We are only halfway through what has become an unprecedented year, during which the corporate world has faced challenges that may fundamentally change how business is conducted going forward. As these developments have unfolded, experts in many fields have talked about using this moment to “rethink” traditional ways of how we do things. Boards of directors should not let this moment go by without some rethinking of how it governs. Here are three fundamental areas of corporate governance that boards can take the opportunity to rethink and potentially reimagine.
1. The Board’s Role: Rethink what the board is there to do.
Everyone agrees that the role of the board has changed over the past two decades, not from the perspective of a director’s fiduciary duties, but rather through stakeholders with increased expectations for what the board is there to do and lower tolerance for underperformance from their perspectives. For many boards, the ground that represents their role has noticeably shifted under their feet. But, when was the last time the board met in executive session for the express purpose of thinking about how the company’s stakeholders look at the board’s role and what that particular company needs from its board? Most annual board self-evaluations are brief sessions for the independent directors to ask each other “How do we think we’re doing?” without deeper thought about what it is they need to be doing to best serve that company.
Boards should set aside time to rethink their role in the context of the fundamental changes their companies will be facing going forward. A board can do this by taking its self-evaluation to the next level and by revisiting its charter, mission statement or governance principles as an exercise in rethinking its purpose. As companies face a new world order, it is more important than ever for the entire board to be on the same page for what it is there to do.
2. The Board’s Committees: Rethink whether the board’s committee structure is stakeholder-driven.
The tide of companies turning away from shareholder primacy and committing (or recommitting) to the stakeholder model of governance creates the conditions for boards to step back and look at how they allocate their attention to the interests of each of the commonly-thought-of key stakeholders: customers, employees, communities and shareholders. A board typically handles its agenda by covering high-level concerns at the full board level and delegating to its standing committees those subjects of particular importance to the company requiring more specific and deeper dives.
Currently, the committees prescribed by law are audit, compensation and nominating. These three committees are largely designed look after the direct interests of the shareholders. So, where do the direct interests of the other three stakeholders get covered? If the answer is “at the full board level,” it may be time to rethink whether that still works and if certain interests of stakeholders other than shareholders should receive deeper-dive treatment in committee. The board can do this by mapping each of the items it covers—both at the full board and in committees—to one or more of the four stakeholders. Upon doing this, it may become apparent that the allocation of the board’s time is out of balance, and the customers, employees, and communities could use more attention at the committee level.
This may mean adjusting or redesigning the structure and scope of the board’s committees. Some boards already have standing committees to cover subjects that relate more directly to its customers (e.g., risk, product safety, innovation) and communities (e.g., public policy). Recently, there have been calls for boards to “reimagine” the scope of their compensation committees to cover the company’s overall workforce and issues of human capital going far beyond executive compensation and benefits. It may be time for boards go even further to rethink whether its governance is truly stakeholder-driven and reimagine how to restructure its agenda and committees to understand and balance the interests of the corporation’s four key stakeholders.
3. The Board’s Resources: Rethink whether the board is sufficiently resourced versus sufficiently paid.
Before March 2020, director compensation had been on a steady, upward trend on the notion that directors are being asked to spend more and more time on their board duties and should be paid commensurate with the amount of work. During the COVID-19 pandemic, in addition to cutting the pay of the CEO and other executives, many boards have temporarily reduced director compensation, not so much hold down costs, but to show employees that the people with ultimate accountability are willing to impose real sacrifices on themselves. If the assumption is that director compensation will go back up to its original levels once business goes “back to normal,” boards need to rethink that.
Boards have felt the pile-on effect of stakeholders continually expecting them to oversee additional areas of concern and own them in a bigger way: political spending, climate change, cybersecurity, data privacy, human capital, artificial intelligence and now pandemic preparedness, just to name a few. Like with all individuals, while a director can be compensated for increased amounts of work, his or her capacity to do a good job will eventually reach its limit, regardless of how much you pay them. What they need are additional resources.
Instead of automatically bringing director pay levels back to what they were, boards should rethink how they allocate those funds and apportion some to procure resources could help them handle the ever-increasing demands. Those resources could be in the form of dedicated support staff beyond the corporate secretary’s office, more independent subject-specific advisors, and access to independent sources of data. Support staff would surely be a welcome resource for the many directors who are retired and no longer have assistants. Boards currently rely on independent auditors and executive compensation consultants, so why not equip with them with experts in other subjects that require them to have current and more specialized knowledge (e.g., cybersecurity, health and safety)? The board receives almost all of its information about the company from management. Most directors do not have access to subscription databases, industry reports, and other independent and more sophisticated sources of data that could supplement what they receive from management. The job of the director will only become more demanding. Giving them additional resources will make them more effective than giving them additional pay.