February 15, 2014
A Review of Recent PwC Reports on Boards, Audit Committees, and Governance
PwC has published the results of their
Annual Corporate Directors Survey (PDF). I recommend a read of the report and have selected a few important points for comment. Here are excerpts from the Executive Summary:
- Directors are even more critical of their fellow directors than last year: 35% now say someone on their board should be replaced (compared to only 31% in 2012). The top three reasons cited are diminished performance because of aging, a lack of required expertise, and poor preparation for meetings."
- Ninety-four percent of directors say they receive information on competitor initiatives and strategy, but nearly a quarter of them wish it were better."
- "Three-quarters of directors said their boards took additional action to oversee fraud risks. Six of 10 held discussions regarding "tone at the top," a 14 percentage-point increase from last year. Other actions included increased interactions with members of management below the executive level and having discussions about insider trading controls."
- "Directors reflected on the increasing importance of the IT revolution at their companies — 15% call IT critical, up from 13% in 2012, and the amount of time directors spent overseeing IT increased correspondingly. Despite the fact that about one-third of boards spent more hours overseeing IT, 61% want to spend even more time considering related risks in the coming year, and 55% say the same about IT strategy."
- "Almost a third of directors believe their company's strategy and IT risk mitigation is not adequately supported by a sufficient understanding of IT at the board level. And only about a quarter "very much" agree that the company provides them with adequate information for effective oversight."
- "The majority of directors have evolved their practices to be more engaged in overseeing traditional IT issues: the status of major IT implementations and the annual IT budget. These account for the highest levels of director engagement (80% and 63%, respectively). But directors say they are not sufficiently engaged in understanding the company's level of cyber-security spend (24%) and competitors' leverage of emerging technologies (22%)."
Some other items caught my eye:
- When seeking new members of the board, risk management expertise ranked very high (as it should). 36% said it was very important and 43% somewhat important. Technology expertise was a little lower, with 33% saying it was very important and 42% somewhat important.
- While 35% of board members said another director should be replaced (for failing to contribute), more than half of new directors felt that way. I suspect that the new directors are less invested in friendship with the others and probably see their virtues and faults more clearly.
- Across the board (pun intended) directors believe their board's performance has increased. Improvement is reported in the management of risk (33%) and oversight of strategy (28%).
- Board members are spending more time on training, with just 19% not participating in any educational activities in the last year.
- Boards want to be able to spend more time on a range of topics (strategic planning, risk management, and IT strategy rank highly), but have not identified any area where many would want to spend less time. Somehow, they have managed to spend more time on the areas they rated highest.
- Consistent with 2012, a vast majority of directors (95%) believe their board has at least a moderate understanding of their company's risk appetite. Additionally, 44% say their time commitment toward risk management increased in the past 12 months, and 60% want to spend more time on this topic next year. The increased time commitment seems to be paying off, as one-third feel their board's effectiveness in overseeing risk has increased over last year.
- Directors are enhancing their digital IQ by meeting more frequently with the company's Chief Information Officer (CIO). The percentage of directors interacting with the CIO at every formal board meeting increased to 20%. Thirty-one percent now meet at least twice annually.
- While IT may still be a complicated and overwhelming topic to digest, boards have become more engaged overseeing nearly every aspect of IT over the last year. Specifically, directors are more engaged with emerging technologies like use of mobile technology, social media training, and cloud computing.
PwC also shared with us their annual report on
Key Considerations for Board and Audit Committee Members.
This report, although issued around the same time as the board survey, takes a different approach. It discusses areas that should be on the agenda of the board and audit committee, including strategy, emerging technologies, risk oversight, ethics, and more.
- 79% of directors want to spend more time on strategic planning (the results of the survey above).
- "Many companies are thinking about their customers in new ways and building more customer-centric business strategies. This may involve a more holistic view of the customer, with changes to customer programs, more tailored products and services, and the expectation of delivering a seamless customer experience across all channels. This shift is partially driven by consumers and business buyers having more choices than ever before, empowered by online access, mobile devices, and social media. Advances in tools to capture and mine analytical data are also driving the change."
- "90% of CEOs say they are strengthening their customer engagement programs."
- "Many companies are also looking at their supply chains as strategic engines for efficiency and flexibility. They're tailoring them to be more transparent, to focus more on new markets, and to be more closely integrated across business functions. These changes can help companies better respond to economic uncertainty and crises, disruptions from natural disasters, and changes in supply-and-demand patterns. Companies will want to identify the suppliers that are central to business strategy and operations and those that could be eliminated. The potential result: cost efficiency."
