Topics: Corporate Governance
Topics: Corporate Governance
January 26, 2022
January 26, 2022
The American boardroom has been under significant stress over the last two years. Many directors faced their most challenging boardroom moments but rose to the occasion, navigating their companies through the depths of the pandemic and making many tough calls to ensure financial survival and adapt to rapidly shifting conditions.
It was maximum-intensity governance and management. As we learned from our surveys, directors’ time commitment doubled in 2020 when they delved into many urgent matters such as employee health and safety, remote operations, supply chain management, and access to capital and government relief funds. Using (and getting more comfortable with) virtual meetings, boards and management engaged much more frequently, sometimes even weekly, and traditional governance boundaries often blurred, as directors and senior executives worked closely together to navigate through the crisis.
This high-speed governance is barely slowing down, as companies now confront many new strategic and operational challenges, including the “Great Resignation,” accelerating digitalization of every dimension of business, rising inflation, widespread demands for corporate climate action, and the integration of diversity, equity, and inclusion into the fabric of every organization. It has made the job of the board much more difficult than it was before.
What makes the current environment uniquely unpredictable and hard to navigate is the fact that these changes are happening concurrently, interacting with and amplifying each other, creating many unintended and unwanted consequences. Just look at the top trends from our 2022 Director Trends and Priorities survey (in the included chart below) that directors believe will have the biggest impact on their companies over the next 12 months.
Talent scarcity is disproportionately affecting companies’ ability to successfully execute their high-stake digital transformations. At the same time, these transformational technology initiatives may inadvertently expose companies to new cyber risks, which may also disrupt already weakened global supply chains that, coupled with the growing labor market shortages, are driving inflation to levels not seen in recent years. A number of these trends are challenges that many directors did not have to grapple with in their prior operational careers and that they therefore have relatively little experience with.
In the coming year and likely beyond, boards will need to govern their companies through both a telescope—spotting new, over-the-horizon patterns across markets, societies, and geographies and connecting the dots between them—and a microscope by keeping a finger on the pulse of the company’s performance and its key drivers, such as talent, technology, brand, and financial stability.
Overall, board effectiveness now seems more important than ever as the pace of change is relentless and stakeholder expectations about what boards should do and look like are ever-increasing. But the pandemic governance model is likely neither sustainable, nor desirable. We need to maintain distance between boards and management teams to effectively govern businesses for the long-term. The board modus operandi prevalent for the last few decades, however, is unlikely to be adequate.
To position boards to help their companies succeed in a more turbulent future, we need to firmly challenge how boards are composed and structured, how they operate and interact with the business, and how they hold themselves accountable. Although the fundamental legal underpinnings of board governance have not changed, longstanding conventions and unwritten norms that have shaped boardroom practices and behaviors deserve to be revisited.
Recent NACD analysis reveals that directors themselves expect that their boardroom practices will need to change in the coming years. For example, a slim majority expect that in the near future the combination of the CEO and chair roles will no longer be acceptable. Almost 60 percent of directors expect that environmental, social, and governance (ESG) reporting will receive as much scrutiny as financial reporting, while more than 50 percent believe that time commitment to board service will vastly increase. Close to 40 percent believe that a sole focus on shareholders at the expense of other stakeholders will come to be considered inappropriate.
Sensing this turning point in the evolution of board governance, NACD announced last week the 2022 Future of the American Boardroom Initiative, led by a special commission that will convene a diverse, influential group of directors and notable governance practitioners from across the investor, regulatory, and academic communities. The year-long initiative will seek to discover how the prevailing governance model may be adapted, or whether a fundamental reshaping is in order, and will develop guiding principles to help boards build toward high performance in a more demanding, inclusive, and turbulent future.
Although the focus of the commission may shift throughout our meetings, we expect much of the discussion to focus on the following five areas:
1. Stakeholder interests. The expanded notion of stakeholder interests, and ultimately the definition of performance through the lens of these stakeholders, is changing how companies create, preserve, and report value. Put simply, companies cannot succeed when society fails or when the planet’s temperatures continue to rise. These issues are no longer externalities; they pose immediate financial, operational, and reputation risks. Boards must perform a delicate balancing act to account for multiple stakeholder concerns, while simultaneously addressing the expectations of shareholders for growth and long-term returns. This multi-stakeholder approach affects the board’s crucial role in establishing the right incentives for management.
2. Board operating model. The furious pace of change has put strains on traditional board operating models and processes, which may have become bottlenecks to effective oversight. Boards may need to adopt a more fluid and flexible model that maximizes the use of precious board meeting time and a structure to better oversee new and fast-changing issues. Similarly, ever-increasing expectations about the board’s role and engagement may have caused scope creep, with many boards struggling to focus deeply on mission-critical issues.
3. Board independence and management accountability. In recent years, boards have been more deeply engaged on a variety of issues such as strategy, influencing more decisions and becoming more operational. This deepened level of engagement could potentially threaten the independence of the board and its ability to hold management accountable. Simultaneously, in many boardrooms, the CEO still sets the agenda, not the board.
4. Transparency. With increasing public scrutiny of the contributions of boards, boards will need to reassess how transparent they should be about their workings, skill sets, and decisions. Currently, much board activity remains outside the view of shareholders and other stakeholders, and this confidential setting helps support deliberation and discussion. At the same time, the black box in which boards function raises concerns about their engagement and accountability.
5. Board renewal. While boards have started to make progress on diversifying their ranks, far too many boards are still reactive in aligning their skill sets and past experiences with the shifting strategic and risk priorities of the business, and do not sufficiently hold their directors accountable for individual (under)performance.
As part of this initiative, we launched a dedicated NACD resource center on the Future of the American Boardroom that includes relevant articles, guidance, and tools to help your boards engage in meaningful conversation and, where needed, take action to prepare for a more demanding future. Throughout this initiative, we will update these resources and report on the progress of our work.
As we shape our guidance, we would very much like to hear about your board transformation. What fundamental changes have you made or are you making to advance board performance? What new practices have you adopted? What norms have you challenged? Please share with me directly at email@example.com.
Friso van der Oord is senior vice president of content at NACD.
NACD: Tools and resources to help guide you in unpredictable times.