2016 Corporate Responsibility Report

External Review Panel

Betsy Bosak

Betsy Bosak

Vice President • Spectrum Knowledge, Inc.
Betsy Bosak is vice president of diversity and inclusion at Spectrum Knowledge, Inc. Prior to this post, she spent 26 years with Northrop Grumman. Her nationally recognized work includes expertise on racial attitudes, work-family balance, women in non-traditional careers and sex role stereotyping. She has published 25 articles in professional journals including Journal of Social Psychology, Journal of Gerontology, Psychology of Women Quarterly and Contemporary Educational Psychology. She also testified at a meeting of the Equal Employment Opportunity Commission regarding post-9/11 issues in the workplace. She received her bachelor of arts, master of arts and doctorate in educational psychology at University of California Los Angeles.

Louis D. Coppola

Louis D. Coppola

Co-founder • Governance & Accountability Institute
Louis Coppola is executive vice president and a co-founder of Governance & Accountability Institute. He also serves on the board of directors for The Global Sourcing Council. Louis provides advice to corporate and investor clients on sustainability strategy, disclosure (reporting), investment and performance. He is co-chair of the Social Investment Forum's Sustainable Investment Research Analyst Network (SIRAN) Sustainable Education and Company Engagement (SECE) committee. He is an active New York Society of Securities Analyst Sustainable Investing Committee steering member. Louis is also an adjunct professor at the Bard M.B.A. in Sustainability (New York City campus) where he teaches courses on business pragmatics of sustainability.

James Haddow

James Haddow

Director • Howard University School of Business
James Haddow is director of the Center for Excellence in Supply Chain Management at Howard University School of Business in Washington D.C. Along with teaching a range of supply chain management courses to both undergraduate and graduate students, he is also a faculty advisor to students during supply chain case competitions. Jim has 30 years of industry experience with specialties including strategic sourcing, supply chain assessment, project management, global security, expense management systems, performance measurement, strategic planning and financial analysis. He received a bachelor of science in business and management, as well as an MBA with a concentration in logistics, from the University of Maryland.

Dean Krehmeyer

Dean Krehmeyer

Executive Director • University of Virginia
Dean Krehmeyer is executive director of the University of Virginia Darden School’s Institute for Business in Society, which serves as a leading global catalyst of thought, information, and action on business. He facilitates executive seminars in corporate governance and business ethics and is the co-author of “Breaking the Short-Term Cycle: Discussion and Recommendations on How Corporate Leaders, Asset Managers, Investors, and Analysts Can Refocus on Long-Term Value.” He received all of his degrees from the University of Virginia including a B.S. in commerce, M.S. in accounting, and an MBA.

Mark A. Shamley

Mark W. Shamley

President and CEO • ACCP
Mark W. Shamley is president and CEO of ACCP and has more than 20 years of experience in corporate and public affairs, corporate social responsibility, business development, and marketing. Prior to joining ACCP, he oversaw community relations and government affairs for the National Basketball Association Orlando Magic. He received his B.S. in marketing from Marist College in Poughkeepsie, New York, and has a MBA in international business from the Crummer Graduate School of Business at Rollins College, in Winter Park, Florida.

Background

For the sixth consecutive year, Northrop Grumman leaders convened an External Review Panel as part of the annual corporate responsibility report formulation process. The mission of the five-member group was to review the 2016 Northrop Grumman Corporate Responsibility Report for readability, clarity of goals and activities, transparency and year-on-year comparability.

Northrop Grumman contributor teams nominate stakeholder panelists with significant professional background, knowledge and experience in key topics related to sustainability and corporate responsibility. To promote continuous improvement and fresh perspectives, panelist terms are staggered. For the 2016 External Review Panel, one new member Louis Coppola joined four current panel members: Betsy Bosak, James Haddow, Dean Krehmeyer and Mark Shamley. For each panel member shown, readers can find an individual biography linked to each image.

