Getting Your Board Ready for Systemic Risk in the Year of the Stakeholder
Dear Friend,
We’ve made it through the first quarter of 2021. It’s hard to believe that the pandemic has been with us for one full year. To say that risk, and most notably, systemic risk is everywhere would not be an exaggeration. Historically, most of us are familiar with enterprise risk management (ERM). The biggest difference between ERM and systemic risk, however, is ERM tended to discount and often ignore low probability risks.
According to my recent interview with Bob Zukis, CEO of the Digital Directors Network (DNN), “With systemic risk, you can’t ignore it, as small or remote risks often cascade and create catastrophic failure in large complex systems.” Nothing brings home the idea of systemic risk more clearly than COVID 19, the recent failure of the Texas energy grid, the Solar Winds cyber breaches, and the container ship that disrupted the world supply chain for six days after an unexpected grounding in the Suez Canal. Who is responsible when the unexpected happens? Whether it is the rarest of risks, slow response times, mixed messages, or lack of government oversight, we continue to see the impact of “systemic” risks in the disruption of supply chains, slowdown of the global economy, social unrest, and/or compromised cybernetworks.
Are companies ready for systemic risk from areas like supply chain, cyber, weather, and pandemic? And, since everything can’t default to the Audit Committee, who on the board should own this? Clearly, global boards of directors did a quick pivot during COVID and were able to shore up their companies while also ensuring the safety and well-being of employees, customers, and communities. To that end, our team at Farient continues to research global stakeholder prominence, and board and executive accountability, to better understand how companies around the world address stakeholder challenges and risks to the corporation.
As we review the events of the past year, I am confident that stakeholder incentives will continue to play an increasing role in executive compensation and how risk is addressed across all aspects of environmental, social and governance. At a minimum, the financial impacts of a massive breach or systemic failure will certainly threaten the ability to reach executive pay targets given the direct financial and reputational impact of unplanned events.
I hope you find this month’s newsletter informative. I encourage you to contact me with any questions and/or thoughts on this topic at info@farient.com
Sincerely,
Robin Ferracone
Hot Off The Press From Farient
Rethinking Enterprise Risk: Why Cyber Risk is Systemic Risk
Recently, I interviewed Bob Zukis, CEO of the Digital Directors Network (DDN) for our Farient Brief series. Bob shared with me that the courts are holding boards accountable for systemic risk which is the inherent risk between the parts of a complex system that can threaten the larger system. In this Farient brief, I asked Bob to discuss the systemic risks and opportunities that surround cybersecurity, what boards can do to embed cyberthreat prevention into governance practices, and how all of this can impact stakeholders and executive compensation.
Climate-Linked Incentive Metrics Expected to Heat Up
Farient’s recent research, 2021 and Beyond: Global Trends in Stakeholder Incentives, showed that more than half of the of the world’s largest public companies are linking executive incentives to stakeholder metrics. Our team at Farient coined 2021 “the year of the stakeholder”, and boards of directors have not disappointed as they stepped up to ensure the financial, physical and emotional well-being of employees, customers and communities. In this article for Agenda, our Head of Farient Information Services, Eric Hoffman, discusses how narratives are shaped by data as more companies embrace climate and sustainability issues.
Chipotle Links Executive Compensation to ESG Goals
By announcing that it will now tie 10 percent of its top executive teams’ annual incentive bonuses to meeting ESG goals, Chipotle has become one company on a growing list of many to factor systemic risks of ESG into executive compensation.
With more than 50 major corporations, including Amazon, Walmart, General Motors and FedEx, now pledging to be carbon-neutral by 2040, it seems that Corporate America is tackling the challenge of climate change. Besides reputational risk, these companies are driven by the realization that a combination of potential government action and the disastrous effects of climate change on the world pose long-term systemic risks, and are taking proactive steps now to avoid calamity later.
April 7, 2021: National Association Of Corporate Directors’ (NACD), Fortune 500 Compensation Committee Chair Advisory Council
Farient Advisors and Weil Gotshal and Manges LLP partner with NACD to discuss the impact of stakeholder prominence, investors and pending legislation with public company compensation committee chairs.
April 15, 2021: Women Corporate Directors (WCD) of the Carolinas and Atlanta
The Carolinas and Atlanta Chapters of WomenCorporateDirectors (WCD) Foundation will host Farient CEO Robin Ferracone and Katherine Blue, KPMG ESG and Climate Services Leader for a timely discussion around insights from Farient’s research, 2021 and Beyond: Global Trends in Stakeholder Incentives.
Robin is our Founder and Chief Executive Officer. She is the author of the book, Fair Pay, Fair Play: Aligning Executive Performance and Pay, and a frequent presenter for well-known organizations including the Council of Institutional Investors, Society for Corporate Governance Professionals, the National Association of Corporate Directors (NACD) and The Conference Board, among others. Robin has written extensively on the topics of performance management, incentive plan design, goal-setting and corporate governance. She has been quoted by numerous business and industry publications, including The New York Times, The Wall Street Journal and The Washington Post. Learn more about Robin.
About Farient
Farient Advisors LLC is an independent executive compensation, performance and corporate governance consultancy. Farient provides a comprehensive array of services to boards of directors and management, including compensation program design, performance measurement and goal-setting, pay and performance alignment, board of directors’ compensation and shareholder communications, among others. Farient is located in Los Angeles, New York, Louisville and Dallas and is a founding partner of the Global Governance and Executive Compensation Group (GECN Group), serving clients throughout the world. Farient is recognized by the Women’s Business Enterprise National Council as a certified diverse company.
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