The Road To Modern Governance

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The one thing certain about 2020 is that it will be a year of rapid-fire change, forcing boards to embrace diversity, culture and tech-fluency.

It’s no secret that organizations face widespread uncertainty, internal and external disruption and challenging risks heading into the New Year. With January not yet over, we’ve already seen the call from Davos for companies to be carbon neutral by 2050, BlackRock’s new requirements around sustainability and Goldman Sachs promising to refuse IPOs to companies with all-male boards. Clearly, 2020 will be a year of rapid-fire change, forcing companies to adopt stronger modern governance practices.

In our ongoing conversations with board directors and C-suite leaders at companies large and small, several themes have emerged for the coming year. Our full assessment can be found in our latest report, “2020 Outlook: The State of Modern Boardrooms,” with themes highlighted below:

• Promoting and Encouraging Diversity: Gender and racial diversity continue to gain momentum as critical issues for the board to consider. But boards need to look at themselves in order to drive substantive change. A successful board needs a unique mix of skills and experience to carry the organization through its long-term strategy and remain attuned to risk. In 2020, board composition and diversity will remain a key challenge. According to a CGlytics S&P 500 diversity report, from 2017-2018 the total female representation on boards grew marginally, up just one percent from 2017. And in regard to the Senate Bill (SB) 826 that required boards in California to appoint at least one female by 2019, recent news highlights that as of December 31, 2019 there were still 26 public companies that had zero women on their board.

• Leading in the Digital Age: The increasingly digitized, globalized and complex business landscape of 2020 demands vigilance from board members and exposes organizations to new risks. Between cybersecurity, climate-related events, newly empowered activists and the ability of digital technologies to catalyze rapid and transformational change in the enterprise, board members will need to anticipate technological innovation and become tech-fluent. Also at stake is how companies can leverage data and insights to help them adapt should the next economic downturn begin in 2020—something weighing heavily on the minds of many CEOs.

• Building a Robust Organizational Culture: Several prominent crises in 2019 – from Boeing to WeWork – uncovered flaws in company culture. We expect these trends to continue. Culture can be “ethereal” – it’s hard for boards to have direct oversight into every aspect of it and requires them to look far beyond board materials to leverage emotional intelligence and analyze risk metrics like employee turnover or whistleblower complaints.

Where We Go from Here: Modern Governance

When considering these trends, it’s clear that a new paradigm for governance—coined as “modern governance”—is needed for organizations to succeed in the new decade. Boards will need to evolve beyond their traditional responsibilities to consider new sources of information, become cultural leaders in the organization, and dramatically improve their ability to quickly adapt strategy to meet disruptive trends.

In light of our conversations with board directors, we’ve identified three ways boards can get started on modern governance to succeed in the New Year:

• Don’t ignore board culture. Boards must understand the relationship between company culture and board culture and react accordingly. Boardrooms need to welcome challenging questions, embrace alternate viewpoints, and have difficult conversations to have a powerful and positive influence on corporate culture. A diverse mix of voices – including gender and racial diversity – will help boards succeed, foster useful dialogue, and ensure boards are aware of risks that may be off their radar.

• Embrace digital skillsets—all of them. “Digital” is not one-size-fits all. Boards need to understand a variety of complex digital issues—from information security and data analytics to e-commerce—and know what skillsets are most important for the business and the board itself. Now is the time to become tech-savvy.

• Make the most of change. Board information needs are evolving rapidly, as new technologies, regulatory challenges and other issues arise that may not be part of the conventional board remit. Governance professionals must become “trusted advisors” who help the board become more tech-fluent and empower them to grapple with the most disruptive challenges facing global business.

Good governance is more important than ever. A 2019 report from the Diligent Institute found that, in an analysis of 14 companies that had recently undergone a governance mishap, the 14 combined had lost $490 billion in shareholder value one year after the incident. Yet the same report found that companies with strong governance outperformed their lower-performing peers by 15% over a two-year period. Good governance is both a risk-mitigator and a catalyst for creating value.

Boards won’t get to modern governance overnight, but they can take steps to improve in the New Year right away. Those that don’t will continue to face new, challenging risks. Those that embrace modern governance will emerge as the winners.

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