2020 Governance Outlook

Friso van der Oord is the Director of Research and Reaa Chadha is a Senior Research Analyst at the National Association of Corporate Directors. This post is based on their NACD report.

Today, the accelerating pace and intensifying complexity of change are creating a fundamentally different operating reality that is putting the competitiveness and governance of many businesses to the test. NACD’s most recent Public Company Governance Survey found that looking forward to 2020, directors are most concerned about the impact of growing business-model disruptions, the slowing global economy, increased competition for talent, changing cybersecurity threats, and rapid technology changes. [1] Each of these trends alone could drive companies out of business. But, as we reveal in this year’s NACD Blue Ribbon Commission Report, Fit for the Future: An Urgent Imperative for Board Leadership, “what makes the current epoch uniquely unpredictable and hard to navigate is the fact that these changes are happening concurrently, interacting with and amplifying each other….” [2] For example, the exponential changes in digital capabilities have increased vulnerabilities to cyber threats and unleashed a war for talent, while worsening geopolitical turbulence, including concerns about increasing trade protectionism, is casting a dark cloud over global economic growth in 2020.

As a result, companies can no longer rely on their historical strategies. In fact, 68 percent of directors responding to our recent Public Company Governance Survey indicate that over the next five years their existing strategies will become completely irrelevant, while 61 percent identify effective board engagement in strategy as the most important improvement priority for their boards in 2020. Similarly, the accumulated experience of both executives and board members in strategy setting, technology, and even industry may be less relevant in the near future. These stark challenges suggest that boards will need to consider a new mind-set and a different modus operandi in order to become fit for a much different and more turbulent future.

Implications for Boards

In NACD’s most recent Blue Ribbon Commission Report, Fit for the Future, we outline five key shifts that board leaders should orchestrate to make their boards fit for purpose. These shifts can help transform how the board is composed, how it operates and interacts with the business and stakeholders, and how it holds itself accountable.

1. Boards must engage more proactively, deeply, and frequently on entirely new and fast-changing drivers of strategy and risk.

Why it Matters: While 2020 is forecasted to aggravate already existing risks and projected to introduce new exposures, it will also offer new business opportunities as a result of accelerating climate change, fundamental geopolitical shifts, and major technology advancements. These rapidly changing drivers of both value creation and destruction demand a much more proactive and intense level of board engagement with management on critical matters.

Recommended Strategies

  1. Adopt a consistent “trust but verify” mind-set in your engagement on fast-moving but critical issues such as strategy, risk, and digital transformation. While it remains important to extend trust to management, when management’s answers are not satisfying, boards should have the confidence to ask tough questions and drill deeper into management’s assumptions about new risks and less-certain opportunities.
  2. Initiate an ongoing dialogue with the CEO to clarify where the board would like to seek deeper engagement and why this creates better governance. This will assist the board in establishing a framework for more frequent communication with management between formal meetings.

Key Success Factor: A transparent and trusting relationship between the board leader and the CEO will be critical to reach agreement on which boundaries need to be reset to allow for more proactive board involvement. Clear boundaries are still needed, with the board providing oversight and guidance.

2. Boards must review their composition through the lens of shifting strategic needs and approach their own renewal to ensure long-term competitive advantage.

Why it Matters: Today’s shifting business realities demand new board skills, experiences, and expertise. However, even with the demand for new skill sets growing, NACD’s recent Blue Ribbon Commission Report found that the majority of directors serving on boards in the Russell 3000 Index still have a background in finance (40%) and executive leadership (62%), indicating a potential mismatch between the types of director experiences that boards look for today and the types of experiences that will support the future needs of their companies. [3]

Recommended Strategies

  1. Boards should look at the company’s current and future strategic needs as well as at valid stakeholder expectations while creating their renewal process.
  2. When adding to the board, ensure that the director candidates are not only “experts” possessing proven, relevant, technical expertise but are also equipped with the capacity to learn, to add value in other areas, and to collaborate.

Key Success Factors: Building a diverse board that, at least on paper, is aligned with the shifting strategic direction of the business is not enough. For board renewal to succeed and create value, board leaders must work to create an inclusive culture in order to amplify diverse voices in the boardroom. Board leaders can help activate diversity by focusing on board renewal and understanding the importance of tenure. Having a mix of tenures on the board will help to maintain a diverse board composition.

