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Priorities and challenges facing todays directors
Highlights Directors continue to look to other board members for candidates. They value industry and financial expertise above all. Boards say risk management is working but there isnt always clear risk ownership. Priorities include mitigating fraud risk and crisis management. Directors want to spend even more time on strategyincluding getting better information on the companys customers and competitors. Boards know IT is crucial to business strategy but often lack a full understanding of the opportunities and risks from mobile computing, social media, and cloud technologies, as well as cybersecurity risks.

on shaping the boardroom agenda

February 2013

A raft of rules from the Dodd-Frank Act and increased shareholder activism have companies and directors expecting increased compliance demands and regulatory requirements, with a continued spotlight on governance issues. Meanwhile, many companies are adopting new technologies such as mobile computing and social mediarecalibrating their views on strategy and competition and focusing on new threats and risks. We heard from 860 corporate directors in our 2012 Annual Corporate Directors Survey. Their voices tell how boards are progressing in their oversight roles and where they continue to face challenges. Amid hurdles and headway, boards are adapting to an ever-changing world and governance environment. Directors are aware that new perspectives and continued adjustments and change may be necessary to fulfill their oversight obligations. This edition of 10Minutes outlines key points from the survey that illustrate how boards are working to improve their oversight. This perspective can help executives identify priorities and tackle challenges. Survey findings may also provide insight as boards cope with regulation and compliance issues in 2013 and beyond.

Up for the task: 1. Board composition: Nearly 91% of directors rely on other board members recommendations for new candidates. Boards can broaden the search without compromising on the skills and attributes required by looking to new or different sources when seeking candidates. 2. The lens on risk: Nearly 53% of directors are only moderately comfortable with the boards understanding of emerging risks to their company. While myriad risks may affect companies, directors should home in on those that mightbe life-threatening. 3. Strategy front and center: One in five directors discusses the viability of the companys strategy only once a year. Some savvy board members suggest discussing strategy at every board meeting. 4. Upping the IT IQ: 51% of directors say they arent adequately engaged in understanding new business models enabled by IT. Boards will need a disciplined process to close this knowledgegap.

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Board composition Fact
Thirty-five percent of our survey respondents have served on their boards for more than 10 years, and the average age of independent directors is 62.1

Risk management
A sluggish US economy, political unrest in certain parts of the world, the eurozone crisis, and extreme weather have impacted business at many companies this past year. More than one-third of directors said their boards have no clear allocation of specific responsibilities for overseeing major risks.

Strategy
Seventy-five percent of directors continue to want to spend more time on strategy, with many being more specific about the direction of strategy discussions. More than onequarter of directors are dissatisfied with the information the board receives on competitor initiatives and strategy or dont receive any information at all. Boards understand the importance of integrating strategy and risk discussions and evaluating broad company buy-in of the strategic plan.

Information technology
The number of cyberattacks jumped 42% in 2012, with an average of 102 successful attacks per week.2

Challenge Nearly one-third of directors

said a fellow board member should be replaced, with aging and lack of required expertise the top reasons. Directors whove served one to two years were more likely to believe this than those whove been on the board longer. A majority of boards believe that adding racial and gender diversity to the board is at least somewhat important. Industry and technology expertise are also highly sought-after.

One-quarter of directors are not sufficiently or at all engaged in overseeing and understanding data security and the risk of compromising customer data. More directors want to devote even more time in 2013 to information technology issues and opportunities.

Progress

Boards want to increase their focus on risk management in the coming year, and they recognize the importance of addressing risks related to emerging technologies and major crises.

1 Spencer Stuart US Board Index 2012. 2 The 2012 Cost of Cyber Crime Study, Ponemon Institute, October 2012.

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New blood: casting a wider net for new directors
Board composition matters. A combination of individuals with the right blend of expertise and experience is critical to board effectiveness. Diversity across industry, geography, work experience, problem-solving skills, race, and gender can contribute to a high-performing board. Board renewal is an idea advocated by many governance observers, as well as by many in theboardroom. What boards want So what do leading boards want in new directors? Naturally, people with the right backgrounds for the jobpeople with the right experience and business acumen. Not surprising, industry and financial expertise are the most highly ranked attributes sought among potential directors, according to oursurvey. International, operational, and technology/digital media expertise also ranked as attractive draws, while human resources and legal expertise were considered less important, the survey showed. Boards turn to fellow directors as the first source in board member searches. In fact, about 91% of survey respondents said they rely on recommendations of fellow board members when they look for a new director. Search firms and management recommendations ranked second andthird. When recruiting new board members, 11% of directors said they look to investor recommendations.
3 Spencer Stuart US Board Index 2012. 4 Ibid.