Panelists’ observations reflect individual points of view and not those of their respective organizations. The process began by providing each panel member an executive review draft of the 2016 Northrop Grumman Corporate Responsibility Report (hereafter "Report"). The panel then met virtually, culminating in an in-person meeting at Northrop Grumman corporate headquarters in Falls Church, Virginia. During this meeting, panelists were able to have discussions with key Northrop Grumman senior managers and content providers related to various approaches and resulting content of the Report.

The panel did not review underlying data or relevant process documents, and therefore the review process does not represent independent verification of the performance data within the Report.

In recognition of the respective time, expertise and contribution of each panelist, Northrop Grumman representatives offered to make a grant in each panelist’s name to a designated, qualified 501(c)(3) organization. Additionally, Northrop Grumman provided panelists reimbursement for related travel and lodging expenses.

General Overview

The overall flow of the Report is very effective and highlights key features about the culture at Northrop Grumman including values and systems thinking. The Report nicely aligns those factors considered material to the company. The data charts continue to be more informative and provide improved comparability and clarity (good examples on pages 9 and 31).

The Report is also improved in integrating key topics throughout, rather than organizing content as individual “silos” within sections. For example, the topics of ethics, diversity, values and supply chain resonate throughout the Report, not just in those respective sections. This is indicative of how Northrop Grumman employees integrate these concepts throughout company operations.

The expanding global emphasis at Northrop Grumman is very clear throughout the Report. Frequent reference to new 2016 programs creates a living document that is in alignment with the company values.

Other overall observations of the Report:

  • Presents well, i.e. layout and graphics.
  • Provides comparative data on inquiries and allegations, and high transparency into results of such allegations, including terminations and other actions resulting from OpenLine Contacts (page 21).
  • Highlights the composition and strong diversity of the Board of Directors.
  • Documents a number of exceptional supply chain programs such as the mentor-protégé, supplier risk assessment and SBIR that highlight the company’s leadership in these areas.

Overall, Northrop Grumman executives and employees have a great citizenship story to tell. Using more topic-specific human imagery throughout, to tell that story, would greatly complement the narrative and message.

Governance

This section is very effective with a narrative and structure designed for “non-proxy-reading” stakeholders. The “Board Oversight of Risk” content and chart (page 18) are very effective in illustrating one of the Board’s primary roles – assessing and ensuring mitigation programs against risks. The chart of director attributes (page 17) is also very effective. While many companies include these attributes – and how well their directors fulfill these attributes – in narrative format, the visual chart format is unique, clear and works very well.

For the “Governance Goal and Performance Summary” (page 16), it might be more impactful if there were external, third-party corporate governance principles cited to which Northrop Grumman practices adhere or exceed. And the “Political Participation Disclosure” section (page 18) reads more like legal language than the rest of the overall section. It would be helpful to expand upon what this content means for the non-legal reader.

Overall, the Ethics section describes a well-designed program with excellent communication, focused training and signs of continuing improvements. The “Ethics: Own It, Live It, Lead It” framework is very effective – it is reinforced and fully described (pages 20 to 22) in an easy-to-understand approach that is clear and succinct, which are two hallmarks of a successful program. The “Values-Based Ethics” box (page 19) is a very nice description tying ethics and culture together; it helps “bring ethics to life” in understanding the culture at Northrop Grumman.

Similar to previous editions, the “OpenLine Contacts” graph is notable for its transparency: it provides very good comparability into the inquiries/allegations identified via the ethics processes by including the 2014 and 2015 figures along with 2016. This graphic could be further strengthened, for example, if accompanied by a comparison of Northrop Grumman calls, allegations and violations against Defense Industry Initiative (DII) peers (adjusted for headcount).

Innovation

This section clearly highlights how important the systems thinking/systems engineering approach is at Northrop Grumman and how the business model serves as a clear differentiator. The specific example, the Wildlife Challenge, demonstrates a close customer working relationship and innovation, two well-established hallmarks at Northrop Grumman.

The narrative could include more content and examples of systems thinking/systems engineering in action. Another improvement to consider: develop a graphic that displays the system engineering process to help the reader understand how it integrates across all aspects of the engineering and development process.

