Major Corporate Risks for the Next Decade

The immediately prior post lists survey results of major risks perceived by corporate CEOs and directors for this year.  Below is the survey list for the next entire decade:

  1. Keeping up with digital technology changes.
  2. Succession and lack of available talent.
  3. Rapid technology change disrupts business models.
  4. New products and services disrupt business models.
  5. Economics conditions.
  6. Ease of entry of competitors threatens market share.
  7. Regulatory changes in how products and services are produced and delivered.
  8. Resistance to change.
  9. Changes in organizational culture (hybrid work, evolving labor markets, changed nature of work)
  10. Inability to use advanced data analytics.

Points to ponder (aside from substantial overlap of risk identification in this list compared with the one-year list):

What about climate change?  If projections are correct, climate change is sinking cities, imperiling energy supplies, impacting food supply, moving populations, creating expanding physical disasters.  The SEC demands commentary on such matters as material– are our boards asleep, or do they consider this is mere social noise?

Is there no concern of political risk?  World-wide or within the US or EU?  Guess not….

Technology is driving business and profit but note the number of concerns that the inherent disruption of tech is creating: factors 1,3,4,6,8 and 10 above are related to destructive risks of advanced technology.  And if investment capital continues to be attracted to innovative tech, there is going to be an awful lot to new technology in the marketplace.

Finally, the list overall seems to implicate the need for a high level of attention to technological factors.  Common advice to boards today continues to maintain that boards generally do not need Technology Committees, as tech is a matter for the whole board.  I never understood that argument; after all, finance is a matter for the whole board but we have F&A Committees for example. What is wrong with thinking about tech from a different angle; eg a Committee asking “from what direction will the tech bullets be coming in the next decade and where will they hit the bastions of our company.”

Survey of Corporate Risk/ Current

This is the first of two blogs tracking risk requiring attention of corporate boards.  This post tracks immediate risk perception, per consulting company Provititi (as distributed by National Association of Corporate Directors).

In order of priority, here is what  a survey of 1453 C-level executives and directors rates as greatest risks:

  1. Government health protocols impacting business
  2. Succession/ talent scarce
  3. Pandemic impact on market conditions
  4. Constant need to update and train for changes in digital technologies
  5. Economy capping growth potential
  6. Increased labor costs impacting profit
  7. Resistance to change limits adaptation
  8. Inability fully to use advanced data analytics limits market info
  9. Cyber threats
  10. Shifting expectations in DEI

Absent and to my mind interesting: climate risk, supply chains, the future of work (last year was #4).

Interestingly, see the next post for risks rated for the next decade and a substantial overlap of cited factors.  My comments on this overlap are also in the next post, as I find that overlap surprising.

Major Issues for Business Today, per the CEOs

INFLATION.  Then there’s inflation.  Businesses are working out their hiring and staffing issues, supply chains are improving, M&A is flat but expected to revive. Lots of investment cash is on the sidelines looking for a place to rest (maximum yield not the main driver).  There are unresolved issues about white-collar back-to-work (see below), but also there’s inflation….

So sayeth the Presidents of three very large, important local companies presenting this morning at the highly informative breakfast meeting at Sheraton Boston of the New England Chapter, National Association of Corporate Directors.  (Disclosure: I am an active member on its Advisory Board.)

At Vertex, Wayfair and American Tower, there seem no global crises in business prospects according to their CEOs.  Each has survived the pandemic: Vertex is in the biotech field (need one say more?), American Tower broadcasts our growing (and 5G) digital communications around the world, and Wayfair sells home goods into what has been a volatile but stabilizing electronic marketplace.  None of these folks are on the ropes.

As to time in the office, each organization has its own culture and own needs, but seems that in the executive arena there is a clear sense of need for people to be in the office some of the time (3 days a week seems the number at this point) and lack of clarity if they need to be the same days, overlap, etc.  Also, CEO Dr. Reshma Kewalramani of Vertex had kind words for dreaded Zoom, as you actually get to know people you would not necessarily deal with, learn something of them personally, and become more empathetic and kind.  None of the CEOs seemed troubled by how return-to-office is sorting out, noting that some people never were “not coming in”– workers in labs, workers in warehouses shipping goods, etc.