- PwC says that companies that acknowledge supply chain as a strategic asset achieve 70% higher performance.
- "Companies are taking advantage of today's emerging technologies and using them to drive revenue and growth. Directors have become more engaged in understanding these technologies, with many planning to spend more time on IT strategy in the coming year."
- Fifty-three percent of US CEOs say social media users influence business strategy, and 82% say they're strengthening their engagement programs with those users. About 46% of web users rely on social media when making a purchase. More people are using their mobile devices to access the Internet, and 80% of consumers plan to conduct mobile commerce in the next 12 months."
- 62% of executives believe that big data has significant potential to create business advantage.
One disappointment is that while PwC draws attention to cyber risk (a new term for information security) and the risk from third parties, especially those to whom the company has outsourced operations, no attention is drawn to other key areas of concern such as:
- Oversight of the management of risk by the company, especially whether the directors are not receiving sufficient information for their oversight to be effective. That information should include a report from the internal auditor.
- Oversight of the strategic planning process. While it is good to see that directors want and in fact are able to spend more time in this area, other surveys indicate they are dissatisfied with the information they receive from management about strategies, including alternatives to those presented by management.
Finally, PwC has also published the results of the
Annual Global CEO Survey (PDF). Their report focuses primarily on the state of the business and opportunities for corporations. However, there are some important points for those charged with governance and related activities:
- "You can't continue to think that the world is the same as it was five years ago. It is incredibly different now: it's even changed from how it was five weeks ago or five months ago. The spiral of change is speeding up. Leaders of society and institutions should communicate this new state of constant change in the world and live accordingly, so that they can lead from an awareness of this change."
- "Technology is an all-pervasive megatrend. So that is going to impact banking and revolutionise it … technological advances, demographic changes and global economic shifts will continue to generate enormous change over the next few decades. And the interplay between these three trends will be as significant as the trends themselves. Together, they will create many new opportunities for innovation and growth, but they will also raise many new challenges."
- "Nowadays, the biggest threat to companies is the companies themselves. If you don't adapt to the circumstances, if you don't understand that, now, competitiveness has to be generated internally, as well as through external opportunities, then your business is at risk."
- "The number of digital natives (i.e. those actively using social media and multiple devices regularly) is expected to grow at a rapid pace. In the U.K., for example, 61% of consumers are expected to be digital natives by 2020 — up from 19% in 2013. … The number of networked devices is soaring accordingly; by 2020, there will be seven times more such devices than there are people. … The digital revolution has given birth to a new generation of consumers who want ever more accessible, portable, flexible and customised products, services and experiences. They expect to move seamlessly — in real time — between the physical and virtual worlds. And they're prepared to disclose quite a lot about themselves to achieve their desires."
- "Nearly half of CEOs are worried about the speed at which technology is advancing — and getting on the 'wrong side' has major consequences: witness the diverging fortunes of the Blu-ray and HD DVD formats."
- "… the most successful CEOs are doing three things to 'industrialise' innovation, i.e. to make it repeatable, dependable and scalable: they're focusing on breakthrough innovation in all its forms; putting disciplined innovation techniques in place; and collaborating much more actively."
- "The costs for acquiring ICT [Information and Communications Technology] and information have fallen to incredibly low levels — and whoever takes advantage of information innovation will win in the marketplace. ... The smartest CEOs are concentrating on breakthrough, or game-changing, innovation. They're explicitly incorporating it in their strategies. And they're using technology not just to develop new products and services, but also to create new business models, including forging complete solutions by combining related products and services. In fact, they don't think in terms of products and services so much as outcomes, because they recognise that products and services are simply a means to an end."
- "When we are doing planning I don't think we can look at it with just one lens. I think we've got to look at what we are doing next week, we've got to look at what [we're] doing next year and then [we] also have to look at a three-, five-, ten-year cycle as well. Our process that we're moving to is more iterative, as I don't like a scenario where you have a definitive approach to planning year-by-year, because I think you need your long-term vision. … We need to become more agile and dynamic in the way we plan."
- "CEOs must now be able to run the business of today while creating the business of tomorrow. They must foster creativity and yet make sure that it's systematic; manage a multigenerational, multicultural global workforce; and satisfy the needs of consumers who are more disparate than ever before. They must pursue all these opportunities for growth while bearing the interests of society in mind, and without compromising on traditional values like quality or integrity."
There's a wealth of interesting information about the challenges for CEOs, their companies and boards in this report. It's a good read.
I welcome your views and comments.