The impact of the political climate on board dynamics and decision-making

Corporate boards face many challenges, internal and external alike, but the political environment in which they operate stands to be one of the most complex. To effectively advise the company they’ve been tasked with championing, directors must stay on top of evolving market trends and be prepared to adjust their strategies accordingly.

But what if those trends change so quickly that it becomes impossible to predict what will happen next?

Arguably, this is the case with the current US political climate. Much has happened since Donald J. Trump was sworn in as the 45th president of the United States, and right now, directors everywhere are working to ascertain what the shift means to them in the context of their role as members of the board.

The singularity of the situation at hand requires a customised strategy. To continue to succeed in the months and years to come, directors must be adaptable, creative and above all else, ready for anything—however unexpected. The impact of the political climate on board dynamics and decision-making

BUSINESS AS UNUSUAL Americans now exhibit record-high levels of anxiety about the future of the country. There’s no question that it’s a difficult time to be making critical business decisions. Since the election, the Dow Jones Industrial 'People are saying they’re more stressed now than they have Average has risen by more than 2,500 points and reached been in quite some time', Lynn Bufka, associate executive record highs for 12 days straight, while the Standard & Poor’s director for practice, research and policy with the APA, tells 1 500 index reached a record high in late February, as Reuters USA Today8. The APA reports that 62 per cent9 of respondents reported. It’s a similar story with the Nasdaq and Russell 2000 in urban areas say the outcome of the election is a very or 2 3 indexes, according to CNBC . Although The Atlantic reported somewhat significant source of stress. Regardless of location, that investors were 'terrified of a President Trump' prior to the 72 per cent of Democrats felt this way, while 59 per cent election, Trump’s pro-growth economic policies have had a of Republicans said they are worried about 'the future of direct effect on the direction of the stock market. the nation'.

At the same time, the Organisation for Economic Co-operation Overall, 57 per cent of Americans are stressed about the current and Development (OECD) reported in its Global Interim political climate and 66 per cent worry about the country’s future. Economic Outlook for March 20174 that while global GDP growth is projected to 'rebound modestly to 3.6 (per cent global growth) by 2018', there is 'low trust in government, and that clouds the Political issues stressing Americans policy environment'. % reporting very/somewhat significant source of stress

Current political Future of our Election climate nation outcome People are saying they’re more 57% 66% 49% stressed now than they have been in quite some time.

It’s not unreasonable to wonder whether the Trump administration’s trade policies, led by 'anti-China economist'5 Results from January survey (Source: The American Peter Navarro, along with Trump’s immigration ban, could still Psychological Association) have a negative effect on the economy. As Shawn Tully, an editor-at-large with Fortune magazine, wrote in a piece titled 'The POLITICS AND ITS PLACE ON THE BOARD Promise and Peril of the Trump Economy'6, 'Put simply, America Politics has always influenced the way corporations and their has never witnessed such a contradictory mix of free-market boards operate. Just consider the study that was released and anti-growth policies in the White House. Or a President who last year by University of Washington Foster School of operates in such an unorthodox and unpredictable way.' Business. Assistant professor Abhinav Gupta found10 that This uncertainty takes a toll on the business world and the conservative boards pay their CEOs more than liberal boards general population, as evidenced by the results of the American do. Conservative-leaning boards are more likely to tie pay Psychological Association (APA)’s annual nationwide 'Stress in to performance, the study finds, raising pay to reflect strong America' poll7. For 10 years, the APA has surveyed Americans 'to earnings and stock returns as well as penalising CEOs when examine the state of stress across the country and understand the company’s performance isn’t as favourable as the board its impact'. The most recent results show that two-thirds of all feels it should be.

