May 29, 2019
May 29, 2019
Is it possible to govern an organization fit for the third decade of the twenty-first century using a board model from the early twentieth century?
The pressures on boards and governance models to change are increasing and directors are faced with two key challenges.
First, boards must adapt governance to the needs and demands of an agile institution. Organizations of all sizes must increase their speed, adaptability, and innovation to thrive in today’s dynamic global environment. This extends to board oversight and governance.
Second, boards are dealing with a growing number of mandates and a near constant onslaught of unpredictable events and tough scrutiny from regulators, activist investors, employees, commentators, politicians, and—most importantly of all—customers. Amid these pressures, board oversight is a complex balancing act as organizations safeguard core business, manage social responsibilities, and develop innovative new propositions, all at an increasing pace.
Against this backdrop, it is time to ask: Is your board agile?
An agile board is able to identify and respond effectively to the rapid and unexpected changes in the internal and external environment. It is characterized by a forward-looking and exploratory approach that challenges and nurtures both current and future business, enables quicker decision-making, and supports the organization to be more adaptable and innovative when confronted by change. The transition to a more agile board will require re-thinking the board agenda, board composition, and board practices.
In the face of rising regulatory and compliance regimes, a board’s overflowing and largely prescriptive agenda is often filled with backward-looking tasks and is mostly dedicated to traditional and procedural governance matters. This limits the time and opportunities for a robust group discussion of strategy.
For example, the recent NACD Public Company Governance Survey found that 70 percent of directors believe their boards need to strengthen their monitoring of strategy execution and their understanding of risks and opportunities affecting company performance. Yet improving the rigor of preparing board agendas ranks last among areas for board improvement: Just 27 percent of respondents ranked it important or very important to improve board agenda planning.
Board agendas need to shift from largely fixed, backward-looking reviews—which are often determined by habit—to flexible, forward-looking agendas. Changes to the pace and structure of a board agenda will need to be implemented alongside new processes to set the agenda to ensure that board discussion is focused on the strategic topics that matter most. For example, updates can be provided to board members instantaneously between meetings, using tools such as a board portal, to provide access to timely data related to ongoing issues. This could release time on the crowded board agenda for forward-looking discussions. Indeed, simply a focused analysis of how the board applies its time or plans the agenda could reveal improvement opportunities.
Board composition is key to bringing fresh thinking to and in stimulating mental agility in the board room. Despite considerable recent focus on diversity in terms of gender, race, nationality, and cognition, many boards are, in reality, still composed of individuals from similar backgrounds. One recent analysis of 2018 board composition showed that about 25 percent of Russell 3000 directors served for more than 15 years before stepping down, and female directors hold 16 percent of board seats in the Russell 3000. Twenty percent of the Russell 3000 have no female directors at all.
To affect change, boards and their nominating and governance committees will need to work with executive search firms, associations, and other networks to access a wider and more diverse pool of potential candidates. Currently, most directors are recruited from known networks of the current board members and the executive team, although there is a growing trend of using executive search firms. Indeed, given the limited number of women in corporate pipelines, if boards want to increase the number of women or broader diversity on boards, they will likely need to break out of traditional director recruiting grounds and processes. For example, according to Catalyst, women hold just 5 percent of S&P 500 CEO positions and just 26 percent of executive positions. There are only three African American CEOs of Fortune 500 companies.
Boards also need to reconsider what the most desired candidate capabilities are when recruiting board members. Most boards currently focus on industry experience, financial expertise, and past executive experience when setting a recruitment matrix. Far less emphasis is placed on experience with topics such as strategy, information technology, international economics and risks, cybersecurity, marketing, digital media, and human resources. Boards should consider contrasting their current recruitment list against the greatest challenges facing most organizations, including digital or technological disruption, talent shortages, and a turbulent geopolitical environment. Doing so reveals that the need for cognitive diversity is fierce.
Re-focusing the board agenda may be difficult in the face of rising oversight requirements and shifting board composition may take time to achieve. Shifting existing practices and mindsets is no straightforward task, but starting small and learning by doing can be significantly more effective in stimulating agility.
For example, simply changing the format of board meetings or where members sit around the board table can shift the dynamics and conversation in the room. Implementing alternative decision-making techniques, such as “red teams” (a group of board members providing deliberately provocative perspectives to stimulate debate), “tenth man” (avoiding groupthink by assigning one board member to be contrarian should the board unanimously agree on something), or “six thinking hats” (considering ideas in six different thinking styles), can also serve as powerful ways to generate greater mental agility around the board table. Boards could pilot a “studio style” approach to board meetings and committees, applying design thinking and cocreation principles to increase understanding, insight, and creative challenge around key business issues. This tactic in particular may suit less formal meetings, such as the annual strategy offsite.
This process of experimenting with and testing new approaches, then refining, practicing, and embedding the changes to formalize new behaviors at board meetings are hallmarks of an innovative and agile organization.
Greater use of digital and analytical tools within the board environment can also enable access to a much wider range of insights, generating deeper understanding and contrary ideas. For example, using real time virtual focus groups to understand the direct perspectives of different communities on key issues will provide much richer insight and understanding than written reports, key performance indicators, or face-to-face briefings can achieve by themselves.
The challenges that boards are facing are only set to grow in complexity over the next few years. Providing fresh perspectives on difficult issues will be a key differentiator between boards and will play a fundamental role in how organizations adapt and thrive in the future.
Michelle Daisley is a partner in Oliver Wyman’s Organizational Effectiveness practice in Europe with a focus on corporate governance and risk organization, as well as governance and effectiveness. Margarita Economides is an engagement manager in the Organizational Effectiveness practice at Oliver Wyman, specializing in wealth and asset management firms.