Environment

This section uses a good combination of comparable data and charts throughout (especially those on pages 31 and 41). The reported progress over time is very impressive. The inclusion of Environmental Sustainability as one of the corporate performance metrics highlights the importance of this dimension to corporate leadership at Northrop Grumman. Another impressive example is the reported continual innovation with the virtual office ergonomic assessment process.

The narrative indicates (page 41) that Northrop Grumman leaders benchmark company performance with industry peers and Department of Labor statistics: consider including those results within the Report. There is also little reference in the Report to areas of concern or ongoing risk related to the environment.

People and Culture

This section discusses numerous new programs for 2016 including ACCOMMODATE, manager readiness and the redesigned Northrop Grumman Development Center, all of which shows the continuing evolution and responsiveness to employee needs. The Corporate Citizenship narrative is well organized by priority area. The emphasis and discussion of STEM programs clearly aligns with the company mission and future needs.

The narrative addresses a broad array of impressive programs with non-financial goals tied to executive compensation for diversity and inclusion, employee engagement and expansion of the diverse slate of candidates, which clearly demonstrates leadership commitment to these areas. The "Community Investment through Philanthropy" graphic (page 42) is strong.

As in other areas of the Report, consider including more comparable data to show trends in employee demographics. Under Employee Engagement, there is no mention of the valuable Employee Resource Groups. Also, the section needs greater balance: it is not apparent where opportunities for improvement or risks lie. Also, as Northrop Grumman is a global business, the Report could highlight more non-domestic citizenship examples.

2016 Report Card:
External Review Panel Recommendations

The external review panel suggested that future Northrop Grumman reports could be improved through a number of recommended changes:

Provide More Comparable Data:

The first example of comparable data appears on page 9, which is an excellent chart showing progress over time related to diverse supplier spending. Similarly highlighting comparable data throughout the report, including year-on-year data across the various content areas, would be helpful in providing greater context to. Other data could include more key employee demographics (race and gender breakdown for total workforce, professionals, managers and executives); details of agency complaints (comparisons over time and benchmark data showing complaints per 1,000 employees); and engagement and inclusion survey data including how Northrop Grumman compares to others in the defense industry.

Create a Single, Concentrated Data Table:

A single data table, containing all key performance indicators, would allow readers and report analysts to easily, quickly and accurately collect analytics from the Report, which are used in rankings by important investor groups and other stakeholders.

Expand Use of Graphics:

Greater use of graphics, to show results and benchmark comparisons over time, would help the reader better visualize progress on key dimensions.

Refine Imagery:

The image treatment is inconsistent throughout the Report. While many clearly relate to and support the topics/descriptions (pages 15, 20, and 26) there are also images with a less clear relationship to the page content (pages 2 and 18).

Improve Goals and Performance Presentation:

This important element gets an inconsistent treatment throughout the report. A greater consistency in the depiction of goals and performance metrics would provide clarity and strengthen the “one voice” narrative.

Highlight Human Rights:

The section on Human Rights (page 14) is thin and surface-level. With this as a critical supply chain issue, there should be more mention of efforts at Northrop Grumman related to this topic. For example, under “Being Responsible: Global Supply Chain Management,” highlight an example of the focus on human rights at Northrop Grumman. This would be a powerful message to suppliers and stakeholders globally.

Expand Reporting on Materiality:

Overall, the Report lacks balance on materiality issues by not citing enough negative issues that might impact the sustainability goals at Northrop Grumman. Future editions could include more content about ongoing challenges.

Eliminate Redundancy:

In places, there is unnecessary redundancy in the Report such as the discussion of “Mission” (pages 7 and 8) and “Supplier Performance” (pages 12 and 13).

Define Terms:

A short glossary of terms not commonly understood would be helpful.

Conclusions

Overall, the Report includes many aspects that are leading practice. Further, the Report is well structured including a GRI G4 Content Index that allows readers to quickly identify content. In total, the Report clearly communicates the numerous goals, efforts and performance of employees throughout the company.

Future refinements might include a refreshed materiality assessment that takes into account best practices developed by industry standard setters and leaders. And the Stakeholder Engagement process could use a better governance structure to make it clearer the type, frequency, goals and outcomes of the various stakeholder engagements.