Topics: Risk Management
Topics: Risk Management
January 5, 2022
January 5, 2022
It is hardly news that changes in markets and technologies are often disruptive to ongoing business success. Or that leadership teams need to adapt what their companies do, and how they do it, to keep up with the future.
The real question is: What is the board’s role in all of this, and how might that role be changing?
In early 2021, the Aarhus University Department of Management and Copenhagen Institute for Futures Studies conducted in-depth interviews with 25 nonexecutive directors and board chairs spanning more than 20 industries, many representing companies with 5,000-plus employees or more than EUR1 billion in annual turnover. We investigated board members’ perception of their roles and responsibilities in maintaining organizations’ future preparedness. While our respondents were from European Union-based multinationals, the future-facing dilemmas and practice insights in the report are similar, if not identical, anywhere in the business world.
To diagnose boards’ future orientation and forward capability, we asked respondents to answer “yes” or “no” to statements such as the following. As you read them, ask yourself: How would your board answer?
For our interview respondents, the results from these and similar questions were decidedly mixed.
Directors strongly recognize that their companies are facing high levels of external change and report rapidly growing board attention on questions of strategy. Respondents offered a ubiquitous “yes” that the board has a role to play—alongside management—in company readiness for future challenges, and that stewarding the company’s long-term success is core to the board mandate.
But respondents are not at all self-congratulatory about how well they’re doing on this. By their own assessment, they’re only partly and imperfectly able to leverage anticipatory systems to assess or advance company readiness. The pandemic has opened everyone’s eyes to what it really means to be future-prepared.
Significantly, the research shows that board members individually and collectively pay attention to their organization’s preparedness for the future. Directors are involved in enterprise risk management, disaster anticipation, and recovery planning; participate in the annual strategy session and strategic planning initiatives; and keep an eye on management succession planning and the talent pipeline.
Also, boards are renewing and diversifying in terms of age, gender, and background. Most directors interviewed reported self-driven, self-guided paths to keeping up to date with industry change—monitoring industry literature and seeking out knowledgeable sources. Many are also active in mergers and acquisitions prospecting, an activity closely bound to building the necessary company alliances, resources, and scope for the future.
In other words, future preparedness is not some outlier board activity. It is a big part of what boards do. But interviewees gave themselves no more than, on average, a “C-“ in terms of how future-prepared they and their companies actually are.
The question then becomes, how might they do better? There are three pathways:
1. Push existing future-oriented board activities further and mutually integrate them. Directors can question comfortable assumptions to prevent annual strategy sessions from becoming a box-checking exercise. A good starter question for this is: “Are you sure this is right?” (not right in the minutiae, but right in terms of worldview and mental model).
2. Apply non-predictive industry foresight methods and approaches. Such methods are unrelated to forecasting or modeling, which proceed by extrapolating data forward. But this approach is brittle to even minor changes in the external environment, and, therefore, is intrinsically unreliable and often directly misleading in times of change.
Instead, enhanced future-industry judgment is achieved by comprehensively scanning and cataloging change indicators (with an awareness of cognitive framing and other cognitive biases) and then creating previews of plausible-but-not-predicted external future operating environments which account for technology, market, regulatory, and competitor developments, as well as the feedback effects among these. This allows current or near-term strategy choices to be critically evaluated against new or surprising conditions, in addition to generally expected conditions.
3. Clarify the relationship between the board and executive management with regard to future responsibility. There is no one right model here. Some boards have cultures that are more hands-off and see their future-related stewardship as an “audit” item: Is management doing the correct positioning for the future? Others see the board taking a more active role in surfacing ideas and bringing them to the table.
As companies look ahead to 2022, the external environment looks as complex as it ever was, perhaps more so. The challenges of sustainability and digitalization are not going away, but merely evolving against empowered non-state actors, supply chain reverberations, and ongoing culture wars. Weather disruption is a certainty, as are remote working, the rapid advancement of artificial intelligence, and an imminent leap to the spatial (“meta”) web. All this—and a pandemic.
In such an environment, a board that merely nods through management plans is not doing its job. The job is to push back so that company future steps are up to the challenge of relentless industry change.
Dr. Adam Gordon is a professor at Aarhus University School of Management, where he specializes in industry foresight and strategic leadership.
NACD: Tools and resources to help guide you in unpredictable times.