving performance and reputation, the alignment of company values, purpose and ethical standards are crucial.

4. Help set the tone and closely monitor the culture throughout theorganisation


Does the board, and by extension thecompany, make it safe for people to do the right thing?

How does the board gain visibility into the middle and bottom levels of the organisation to assess the company’s ‘actual’ culture?

How will boards ensure that incentivestructures align with strategy and encourage the right behaviour?

How can boards reflect on theirown culture and weed out signsof groupthink? Do discussionslack independence orcontrarian voices?



This is not an option anymore: companies today will have to apply a more rigorous and holistic approach towards data governance — the processes and controls in place for data integrity, protection, availability and use of data. While overlapping with cybersecurity, data governance includes a company’s policies and protocols regarding data ethics, compliance with industry-specific privacy laws and regulations, and new privacy laws andregulation that govern how personal data, from customer, employees or vendors, is collected, processed, stored and used. Data governance also includes company’s policies and protocols regarding data ethics, in particular, managing that fine line in terms of how the company may use customer data in a legally permissible way with consumer expectations as to how their data will be used.In 2020, given its sophisticated nature, as cybersecurity and data privacy will continue to be a priority for boards, instead of only looking at business performance, there will be greater need to develop the trust thatstakeholders place in an organisation.


• Boards must insist on a robust data governance framework, one that oversees data collection, storage, management and usage • Boards must continue to manage the tension between consumer data and consumer expectation of how their data will be used; building digital trust is vital• Boards must conduct regular assessments and mock drills to assess a company’s resilience to cyber risks• In order to achieve the desired digital outcome, boards must extend their understanding of the company’s digital journey, maturity and mindset, along with taking due cognizance of the digital operating model• Boards must continue to enhance their digital knowledge as a deeper digital understanding will lead to better oversight.

5. Approach cybersecurity and data privacy holistically —as data governance


What are the key threats surroundingcybersecurity and data privacy?

Do we fully understand our currentvulnerabilities and what processes do we have in place for dealing with such threats?

Do we have programmes ready to meet the challenges of an evolving cyber-threatlandscape? Additionally, do we have aconscious cyber culture within the organisation ?

Do we have the appropriate talent/cybersecurity professionals to manage such risk, thus extending protection measures to the ecosystem of suppliers and partners?



Few board responsibilities are more important than hiring and firing the CEO — a reality that continues to hit the headlines, particularly if the board is caught flat-footed. Given the complex and disruptive business and risk environment, it is essential that the company has the right CEO in place to drive strategy, navigate risk and create long-term value for the enterprise. Clearly linked to the importance of having the right CEO is having the talent required — from the top of the organisation down through the ranks. Companies will face an increasingly difficult challenge in finding, developing and retaining the required talent at all levels.


• The board should ensure that the company is prepared for a CEO change — planned and unplanned• CEO succession planning is a dynamic and ongoing process. Boards must always think about developing potential candidates and planning for a succession, starting the day a new CEO is named• Nomination and remuneration committees should continue their focus on talent development and consider including succession planning and talent development as a performance metric tied to pay plans.

6. Make CEO succession and talent development a priority


How robust are the boards’ successionplanning processes and activities? Aresuccession plans in place for other keyexecutives?

Does the managements’ talent plan align with its strategy and forecast needs for the short and long term?

Which talent categories are in short supply and how will the company successfullycompete for this talent?

As millennials and young employees join the workforce in large numbers and talent pools become globally diverse, is the company positioned to attract, develop and retain top talent at all levels?



It is a sobering data point: between 2010 and 2017, headlines with the word crisis and the name of one of the top 100 companies as listed by Forbes appeared 80 per cent more often than in the previous decade.Even the best-prepared companies will experience a crisis and companies that respond quickly and effectively tend to weather crisis better. Crisis readiness goes hand-in-hand with good risk management; identifying and anticipating risks and putting in place a system of controls to help prevent crises or mitigate their impact. We are clearly seeing an increased board focus on cultural risks as well as key operational risks across the extended global organisation, for example, supply chain and outsourcing risks, information technology, data security risks, etc.


• Boards should help ensure the crisis readiness of the organisation• Boards should help ensure the management is weighing a broad spectrum of ‘what-if’ scenarios, ranging from supply chains and the financial health of vendors to geopolitical risks, natural disasters, terrorist acts and cyber threats• Boards must have a heightened focus on risk management; identifying and anticipating risks and putting in place a system of controls to help prevent crisis or mitigate their impact.

7. Have a crisis response plan in place and practice it


Does the board understand the company’s critical operational risks? What has changed in the operating environment? Has thecompany experienced any control failures?

Is the management sensitive to early warning signs regarding safety, product quality and compliance?

Is the company’s crisis response plan robust and ready to go? Does it cover differentscenarios?

Is the plan actively tested or war-gamed and updated as needed?

Does it include communications protocols to keep the board apprised of events and the company’s response, and to address the company’s stakeholders?



Shareholder engagement continues to be a priority for companies as institutional investors increasingly hold boards accountable for company performance and demand greater transparency, including directengagement with independent directors. Institutional investors expect to be able to engage with portfolio companies, especially when there are governance concerns or when engagement is needed to make a fully formed voting decision. There has been an increase in voting against resolutions by shareholders. The resolutions voted out are typically on-board appointments/reappointments (includingmanaging directors) and related-party transactions


• Boards should request periodic updates from the management about the company’s engagement practices• Boards must be aware of the organisation’s engagement plan and course-correct the plan whenever required• Boards should pay attention to trends in shareholder proposals, even those that do not receive majority support.

8. Be proactive in engaging with shareholders, including activists

Strategy, executive compensation, management performance, ESG initiatives and board composition will continue to be on top of the boards’ agenda in 2020. We can also expect investors to focus on howcompanies are adapting their strategies to address the economic and geopolitical uncertainties and dynamics shaping the business and risk environment in 2020.


Does the board know and engage with our largest shareholders and understand their priorities?

Do we have the right people on the engagement team?

What is the board’s position on meeting with the investors? Which independent directors should be involved?

Is the company providinginvestors with a clear, current picture of its performance,challenges and long-term vision?



KPMG in India contacts: Ritesh TiwariPartnerRisk ConsultingLeader, Board Leadership CenterT: +91 124 336 9473E: [email protected]

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The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.


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