Diversification: room for improvement Most directors believe racial and gender diversity to be at least somewhat important when identifying new director candidates. However, women make up about 17% of all directors in the S&P 500,3 and ethnic minorities comprise 12% of the biggest 200 companies in the S&P 500.4 Twenty-eight percent of directors are not currently seeking gender or ethnic minority director candidates. Some are acting to diversify their boards. Prompted by board self-evaluations, two-thirds of directors in our survey said they made changes, one of which was to diversify the board with more women and minorities. Other actions included seeking individuals with additional expertise to join the board and changing the composition of the boardcommittees. What more can be done? When looking for new candidates, its important for directors to remember that some board was their first. So they could consider individuals who have not previously served on a board. Another suggestion is that boards focus as much attention on their own succession as they do on CEO succession planning.

What sources do you use to recruit new board members?

Other board members recommendations Search firms Management recommendations Investor recommendations Public database Other 10.7% 4.1% 1.7% 0% 50% 100% 67.2% 54.8% 90.7%

Source: PwC, 2012 Annual Corporate Directors Survey, September 2012.

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Crunch time for risk management
Risk management is a top priority for boards. And directors seem confident in their companys approach to risk management. Nine in 10 directors in our survey are at least moderately comfortable with their companys key performance indicators regarding risk management objectives. Nearly all feel the same about the boards understanding of the companys risk appetite. But if Aesop were to consult with these boards, he might remind them that the best of intentions will not always ensure success. When asked about the allocation of risk oversight between the board and its committees, 26% of directors said there was no clear allocationand 11% said they were not sure. While there is no one right way to oversee risk, there should be clarity on who owns the responsibility. Not knowing who on the board is tasked with the specific duty could cause oversight gapsand a lack of accountability as to who owns oversight likely means that nobody does. So, what to do? As management identifies the top risks to the company, each should be assigned either to the full board or one of its committees. Bright lights aimed at cutting fraud risk, whistleblower issues Fraud risk remains a prickly issue for directors. Aggressive crackdown has ushered in a new wave of prosecutions and allegations of fraud at high-profile companies. The SEC filed 734 enforcement actions in 2012, just one shy of the previous year. There were also more than $3 billion in penalties and disgorgement.5 Boards are actively working to mitigate fraud risks, with many boards prioritizing discussions about the companys tone at the top. The SEC received more than 3,000 tips from its whistleblower program in 2012, the programs first full year, and it has paid its first reward. Most companies have responded to the new rules by placing greater emphasis on employee awareness of company ethics and compliance requirements and enhancing the companys follow-up process on compliance-related complaints. It is managements responsibility to ensure compliance with federal securities laws, but it is the boards job to provide the oversight to ensure that whistleblower policies are working. A crisis in crisis management? Crisis management oversight has become an increasingly important issue for boards, with natural disasters, political turmoil, and continued economic volatility seemingly the way of the world today. Yet one-third of directors have not discussed managements plans to respond to a major crisis in the past 12 months. Company missteps can also quickly swell into crises, thanks to the viral nature of social media. But companies can also use social media to influence the narrative. Although this is happening more often, 57% of directors said they are not comfortable with the companys plans to use social media in the event of a crisis.

How comfortable are you with your boards understanding of the companys risk appetite?
Not sufficiently 3.1% Not at all 0.2%

Moderately 35.2%

Very 61.5%

Source: PwC, 2012 Annual Corporate Directors Survey, September 2012.

5 SECs Enforcement Program Continues to Show Strong Results in Safeguarding Investors and Markets, Nov. 14, 2012.

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Setting their sights on strategy
CEOs typically set strategy and own execution, but boards should have a starring role in shaping, developing, and monitoring. Directors add value to strategy discussions by asking the right questions and challenging the assumptions underlying managements thinking. Because the business environment undergoes constant change, companies must be resilient and adaptable to remain relevant and stay competitive. In volatile environments with disruptions the norm, directors recognize that execution of the companys strategic plan is as important as setting it. Twothirds say they evaluate external benchmarks and data to independently corroborate managements assumptions and assertions when reviewing the companys strategy.
How satisfied are you with the information your board receives on competitor initiatives and strategy?
Do not receive 8% Very satisfied 15%

Boards also raise an information gap in companies approach to managing IT risk and strategy. More than one-quarter of directors want to see an improvement. According to more than one-third, the approach does not adequately anticipate potential competitive advantages from emerging technologies. Boards should require management to provide them with key information to enable them to best oversee the companys strategy. Is it working? Many directors (42%) believe strategy important enough to discuss at every board meeting. Thirtysix percent discuss strategy twice a year, and 21% do so once a year. Three-quarters of directors in our survey want to devote more time to strategic planning in the next year, up from 60% in the previous year. Executing company strategy is as critical as discussing it. And its important for boards to understand if the strategy is actually working. Typically, boards assess the companys strategy over a 12 to 24-month period, but directors should monitor key performance indicators and assess the progress of key business issues throughout the year.

Know your customers and what your competitors are doing Understanding the companys customers and how its competitors are doing are elements of how directors oversee strategy. Getting the right information from management is critical. A majority of directors in our survey are satisfied with the information management provides about general and specific customer satisfaction. But 14% are dissatisfied with the information they receive, and 20% of directors say they dont receive any information about customer satisfaction.