3. Boards must adopt a more dynamic operating model and structure.

Why it matters: The rapidly shifting business environment also puts strains on the traditional board operating model, which struggles to keep up with new demands. The three traditional board committees suffer from mandate overload, while meeting agendas still allocate a disproportionate amount of time to procedural and compliance issues. A more fluid modus operandi for boards is needed to effectively oversee new issues and ensure productive discussions.

Recommended Strategies

  1. Have more frequent joint meetings of committees that have overlapping mandates, in addition to a strong relationship and interaction between committee chairs.
  2. Reviewing the agenda for its effectiveness and assessing how the board is spending its time ensures that the most critical issues receive appropriate attention.
  3. Boards should perform a rigorous governance review that dives into the board’s governance guidelines, operations, structure, and charter(s) every year.

Key Success Factor: In order to build more agility into board operations and structure, the board leader needs to drive an ethos of continuous self-improvement among the board, especially the committee chairs.

4. Boards must be much more transparent about how they govern.

Why it Matters: “Where was the board?” is one of the first questions asked after a governance failure or ethical issue. This implies a lack of visibility into how boards operate when confronted with major challenges. There is a constant call from stakeholders to make the board room’s inner workings less opaque. Investors in particular want to see explicit disclosure on how boards operate, make decisions, and hold themselves accountable.

Recommended Strategies

  1. Provide greater transparency internally and externally around boardroom operations and decision making.
  2. Prepare designated members of the board to engage directly with investors on selected governance matters.

Key Success Factors: To aid transparency, the board leader should engage directors and management on how to offer increased visibility into the workings of the board. At the same time, board members should seek to better understand their investors’ shifting information needs on board operations.

5. Boards must hold themselves more accountable for individual-director and collective performance.

Why it Matters: Forty-six percent of respondents to NACD’s Board Leadership Survey reported that their board leaders fail to remove directors who are no longer qualified to serve. [4] When it comes to board performance, accountability starts with the rigor and candor of discussions in the boardroom. External pressures such as investor, regulatory, and societal expectations compound the need to ensure accountability in the boardroom.

Recommended Strategies

  1. Define the board’s annual objectives, and assess how the board delivers against them on a rolling and annual basis.
  2. Ensure board directors are engaged by maintaining a targeted, continuous, learning agenda for the board.
  3. Confirm that board evaluations are comprehensive, assess both individual-director and full-board performance, and are followed through with specific improvement actions.

Key Success Factors: Board leaders should establish a behavioral framework to set expectations for director engagement and contribution. This will help clarify what the board’s performance standards are and help to objectively evaluate the continued relevance of individual directors.

The Board Leader as a Catalyst for Change

The board leader (the lead director or independent chair) will need to act as a catalyst of these five shifts to build “fit-for-the-future” boards, but they cannot command and dictate change as management leaders often do. As the first among equals, they must use their influence to build consensus for adopting new governance practices and approaches and for establishing new behavioral norms. Productive dialogue with the full board and each individual director will be critical.

This new change mandate requires the board leader to reflect on both their skill set and their mind-set. Are they adaptable in light of the shifting operating realities for business? Do they effectively communicate both within the board room and with management and external stakeholders to build support for change? Can they overcome resistance to changing the board’s composition, structure, and operations? Above all, as change agents at such a critical juncture for good governance of companies, they will need to show fortitude, courage, perseverance, and strength of mind to help their board evolve rapidly.

* * *

The complete report is available here.

Endnotes

1NACD, 2019–2020 NACD Public Company Governance Survey (Arlington, VA: NACD, 2019), p. 12. (go back)

2NACD, Fit for the Future: An Urgent Imperative for Board Leadership (Arlington, VA: NACD, 2019), p. 8. (go back)

3NACD, Fit for the Future: An Urgent Imperative for Board Leadership (Arlington, VA: NACD, 2019), p. 14.(go back)

4NACD, Data Snapshot: The Voice of NACD Members on the Future of Board Leadership (Arlington, VA: NACD, 2019), p. 2.(go back)

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