1 'Dow hits 12th record high close; Trump talks up infrastructure spending', Reuters, 6 'The Promise and Peril of the Trump Economy', Fortune, Shawn Tully, 16 February Caroline Valetkevitch, 27 February 2017, http://www.reuters.com/article/us-usa-stocks- 2017, http://fortune.com/2017/02/16/president-donald-trump-economy-executive-orders- idUSKBN1661KL policy/ 2 'Dow, S&P, Nasdaq and Russell notch new record highs, up more than 10% since 7 'Stress in America', American Psychological Association, February 2017, http://www. election', CNBC, Fred Imbert, 21 February 2017, http://www.cnbc.com/2017/02/21/us- apa.org/news/press/releases/stress/index.aspx markets.html 8 'Poll: "Political climate" is freaking most of us out', USA Today, Kristen Jordan Shamus, 3 'Why Investors Are Terrified of a President Trump',The Atlantic, Derek Thompson, 16 February 2017, http://www.usatoday.com/story/news/nation- now/2017/02/16/poll- 24 October 2016, https://www.theatlantic.com/business/archive/2016/10/donald-trump- two-thirds-americans-stressed-future-us-politics/97986834/ business/505097/ 9 'Stress in America', American Psychological Association, February 2017, http://www. 4 'Global Interim Economic Outlook, March 2017', The Organisation for Economic apa.org/news/press/releases/stress/index.aspx Co-operation and Development, March 2017, http://www.oecd.org/eco/outlook/ 10 'Political ideology of corporate boards influences CEO compensation', Foster School economicoutlook.htm of Business, 31 October 2016, http://foster.uw.edu/research-brief/political- ideology- 5 'Trump names anti-China economist as trade council chief', Al Jazeera, 22 December corporate-boards-influences-ceo-compensation/ 2016, http://www.aljazeera.com/news/2016/12/trump-names-anti-china-economist-trade- council-chief-161222132749189.html The impact of the political climate on board dynamics and decision-making

If political ideology can affect the board’s perspective on running among the companies added to the #GrabYourWallet boycott a business, it stands to reason that a turbulent political climate campaign after the granddaughter of the company’s founder, will impact the way board members function as well. As the who is also an L.L. Bean board member, made a large donation Harvard Business Review reports11, a survey of more than 4,000 to a pro-Trump political action committee. Business Insider also global business directors that was conducted in 2015 found that reports13 that companies including , and Macy’s 65 per cent of directors regard the economy as the political have severed ties with Trump and various Trump brands in an issue they care about most. Corporate tax rates and political effort to remove themselves from boycott lists. instability rank 22 per cent and 18 per cent, respectively. All of this puts corporate directors in a difficult position. Factors The study also shows that directors are generally pessimistic like the economy, the zeitgeist and consumer trends affect about the state of the economy over the next three years. 'Why corporate strategy. When the economy is in a state of flux as does all this matter?' ask Boris Groysberg and J. Yo-Jud Cheng, policies—such as Trump’s immigration order and travel ban, authors of the HBR article. 'Because board members are likely to which was recently revised14—continue to change, it isn’t easy for factor in their pessimism as they advise their companies on firm boards to deliver on what’s expected of them. What happens to strategies, merger and acquisition activity, resource allocations a company’s relationship with existing global allies, for example, and expenditures in the coming year.' if Trump’s 'America first' maxim15 alienates China and Mexico? How can directors vote on a potential international expansion as To complicate matters further, consumers’ political affiliations part of an evolving corporate strategy without knowing whether have resulted in economic protests that impact companies of or not Trump will impose a 35 per cent tariff16 on businesses that all kinds. As Business Insider recently noted12, L.L. Bean was open a factory abroad?

The political issues board directors care most about

Percentage of directors who say the issue is important11

65% Economy 6% Unemployment

59% Regulatory environment 5% Equal rights for women

38% Cybersecurity 4% Foreign policy

22% Corporate tax rates 4% Economic justice

18% Political instability 4% Immigration policy

18% Health care costs 4% Personal tax rates

National retirement program 14% Environmental sustainability 3% costs/expenditures

11% Education 3% Carbon tax

8% Energy costs 5% Other

8% National budget deficits

11 'The Political Issues Board Directors Care Most About', Harvard Business Review, 15 'After Trump pledges "America first", the world responds with protests and dismay', Boris Groysberg and J. Yo-Jud Cheng, 16 February 2016, https://hbr.org/2016/02/the- , Griff Witte, 20 January 2017, https://www.washingtonpost. political-issues-board-directors-care-most-about com/world/demonstrationsand-apprehension-mark-worlds-response-to-trumps- inauguration/2017/01/20/6f1f2dc2-dce4-11e6-918c-99ede3c8cafa_story.html?utm_ 12 'The anti-Trump boycott of 70 retailers won’t back down — here’s how it could affect term=.81e1c3a6035c sales', Business Insider, Leanna Garfield, 21 January 2017,http://www.businessinsider. com/trump-boycott-companies-will-it-work-2017-1 16 ' Warns of 35% Tariff For Companies That Move Abroad', Fortune, Mahita Gajanan, 4 December 2016, http://fortune.com/2016/12/04/donald-trump-tariff- 13 'Here are all the companies that have cut ties with the Trump family', Business company-regulations/ Insider, Hayley Peterson and Kate Taylor, 7 February 2017, http://www.businessinsider. com/companies-cut-ties-with-trump-2017-2 14 'Trump signs new travel ban directive', BBC News, 6 March 2017, http://www.bbc.com/ news/world-us-canada-39183153 The impact of the political climate on board dynamics and decision-making