Dissatisfied 21% Satisfied 56%

Source: PwC, 2012 Annual Corporate Directors Survey, September 2012.

On competitive intelligence, one in five directors are dissatisfied with the information management provides about competitors initiatives and strategy, while 8% do not receive any information about thecompetition.

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Getting a grip on IT
How engaged is your board or its committees in overseeing/understanding the following?
Very/Moderately Not sufficiently/Not at all Dont know Data security and risk of compromising customer data New business models that are enabled by IT (such as online stores) Strategy for the companys use of cloud technologies Crisis management social media response plan Employee social media training and policies The companys monitoring of social media for adverse publicity Tech support of employees use of non-company owned mobile technologies (i.e., smart phones, tablets) Competitors leverage of social media and other emerging technologies 0% 50% 100%
Source: PwC, 2012 Annual Corporate Directors Survey, September 2012.

Social media, mobile computing, the cloud, and other emerging technologies continue to change the way many companies do business. And nearly nine out of 10 directors in our survey believe IT is at least somewhat important in creating long-term shareholder value at their company. But there are new risks with IT, like cyberattacks, data theft, and misuse of mobile devices and social media by employees. To illustrate: There was a 42% jump in the number of cyberattacks in 2012, with an average of 102 successful attacks per week.6 And 28% of companies say they have dealt with a security breach because of an employees unauthorized use of a mobile device.7 Emerging technologies are your friendbut their risks arent Directors understand the importance of considering technology from a strategic perspectivehow emerging technologies can help a company better connect with customers and employees and leap ahead of competitors. They also understand that a companys decision to use social media, mobile computing, and the cloud to pursue new business avenues means addressing risks that can come with those technologies. But directors struggle with emerging technologies. Another survey shows that nearly two-thirds of directors dont do their homework about IT issues.8 And the majority of directors in our survey said they are not adequately engaged in overseeing or understanding how competitors are using emerging technologies and whether the companys tech team supports employees use of personal

mobile devices. Two-thirds or more say the same about the companys social media training and policies for employees and how it monitors social media for adverse publicity. Directors have a better handle on cybersecurity risks, but nearly one in three are not engaged in the topic. This may be why 57% want to spend more time discussing information technology risks and opportunities in the coming year. IT in the boardroom Knowing who on the board is responsible for IT oversight is a must. The responsibility for overseeing IT often depends on the companys business and the importance of IT to enabling the companys operational and strategic priorities. One-quarter of directors in our survey said IT oversight is the full boards job, as it is the full boards job to understand and discuss the strategy ramifications of IT on the companys business. More than half say IT oversight is the audit committees responsibility, but some directors (8%) say their boards dont oversee IT at all. Boards arent necessarily seeking directors with direct IT experienceonly 30% say its very important to add directors with that background. But more directors are adopting technology for boardroom business: 60% use tablets to get their board information, up from 42% a year earlier.

6 The 2012 Cost of Cyber Crime Study, Ponemon Institute, October 2012. 7 Good Technology. The Device Dilemma, The Tug of War Between Employees Mobile Demands and ITs Security Needs, 2009. 8 CIO Board Interaction Survey, November 2012.

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Industry series: Pinpointing potential in Chinas health reform With the approval of the 12th Five-Year Plan, Chinas healthcare industry isand will continue to beflush with investment opportunities. Stronger infrastructure, expanded insurance coverage, and a growing number of private hospitals mean foreign investors can partner with the country more readily than ever. This 10Minutes explores the current and future options for business in the open, decentralized healthcare field of China. Cybersecurity realities Nearly 80% of large US businesses suffered a known security breach in the past year, risking company growth, competitive positioning, shareholder value, even national security. With so much on the line, company leaders need to begin thinking and acting differently when it comes to security. This 10Minutes explores how companies can better protect their information assets and their business ecosystems and use cybersecurity to their advantage.

Industry series: The customer-centric utility After a century in which their operating model changed little, regulated utilities now face empowered customers, the evolving smart grid, and deregulation. An emerging customer-focused model dictates that customers view their utilities as service providers rather than solely distributors of electricity, gas, or water. This 10Minutes explores what utility companies will want to consider when reshaping themselves around the customer. Industry series: Harnessing customer demand to drive growth in retail and consumer While many retail and consumer companies are doing a good job of understanding their customers, how many firms are creating demand by coordinating initiatives across marketing, sales, and innovationfunctions and activities that have come to encompass the demand chain? This 10Minutes examines why and how companies can strengthen their demand chains to drive growth.

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To have a deeper discussion about the corporate boards oversight role, please contact: Mary Ann Cloyd Leader, Center for Board Governance PwC Phone: (973) 236 5332 Email: mary.ann.cloyd@us.pwc.com Don Keller Partner, Center for Board Governance PwC Phone: (512) 695 4468 Email: don.keller@us.pwc.com Catherine Bromilow Partner, Center for Board Governance PwC Phone: (973) 236 4120 Email: catherine.bromilow@us.pwc.com

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