Adapting To The New Normal Of Governance

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Kris Pederson, Americas Leader of the EY Center for Board Matters, digs into the results of a new survey that finds boards eager for a lot more dialogue and a lot less presentation.

In the current era of perpetual volatility, companies must navigate a landscape fraught with ongoing disruption. In addition to the lingering effects of the pandemic, boards and management face numerous sources of turbulence such as geopolitical conflicts, shifting regulatory frameworks, ESG issues and the many challenges that accompany rapidly evolving technologies.

This new reality has profound implications for how boards operate and carry out their duties. Agility and flexibility are essential, and boards are undergoing significant restructuring of how they work in the face of constant disruptive change. “It’s really one of the first times when major board transformation has happened proactively and not in response to regulatory developments,” says Kris Pederson, Americas Leader of the EY Center for Board Matters.  

To better understand how boards are responding to changing demands, EY and Corporate Board Member worked together to survey more than 250 U.S. corporate directors representing a wide range of companies across industries. In the following Q&A, Pederson helps unpack the survey results and offers key takeaways for directors.  

One of the biggest concerns for directors seems to be finding adequate time on the agenda for the growing number of issues facing the board. How can boards do that better?

It’s interesting because during this inflection point, virtual has meant easy access to directors—and management—and the development of a lot more virtual touch points. That’s helped with the boardroom agenda time because more is being done before the board meeting. Most committees now speak before the board meeting. When I sat on boards, we never had pre-committee meetings. That all happened in person during the board meeting, but doing things ahead of time can be very efficient.

The board meeting itself can be made more efficient when more is done in the board packet with pre-reads—inclusion of executive summaries in the packets can be immensely helpful. If management is sending materials to the board, there might be 30 slides, but it should have an executive summary on the front page that says, “Here are the three key points we need to discuss, and here’s one thing we want to get a vote on.” It should be very clear what the board will do with all that data during the meeting rather than just coming in cold.

The other thing is to leverage a consent agenda for more ongoing and regular agenda items. So rather than having six or seven one-off agenda topics, boards can read the minutes and just read, consent to and approve a whole series of tactical items that they otherwise act on one by one at every meeting, such as the reading and approval of the minutes. When consent is given to accept that the board members reviewed such items before the meeting, I’ve seen boards save as much as an hour of time.

Another key area where board members said they could use improvement was around streamlined communication with management. What are some ways boards can improve there?

In the virtual world, everyone is more reachable, making it easier for board members to weigh in and share ideas. On the flip side, it’s also now much easier for directors to reach out directly to management to ask a question, but they need to be careful not to overreach.

During the pandemic, it was easy to contact management to get a quick update on business continuity or other things. Some of this has carried over. It can be easy to forget how much work goes into management preparation for even a short conversation with the board. Too many requests can create a real sense of fatigue for management. We’ve also seen some board-management role blurriness, which can be a problem.

To help, some boards select a point of contact between the board and the management team. For example, the audit committee chair might be the key person to reach out to the CFO, and the compensation committee chair might be on point for the chief human resources officer (CHRO). This allows for consolidation of communications, and there might even be a weekly standing call with the key go-to management person. As a result of the streamlined communications, there is a lot less presentation time during board meetings, allowing more time for strategic dialogues.

It is clear from the survey results that’s exactly what board members want—60% of directors said they want more dialogue and less management presentation. Furthermore, four in 10 directors said that if they had two hours less for the meeting, they would reduce management presentation time to allow management to take greater advantage of the talent at their boardroom table. In so many of the board meetings I attend, I am amazed at the breadth of talent and experience around the room, but a lot of the time the agenda is consumed by presentations instead of a dialogue between the management team and the company’s directors. Directors would like that to change, and it is a real opportunity for companies.

Do you see it changing?

Directors are asking for change. We know this because we see it in our survey results. If directors had more time, they would increase the amount of discussion. If they had less time, they tell us they would cut presentations—more talk, fewer slides. A director I spoke with recently who serves on a couple of boards was really questioning whether being a director is a good use of time if management just wants to present to the board without seeking input. I thought that was interesting. To nudge management, the board might suggest: “In advance of the next meeting, we would like the pre-meeting package to include materials with clear summaries, key questions and action steps for the meeting so we can get more quickly to a discussion about core considerations and provide substantive input.”

The directors who everybody wants on their boards are busy executives who want to contribute to the organizations for which they have oversight. If they’re spending time in a board session, they want to be useful. They want to engage in constructive conversation. They want to ask questions, think about the future of the business and talk about how to move the business forward.

And as boards are populated with the next generation of talent and become more diverse, we see them operating differently. They use technology to dive into information and move decisively in what might be described as a fast-track environment aligned with today’s speed of business. Many of them are sitting executives, and they expect to have the opportunity to engage with management as a board director.

In the survey, there seemed to be a split around time for board socializing, with some directors wanting more and others wanting less. What do you make of that?

I think the nuance in the survey is that board members want intentional socializing. They want a lot less chitchat over cocktails. Instead, they prefer to engage in important conversations with other directors and the management team. They also want to connect with high-performing, high-profile employees who aspire to management roles as part of the company’s succession planning, and they welcome external speakers on relevant topics.

