TITLE: What Does It Take To Build a Modern Board? Part I

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Huw Richards: Hi. I'm Huw Richards, head of digital investment banking at J.P. Morgan. I'm the host of our podcast series, What's The Deal? In each episode, I'll be joined by global business and industry leaders to look at the trends driving deal-making today and how they are transforming businesses and industries around the world.
Huw Richards: We recently recorded an in-depth conversation with two of my colleagues on the widely discussed topic of ESG or environmental, social, and governance. And in that conversation, we covered a lot of ground on the E and S fronts. But today we're going to take a closer look at corporate governance.
Huw Richards: With so much headline discussions centered on the composition and diversity profile of boards, today we're going to focus on the question of what it takes to build a modern board. To do this I'm joined by two experts to share their perspectives on addressing this question.
Huw Richards: Right inside the boardroom, I'm excited to be joined by Susan Chapman-Hughes. Susan holds seats on both the boards of Toast and Smuckers, and also sat on the board of Potbelly Corporation for six years. Susan started her career as a Citi planner and held positions as chief administrative officer of Citi Realty Services at Citi group, as well as EVP global head of digital capabilities, transformation and operations at American Express. Also joining us is my colleague Rebecca Thornton. Rebecca leads the directory advisory services group at J.P. Morgan.
Huw Richards: This team helps refer candidates to corporations in search of independent directors and works with clients on board building, succession planning and activism defense. 
Huw Richards: Welcome Susan and Rebecca. Thank you so much for being here today. 
Susan Chapman-Hughes: Hi, Huw. It's wonderful to be here.
Rebecca Thornton: Excited to be here, Huw. Thank you for having us.
Huw Richards: Great. Well, we appreciate you taking the time. So before we get started on the specifics of board composition and governance, I really want to set the stage within the broader context of ESG. So Susan, we on our podcasts, we really like to try and go behind the headlines in our conversations. So can I start with you on your perspective on just how seriously are board members and companies taking these interrelated topics of ESG?
Susan Chapman-Hughes: Boards are absolutely taking them very seriously. They candidly don't have a choice. There are so many things that have been happening outside of the company that impact the company's performance that are driven by ESG. Companies and boards have to be very serious about how they handle them.
Susan Chapman-Hughes: Obviously the environmental piece has been around for a very long time. Clearly over the years, the social piece has become much more prominent last summer with the incidents, around George Floyd's murder.
Susan Chapman-Hughes: Many companies realize that they have to get much more serious about it. And we certainly have seen lots of activity from the investor community, driving and pushing for companies to be more focused on this, as well as, organizations like Glass Lewis, the proxy advisors and ISS really beginning to push on companies to focus on this.
Huw Richards: Sounds as though what I'm hearing from you is that a lot of the stakeholders are joining together to send messages to companies that this is something that needs to be at the top of their radar screen.
Huw Richards: And Rebecca, when you are working with boards and when people are discussing their board searches with you, succession planning, et cetera, where does this topic, come in their, in their list of requirements?
Rebecca Thornton: It's been fascinating to be in a front row seat for the past nearly 25 years of governance. And if you look back at really Sarbanes-Oxley as being sort of a beginning of the focus on governance, we've seen to Susan's point a moment ago, the proxy advisors and the institutions playing a really significant role. 
Rebecca Thornton: So it's been a pretty exciting and dynamic time, no more so though than I would say the last two years where the focus on diverse and underrepresented boards has really been front and center of the criteria we get from our clients. About north of 80% now of our placements are women and or underrepresented minorities.
Rebecca Thornton: And I would say probably north of that, 90, 95% of our requests are exclusively looking for, women and underrepresented minorities, it truly is such a dynamic flip from where we worked 20 plus years ago when, the way that we went about doing director searches was looking at the CEOs who are not yet over boarded.
Rebecca Thornton: And as we all know, CEO's, 25 years ago were almost exclusively white men. So it's been a really fascinating, and I think quite encouraging change of course that we've seen here in the last few years driven, in my opinion, really, by a lot of the institutions and proxy advisors who have put really clear expectations around governance.
Huw Richards: Rebecca, you talked to a lot about governance there and diversity. And as Susan said, the environmental issue has been around for awhile, but it's definitely picking up focus. How is that being played out in director searches as well?
Rebecca Thornton: I'm glad you asked because it continues to surprise me how little we actually hear about the environmental piece of our criteria. In the, probably 1500 board searches I've done in my career, I think two or three of them had environmental as a criteria.
Rebecca Thornton: I'm hopeful that they're using their executive teams and advisors, to be prepared on that dimension, but we're not yet seeing it taking up a seat. And very few companies in the S&P 500 actually have an environmental, committee. 
Rebecca Thornton: It's still pretty small numbers, based on what you might expect.
Huw Richards: Interesting. And Susan, we began to touch a little bit on some of the stakeholders, that you mentioned the proxy advisors, et cetera. 
Huw Richards: And I'd like to take a little deeper dive from your perspective about what risks are companies thinking about, if they don't get this right? Right, if they don't take it seriously, what do they think the potential ramifications could be?