All were concerned about inflation as a headwind for the general economy, with no specific identified breakdown being anticipated but a general sense that the Fed needs to keep tightening. Chairing the meeting was NACD-New England President Cathy Minehan, formerly with the Fed; according to Cathy, the Fed should have started raising rates sooner!

 

Board Diversity Initiatives Under Fire

Previously reported in this space were a California statute requiring corporations to have specified numbers of female and minority directors, and a NASDAQ rule requiring covered companies to have at least one female and one minority board member or report the reason for not doing so.  Recently a Federal Circuit Court struck down the California law, and now the Federal Fifth Circuit (a majority of which are Republican appointees) will shortly rule on whether the less restrictive NASDAQ articulation passes constitutional muster.

There is substantial “noise” in the marketplace on both sides of this question.  Some major corporations are supportive of the NASDAQ rule (Comcast, Microsoft, Starbucks among others); many are opposed, including 12+ Republican State-Attorneys-General who claim unconstitutionality.

Core issue is: do such requirements for diversity themselves constitute discrimination.  Same issue being raised generally about quotas in other contexts.  The culture war, and reliance on originality as a legal doctrine, continues in multiple arenas.

SEC Final Action on Executive Compensation Disclosure

The SEC has issued final rules requiring reporting companies to explain their executive pay regime to shareholders; there are two tiers of disclosure, with greater detail sought from larger registered companies.

Why does this not seem like “news”?  Because twelve years ago Congress required the SEC to issue such rules, and seven years ago draft rules were promulgated that had substantial impact on how public companies in fact addressed comp disclosure.

The final version of the rules is substantially similar in general import to the interim version, seeking information on how pay is conceptualized based on corporate performance.  Companies need to list performance factors they consider (but need not rank them in importance), including shareholder return, net income or any other criterion the company chooses.  In a bow to ESG and emerging definitions of the role of corporations in society, criteria which are not economic are expressly solicited.

Finally, there is no escape from partisanship on the Commission; it is almost a knee-jerk.  The approval vote was split 3-2 along party lines, with the Republican members complaining that the SEC should have updated its economic analysis supporting the rule rather than relying on a seven-year-old statement.  While something can be said about this point, given the fact that we have been living with a very similar version of the final rule for seven years and given the fact that tweaks to the original promulgation were made in response to prior comment from the public, it is hard to conclude that the critique of the Commission’s action is of great substance.

END OF SUMMER HIATUS–Program for next year and observation about ESG

It has been a couple of months since last post, during which time I enjoyed the summer, spent a month in Paris, and finally this week shipped my youngest off to college again.  That final act is my cue to again attend to all my business, including these posts.  This year I will continue to address key issues concerning business:

*developments at the SEC as affecting public companies and as trickling down to the private sector as guidance or best practices

*developments in practice,  litigation and statutes affecting the duties of business officers and directors

*evolution of standards of performance by business as driven by emerging societal expectations.

As for a preview on the latter point: in catching up on summer reading I encountered an issue of The Economist magazine substantially dedicated to evaluation of ESG as an investment strategy.  The details are granular but important and I direct you to the magazine itself if you subscribe and missed it.  Key take-aways include a questioning of the efficacy of ESG in predicting market performance and a critique of the lack of a consistent definition of ESG among commentators so that it is impossible to identify the best market strategy.  There is also a critique of the advisory community as using ESG as an ill-defined marketing tool.

If anyone has some insight on ESG and its impact on the market, feel free to respond by comment to this site (I will review and post worthy responses) or send me your thoughts at    smhonig@duanemorris.com

Strict Crypto Regulation on Horizon

The Senate Friday proposed a bill for the comprehensive regulation of crypto currency and for digital assets akin to securities.  Regulation of crypto, which is classed as a commodity, will rest with the Commodity Futures Trading Commission, while digital assets that function as investment vehicles will continue to fall under the SEC.

