What should be on the minds of directors in 2013? Social media

Ask corporate governance expert Henri Eliot what looms as a concern for directors in the year ahead and his answer may surprise.

Social media is the new unknown in governance and many directors and boards don’t even know it is a reputational risk, the chief executive of consultancy Board Dynamics says.

It could even pose a bigger concern for company boards than health and safety.

“The power of social media is huge as stakeholders are no longer limited to voicing their concerns in private, but can mount a negative campaign against any company or director involved in a scandal overnight.

“An employee or customer can tweet instantly that Telecom broadband is down, for example,” Mr Eliot says.

Or tongues can wag freely online about the size of a chief executive’s pay packet or bonus.

Negative comments and campaigns can damage a company’s brand within seconds, even if the facts are incomplete.

“The damage is done once it goes live on the internet through Twitter or Facebook or in a blog.”

However, Mr Eliot says social media’s potential to damage a company’s reputation is an around-the-clock risk most boards do not have strategies in place to tackle.

In comparison, “known risks” such as the strength of the dollar, access to capital, legislative changes or slowing growth in emerging markets have usually been identified, with processes in place to monitor and manage them should they arise.

"Directors need to think of social media as the old fashion complaint letter that took a few days to received. Now it's in real time," Mr Eliot says.

While directors can not be held responsible for negative comments made about their company on social media platforms, it is important that they are well informed and aware of the potential.

Mr Eliot says it is a good thing that companies are employing methods to track their online presence, but directors need to ensure this information is fed back to the boardroom, and directors are made aware of this activity.

“It’s the tracking that is the key.”

What else will directors worry about in 2013?

Offshore risks
Economic uncertainty offshore still poses risk to Kiwi companies.

This includes the European debt crisis, political volatility in the Middle East a fragile economy in China and, closer to home, the ups and downs of the Australian economy.

“Directors need good economic and political analysis to stay up to date with global economic uncertainty.

“You’d be amazed how little directors read. But it’s so important to have several perspectives when you make a decision as a director, acting as a guardian of shareholder interests.”

Skills and ethnic diversity
The importance of skill and ethnic diversity will not be overlooked as the NZX’s diversity rule is adopted in 2013.

This states that the annual report of listed company must provide “a quantitative breakdown as to the gender composition of the issuer’s directors and officers as at the issuer’s balance date”.

Although transparent reporting of diversity policy is a good start to ensure boards evolve from the “’stale, male and pale" label, skill sets and ethnic diversity will also need to be addressed.

Mr Eliot says studies have shown that a range of diversity in the boardroom (gender, skill, age and ethnicity) improves effective governance by challenging the status quo.

But most New Zealand company boards lack any form of diversity and are more like an “all-white male club”.

Diversity is important to protect shareholder interests to strike the right balance of knowledge and skills and ensure you have several perspectives when making a decision.

“Gender diversity is still top of mind for many boards. There is a growing pool of women for directorships, but some need the opportunity to gain governance experiences.”

Mr Eliot suggests this could be helped if companies encouraged more senior executives to sit on boards while they are in their executive role.

“It’s a type of mentoring approach, so they would have no voting rights. They’re just there for boardroom experience.”

Changing technology and consumer trends
As well as worrying about the global economic climate, directors will worry about new trends that canchange their business and operating models.

A "Kodak moment" is to avoided, when the product is overtaken by new, digital trends. That’s the challenge Research in Motion, creators of the BlackBerry mobile phone device, will have faced as many people have migrated to Apple’s iPhone or Android alternatives.

“The question directors need to ask is, how do we change to be sustainable?”

Directors need to work closely with the company’s management team to identify threats and opportunities for the company.

Technology
New technology is evening out the playing field for many smaller companies, Mr Eliot says.

For example, the common use of cloud storage services provide competitive advantage of scale many smaller companies could previously only dream about.

Companies will need to look at talent rather than access to information, he says.

Could we see the beginning of talent wars?