For instance, the survey revealed that 33% of directors would reduce the director-to-director socializing; 46% would increase socializing with management members and high potentials; and almost 30% want to engage more with employees. So, socialize, have lunch with a group of employees at the factory floor and take a tour, learn about what’s going on and meet the folks out there and see the business in action. It’s intentional socializing—that is the nuance.

There was a time not that long ago when CEOs were careful to guard interaction with employees, and board members did not have free access. Is that going away?

It’s definitely less prevalent. Some high-profile leaders say, “Our board members have an ID and access to any door in our global organization, and we want them out there.” And we’ve interviewed high-profile directors who say, “Every time I travel, I stop by, I meet employees. I want to see things directly and engage and have an informed opinion of the employee morale, of the culture.” In our experience, leading companies often have the most informed, highest-performing, highest-value boards, and their directors have access to employees and managers.

Just as we talk about management by walking around, governance that includes walking around is a useful concept. We’re also seeing more interest in that from the management teams. As a result, board members can give more realistic feedback that factors in what they see and hear. It is particularly relevant as it relates to talent and compensation, as we see more compensation committees evolving to also include talent. The benefit of having that human interaction can help directors create more informed points of view about compensation and talent considerations.

There are some clear advantages of the virtual meeting, but there are risks as well. What should directors be aware of or vigilant about in terms of what might be lost?

People do get burned out. It’s hard to be in virtual meetings all day. Some board members are good at that, and others aren’t, but it doesn’t mean they don’t have great content to offer. Virtual works better if you know the people with whom you are interacting. So, intentional socializing or participating in some fun activities is important to create a level of camaraderie.

But you should be thoughtful about what those activities are so they benefit those who are participating. So, when you attend a virtual meeting, remember, it’s hard to see all the nonverbal cues and take the pulse in the room. Consequently, it is critical that everyone turn on their camera for the meeting. Participants need to see each other’s eyes and body language.

As we see the proliferation of committees and work done at that level, will board members see more of C-Suite members?

We’ve seen more C-Suite executives presenting to the committees, and that’s a good thing. For example, it’s now common for the CHRO to be on the compensation committee agenda during which time they can share as needed and later with the full board as well. That has been a real change. It came from Covid, it came from the ‘S’ in ESG, the social justice movements, where suddenly, the board is leaning in on those people topics that are front and center today. That’s a good thing.

We’ve also seen some different committees spring up. We’re witnessing the formation of more innovation committees, technology committees, sometimes emerging tech or even cyber as a stand-alone committee, as opposed to being part of audit. We see more committees organizing around sustainability. I think a lot of this will continue. And maybe even nuanced committees around geopolitical topics with the potential of impacting markets and supply chains. In the recent EY report on Fortune 100 cyber disclosures, we saw an increase in these companies seeking cybersecurity expertise on their boards, with 61% of the companies examined disclosing that they seek this expertise in 2023, up from 20% in 2018.

In other instances, a board may find it beneficial to add a member to a committee to work on strategic topics tied to the long-term viability of the company. Or they may need to pull expertise related to doing business in a particular country, or how to respond to other global hotspots.  

Issues around cybersecurity and data privacy have been keeping a lot of directors up at night and it’s difficult to gauge risk when you’re unfamiliar with the topic. But that can also eat up a lot of time.

Cyber continues to be the number one risk topic for boards. We’re working with directors to think about cyber breaches and how to respond. Because it’s not if, but when. So, readiness drills for the board, cyber simulations and ransomware dialogues are all important.

Boards set the tone from the top down, and in their advisory capacity, they need to be aware of their role and what happens in the event of a cyber breach. By working through these exercises, the board can gain further insights and have discussions about being a target of a ransomware attack and how the company will respond. Board members need to know what their role will be in the event of an attack.

Those playbooks are very important for boards. They also need to be diligent about scheduling time to regularly hear from the CISO or the chief security officer to stay on top of the company’s cyber risk vulnerabilities.

Many boardrooms may also benefit from a wider variety of voice. Cybersecurity is not just about threat and response. Most breaches are the result of human error. Hearing about the broader cyber risk culture can help directors better understand how prepared their organizations are when they encounter threats.

As companies and their boardrooms are digitalized and adopt emerging technologies, cybersecurity should remain top of mind, and consideration should be given to potential vulnerabilities and risks each step of the way. Cyber is an important focus area, as is data privacy. Maybe it’s not a cyber breach, but the board needs to understand how the company maintains data privacy to be sure data assets are protected and not shared broadly. Employee data, customer data, that kind of information is so important.

We’ve also been doing a lot of work around trust. In other words, how we protect and think about risk. A trustworthy business has the potential to take market share. The question then is: “How do you capitalize on these investments?” It is not just an operating cost; it’s an investment in a company’s future growth.

The study concluded that leading boards recognize that the board of 2030 will likely get work done in a different way than the board of 2020. What do you think the biggest changes will be?

There will be a lot more tech in the boardroom. I think we’re just scratching the surface. We’ve got digital board documents and that’s great, but what about AI-enabled digital board documents, where you could pose questions around the board materials in real time and use generative AI to sift through a confidential data set of board records and seek answers from management teams. The boardroom will look a lot different in terms of how it’s digitally enabled in the future. That’s probably the biggest change on the horizon. With that, we anticipate boards having a lot more dialogue in the boardroom and more opportunity for directors to bring their ideas and experience to the fore.

The views reflected in this article are the views of the author and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.

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