Susan Chapman-Hughes: The first big one is customers are going to choose to not buy your products. You have to be really very thoughtful about the fact that if you look at millennials, if you look at Gen Zers, many of them are very focused on companies that are mission driven. They're focused on companies that, understand the importance of protecting the environment.
Susan Chapman-Hughes: They're focused on companies reflecting the demographic mix of their population. And so they are voting with their feet. And you see that, in many of the various industries that are around. And it doesn't matter what industry it is. They literally are looking at everything that they consume. 
Susan Chapman-Hughes: I also think, boards have a responsibility and companies have a responsibility to not just, focus on shareholder value. At the end of the, the day, the stakeholder conversation is just a much broader one. But we've seen how just in the last year, companies have been forced to step up and engage in social conversations or conversations that are being driven by social issues of the day.
Susan Chapman-Hughes: CEOs and boards need to be prepared to talk about issues in real time. 
Susan Chapman-Hughes: And they have to be able to assess the risk associated with it for their company and how that's going to help them grow or not grow or impact the bottom line. The companies that I've, had the opportunity to be a part of the board, I've just seen the employees, and the customers really want their company to do the right thing.
Susan Chapman-Hughes: If you don't have people sitting in the boardroom who can help guide you and discuss those conversations and help give you perspective on the issues, then oftentimes, boards have blind spots around that. The diversity piece, of boards really helps that, and it helps them identify the risks that go beyond the typical things that, that risk have been in the past.
Huw Richards: Interesting. Has the speed at which all of this occurred, has that surprised you as insiders or were you just sort of thinking, well, it's about time that people caught up?
Susan Chapman-Hughes: No, personally, I think it's about time. People have been dragging their feet for issues that have been out there for a very long time. They just have had some precipitating events that have forced them to have to step up and deal with them. it's about time. 
Huw Richards: If you're all enjoying this conversation as much as I am, you can subscribe to this as well as our other podcasts to stay on top of the latest industry news and trends. J.P. Morgan's At Any Rate, Market Matters and Tech Trends are all available on Apple podcasts, Spotify and Google podcasts.
Rebecca Thornton: I totally agree with Susan's points. I would just say we're celebrating pretty small victories at this point, for female representation on S&P 500 boards, it's gone from 22% to 30%. And as a female, I will tell you I'm not satisfied. And I know that the numbers of underrepresented minorities are even fewer.
Rebecca Thornton: The genie's not going back in the bottle. And I think the companies who have been quick to adopt and adapt, will be rewarded for it. And the ones that don't will be punished for it by their stakeholders, by their employees, suppliers, et cetera.
Huw Richards: If one was to be controversial, one could say that a lot of corporations feel as though they're just being very reactive at this point, versus then actually trying to stake out at advanced future ground on this. A, do you agree with that? And B what do you think it will take for companies to move from reactive to proactive around some of these issues?
Susan Chapman-Hughes: I think it's okay that it's reactive. Whatever the precipitating event is that is moving forward it's okay. I think the thing is, once you have been awakened and you know that it's an issue, and you understand the context for what it is, then you have to be proactive in creating an organization that can keep it top of mind.
Susan Chapman-Hughes: And it doesn't become something that is what I call window dressing. So that means that, your leadership teams and your organizations have to be diverse from top to bottom. 
Susan Chapman-Hughes: If your leadership team doesn't reflect the broader community and the folks who are dealing with these issues, and if there aren't clear opportunities for those people to grow to more senior ranks in your company, then you're not doing it right. And the only way you can do that is making a commitment to being different.
Susan Chapman-Hughes: One of the things that I oftentimes try to advise, companies on and organizations is to just really be very thoughtful about what are the norms of your organization. What's the culture of your organization? Are those things actually supporting the goals that you have around changing the dynamic or are they hurting it?
Susan Chapman-Hughes: There are a lot of well-meaning and very good intentioned people out there who just get it wrong. I always like to use the word empathy in the way that I talk about this. And if you really think about empathy, empathy requires you to actually put yourself in other people's shoes.
Susan Chapman-Hughes: So if you're spending time with all people who look like you, who think like you, who act like you, you might be as well-meaning as you wanna be, but at the end of the day, you're not really going to be able to be truly empathetic because you haven't really taken the time and the energy to change the way you think.
Susan Chapman-Hughes: And that's really what it requires.
Susan Chapman-Hughes: I do think that people are beginning to recognize that. They're recognizing that the way they bring people into the boardroom has to be different, the way they do searches has to be different, the way, just some basic norms of the organization have to be different. They may not always get it right, but at least they continue to try and continue to evolve.
Susan Chapman-Hughes: This is a grand experiment in change, right? And if you know anything about change management, then you know that you start out with a really awesome plan, but ultimately where you end up is never where you started, because they're all kinds of things that you learn in the process.And so I just think that boards have to have a muscle around managing change and understanding that.
Huw Richards: This material was prepared by the investment banking group of J.P. Morgan Securities, LLC and not the firm's research department. It is for informational purposes only and is not intended as an offer or solicitation for the purchase, sale or tender of any financial instrument.
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