Regulation must be instituted within 180 days of passage of the bill, which is understood to have Presidential approval.  Interestingly, Senator Lummis of Wyoming, a state with a concentration of digital businesses due to its almost unique statutory flexibility for chartering atypical entities tied to block-chain, was one of the bill sponsors.

Regulatory guidance would include addressing internal governance, external audits, policies providing operational controls, security of assets, mitigation of risk, and management changes. Intriguingly, also mentioned is organizational “culture,” a vague reference to the sometimes hyperbolic presentation of both cryptocurrency and digital assets by intermediaries.

Two other noteworthy items: guidance also will be aimed at use of digital assets for illicit activities; and, companies issuing digital currency will be given direct access to the Federal Reserve System’s mechanisms for payment transfers (now restricted to banking institutions; it is through utilization of banks that crypto currently is handled when transactions require it, which imposes a cost in dollars, delay and potential vulnerability).

Privacy in California

It is not news that California’s laws reflect personal rights as seen through a liberal political lens.  Thus a few years ago when California adopted an atypical law giving consumers the right to learn the nature of personal information collected by a business and to be assured it would not be resold, there was little surprise; a couple of other States have similar laws.  (Beginning in 2023, consumers also will have right to cause the deletion of such information, creating problems of definition for companies that often claim that such information is needed for client service.)

In 2023, these provision automatically become applicable to employees of a company.  Putting aside that information about an employee could be recorded in a million places within a company and in both electronic and hard copy form, surely some such information is needed in support of the employment and compensation relationships.  How do companies make sure they find it all, and what happens if they must delete it all?  How does a company track employee compensation and insurance, retirement benefits, etc.?

I expect there will be clarifying regulatory pronouncements so stay tuned.  Even California voters do not want the State economy, largest in America and much larger than that of very many entire countries, to grind to a halt over protection of employee data.

APB on an NFT

Who copped Fred Simian?  Is it IP theft, copyright infringement, or plain old-fashioned larceny?  Most of America’s lawyers want to know the answers, even though they do not represent any party to the seemingly nefarious affair.

Okay– as Sargeant  Joe Friday would say: “just the facts.”  Fred Simian is a non-fungible token (an unique electronic image without physical embodiment)  owned (per the definitive block-chain record of NFT ownership) by actor Seth Green.  Its image, which Green was using as a basis for an upcoming TV show and which thus had apparent commercial value (putting aside that the market for NFTs issued by Bored Ape Yacht Club have greatly appreciated in value since issuance even without commercial utilization) was somehow stolen; at least, it is no longer in the possession of Green, but was sold on the trading market to an identified third party.

Access to the image was taken and was thus possessed by a second party thief who passed possession to a third party purchaser on Open Sea (the exchange for NFTs).  Imagine you have a house and the deed is recorded at the registry.  You live in the house and own title to it.  Then someone throws you out of the house and moves in.  That person is in possession.  But does not own it.

It is not even clear whether historical laws concerning theft apply (a thief cannot pass good title to stolen goods to a buyer even if the buyer is innocent).  Does the law of copyright apply instead?  Would the result be different in copyright–that would be a dumb result, wouldn’t it.

NFTs are not crypto currency, though they are protected (allegedly but apparently not yet fully in sense of possession) by blockchain technology.  That technology is not unique to currency; it is an open ledger system with many other applications, including so-called smart contracts which are a type of legal agreement which could involve anything (think, the sale of 100 barrels of herring can be sold over blockchain).

It is indeed a brave new world.

Microsoft Kills Noncomps

The big news in the press last week about Microsoft was that it would publish compensation data, but the most important part of the Microsoft announcement was that it would no longer require non-competes nor enforce old ones.

The obvious driver is the competition for top talent.  But there also seem to be two fundamental changes: first, big tech used to be most ardent enforcers of noncomps but I bet Microsoft is in the forefront of a sea change; second, the pace of change in tech is such that protecting today’s ideas seems useless since progress will obsolete tomorrow the cutting edge technology of today.

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