The governance skills, processes and structures that got today’s companies where they are now will not be the same as those required to sustain high business performance in the future. My call for reform in the boardroom is based on 40 years of real-life governance and exposure as a CEO to industries and companies navigating the disruption that is occurring in our business world.
A tsunami of forces—the Internet of Things, aging demographics, urbanization, synthetic currency, electric vehicles and decarbonization are but a few—is reshaping all elements of our society. These drivers of change cut across all business sectors, and the tools, skills and talent required for boards to discharge their governance responsibilities and add value in these times must evolve accordingly.
Strong governance sets the stage for management and directors to execute the business of the firm. It also sends a message to the markets and stakeholders that their voice is being heard in the boardroom. But governance effectiveness is not static—like all other aspects of a company’s business, it needs to be continually improved and adapted to the circumstances of the company and the environment it operates in. Failure to evolve can lead to a business falling behind the curve, which, worst case, can cause serious reputational and financial harm.
Thus boards have a choice to make. Progressive boards are becoming more active in areas such as strategy, talent development, investor engagement and cybersecurity. By focusing more time on the future of the business from both a risk and opportunity perspective, directors can provide constructive, forward-looking governance, which in turn improves the probability of success.
“High-performance governance leads; it does not follow.”
Conversely, if the board’s priority is to focus on the past through emphasis on compliance, with little time allocated to the company’s potential for innovation, it is more likely to be caught off guard when the future arrives. High-performance governance leads; it does not follow. With the speed of change and adaptability increasingly defining success in today’s business world, the board must evolve its governance practices and priorities with greater urgency or risk losing relevance.
My call for board governance reform is based on my work with and observation of companies that are successfully navigating these turbulent times. What are they doing that differentiates them from the rest of the pack? The following suggestions are pragmatic and practical but often overlooked.
1. Diversity. The table stakes for driving sustainable governance improvement call for increased diversity of the board’s skills, gender, age and industry experience. Although the range of skills is improving slightly, it is appalling how many boards remain anchored in a very narrow skills profile. At best, some are living museums of yesterday’s business talent. Companies with such boards are exactly the kind of businesses agile competitors like to target and investor activists increasingly focus on. Tenure and age limits are sometimes helpful but should not be the default mechanism in the absence of a robust board performance evaluation system, including peer reviews. Industry knowledge, strategic insight and prevention of groupthink are essential to spotting opportunities and avoiding risk.
2. Decision-making. High-performance boards are capable of speedier, more resilient decision-making. Creation of issue-specific ad-hoc committees, special task forces and advisory boards are just a few examples of the structures and processes used to focus director skills quickly on emerging material events. Boards cannot afford to be caught flat-footed on fast-breaking industry issues or policies. Boards, in concert with management, must initiate more and react less. This means strategic planning needs to be strongly integrated with risk management and scenario development at the board level. Focusing on these processes does not make boards clairvoyant but helps them consider possibilities and mitigate surprises to avoid being blindsided.
3. Culture. Oversight and encouragement of a company’s culture is essential for success in a disruptive world. Defining that culture and learning how to measure it and its impact on values—and how that drives business performance—is an area directors need to pay more attention to. Culture drives values, and boards set the tone for what is acceptable. Zero tolerance for a toxic environment—from sexual harassment to racial bias—is a message that today’s boards must own and act on decisively when missteps occur. Fostering a culture of innovation, learning and speed of adoption or integration of new processes or technology is a distinguishing skill of leading companies. If the board does not advocate a sense of urgency, accountability and attention to values, who will?
4. Tone. The tone at the top must be set by the chair and CEO. These two roles are the primary links to management and the board, through which the flow of information is exercised. The separation of these roles (absent a lead director) signals the board’s recognition of the importance of board independence. However, while they have different roles, the board and management need to be aligned and nonadversarial in their discharge of duties. Lack of alignment causes friction and is a major cause of wasted energy and effectiveness on some boards. This does not mean that robust differences and debates do not occur, but they should be subject-centric, not rooted in emotion. What management experiences in the boardroom cascades throughout the organization, for better or worse.
5. Insight. Skeptical, curious and courageous are qualities high-performance directors possess. Information is challenged in a constructive manner. Questions lead to insights and better understanding. Directors are on boards to contribute their insight, views and ideas, so silence is not an option. A company should be better for their presence, but if they do not contribute then they are passengers, and no board can afford this type of director. As a result, some of the situations directors face today—from removal of a nonperforming CEO to attempts to refresh a director whose contributions are waning—are tricky. The most successful directors have the skill and ability to handle these situations respectfully.
6. Leadership. The board chairman is responsible for initiating and leading reform in governance skills, perspective and process. He or she ultimately owns the issue of board/management alignment. However, having talented lead directors, strong committee chairs and an effective CEO are essential, as no one person can do it all. In the end, the qualities and talent of the chairman are the most important ingredients for achieving strong governance. He or she cannot be passive or simply a referee, nor active to the point of dominating all discussion. In some respects, a chairman is like a conductor, drawing from a wide range of talents to optimize the best possible performance by the board.
The chairman also oversees director evaluations, as well as the CEO’s evaluation. While these tasks are often directed by committee, ultimately the board owns the results. This is tough, complex and extremely difficult work, so as much time, care and effort should go into the selection and ongoing performance assessment of the chairman as the CEO. The chairman’s role is not tenured, and although rare, boards should not be reluctant to refresh the position if circumstances demand it.
In closing, there are three important questions we as directors and chairs need to continually ask ourselves to ensure our governance is fresh and relevant:
- Do we have the talent at the board and management level to execute our strategy?
- Does our balance sheet match our strategy?
- How do we measure our strategy and governance effectiveness to ensure we are creating shareholder value?
Boards that lead the charge in all these areas will position the company for maximum growth while also mitigating any risks involved.