BATTLE UNCERTAINTY WITH FLEXIBILITY AND how corporate boards function and set priorities', Groysberg POLITICAL DIVERSITY and Cheng write. While they add that 'having directors with a range of political philosophies can invigorate board discussion Directors are expected to make educated business decisions and ensure that a wide array of issues and solutions reach the designed to help a company to grow and those decisions have boardroom', directors must know that politics can—and likely to stand up against any investment and economic climate, will—influence both decision-making and board dynamics. including ones that may seem enigmatic. Whether faced with an unpredictable political climate or politically fuelled differences EMBRACE CREATIVITY of opinion within the board itself, directors’ best strategy is flexibility. Directors should be encouraged to start conversations with 'What if?' and to think creatively, both in order to maximise 17 When volatility, uncertainty, complexity and ambiguity reign, board members’ expertise and to reduce the possibility of companies must be ready to pivot quickly and respond with the complacency. best interests of the company in mind. In other words, directors must come to the table with an open mind, ready to tackle every The common practice of presenting solutions finalised long ago possible scenario. without giving thought to how they fit into the evolving political atmosphere fails to take full advantage of a board’s inherent It’s tempting for directors to take a fixed approach to board creativity, born of the combined expertise and experience of decision-making. Unless they know with certainty how to resolve diverse directors. These professionals' knowledge of market an issue or feel they can accurately predict how their fellow trends, the competitive landscape, demographic shifts and more directors will react to an idea, they are sometimes reluctant to gives a board the power to assess and effectively tackle the move forward. But strong corporate governance requires that issues that matter most—no matter what kinds of changes may directors adapt to change, inside and outside of the company. be in store. As turbulent as today’s political climate may be, there are always challenges beyond a board’s control and knowing how In a way, the current political climate presents a valuable to face them is crucial to ongoing success. opportunity for boards to change the way they make decisions. As part of a series on leadership and management, Canadian Consider the outlook of the US Securities and Exchange newspaper, The Globe and Mail, offers20 two questions designed Commission, which analysed the work that directors do and to promote creativity: 'How do we get there?' and 'What do we shared several principles 'critical' to corporate governance. have to do differently?' Regardless of the problem at hand, these 18 According to Luis A. Aguilar , former SEC commissioner, 'in questions can help organisations create innovative solutions that today’s volatile world, how a company prepares for and also differentiate the company from the competition. responds to major disruptive events — sometimes referred to as "resiliency" — has become increasingly critical to the protection 'Creativity is driven by declaring a goal without knowing exactly and growth of a company’s assets'. how it will be achieved and doing the hard entrepreneurial work to figure it out', writes Roy Osing, former executive vice- The current political climate aside, politics will always have a president of Telus20. 'It’s about having the intestinal fortitude to place in the boardroom. As Boris Groysberg and J. Yo-Jud Cheng enter uncharted waters, pointing your ship in the direction you 19 discovered in their survey , political affiliation can have a strong want to go, and navigating — creating — as you go.' influence on board members’ decisions. For instance, while both Republican and Democrat directors consider strategy to be the A flexible and creative board is resilient and prepared to deal skill most needed by directors, Republicans value financial/ with all external challenges. To build and grow a company in audit expertise and industry knowledge. Democrats, meanwhile, unpredictable times, versatility and judicious decision-making prioritise risk management and technology skills. are key. The most successful companies will wholeheartedly embrace these strategies. 'Political affiliation is another form of board diversity — one that is rarely discussed, but could have profound implications on

17 'What VUCA Really Means for You', Harvard Business Review, Nathan Bennett and 19 '7 Charts Show How Political Affiliation Shapes U.S. Boards',Harvard Business G. James Lemoine, January–February 2014, https://hbr.org/2014/01/what-vuca- really- Review, J. Yo-Jud Cheng and Boris Groysberg, 23 August 2016, https://hbr. means-for-you org/2016/08/7-charts-show-how-political-affiliation-shapes-u-s-boards 18 'The Important Work of Boards of Directors', US Securities and Exchange 20 'Two questions leaders should ask to get the creative juices flowing',The Globe and Commission, Commissioner Luis A. Aguilar, 14 October 2015, https://www.sec.gov/news/ Mail, Roy Osing, 27 July 2016, http://www.theglobeandmail.com/report-on- business/ speech/important-work-of-boards-of-directors.html#_edn33 careers/leadership-lab/two-questions-leaders-should-ask-to-get-the-creative-juices- flowing/article31016575/ Unleashing the value of information. Securely.

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