Future-proofing your board

There has been massive instability at a global level in the last two years, including geopolitical events, the pandemic and inflation.

There has been massive instability at a global level in the last two years, including geopolitical events, the pandemic and inflation. However, we are also in the midst of a longer-term shift arising from political instability and deglobalisation. There is increasing investor focus on ESG, notably integrated reporting and disclosure requirements when it comes to climate change and stakeholder engagement. All these trends have major implications for board members, who need to be increasingly effective in overseeing risk and strategy.

In this podcast, Dr Sabine Dembkowski, Founder and Managing Partner of Better Boards, discusses board future-proofing with Professor Didier Cossin, a Professor at IMD Switzerland and the Founding Director of the IMD Global Board Centre. A renowned global expert in governance, Professor Cossin works with boards and senior leaders worldwide to provide the latest thinking on best-in-class board effectiveness, dynamics, and design.

Some of the key takeaways of the conversation include:

“We are the number one risk. It is our ability to decide”

Didier relates how his PhD studies in the world of investments and risk, showed him that risks are closely linked to the quality of decision-making. Working on governance and risk at MIT and Harvard, he co-authored a paper on board turnovers in the early 1990s. Since then, he has spent the last 20+ being directly involved with helping boards perform better, from non-profit organisations to large corporates.

“You have to create a certain level of resilience while building up agility”

Didier feels that the most important shifts affecting boards currently involve the world’s current polarisation. He explains the trend towards a multipolar world, especially for the larger organisations, making it essential that they combine prudence with agility. He cites geopolitics and its vast implications for decision-making and impact on governance, using Russia, and US-China tensions as examples, where polarisation is happening already.

Didier also relates how issues such as climate and ESG have become very polarising in many ways. He feels organisations and their boards need to create a certain level of resilience while building up their agility in preparedness for the big shifts that are happening.

“Responsibilities board members didn’t have in the past and pressures from all sides of society from the regulators”

Didier outlines that as boards become much more engaged than in the past, they need more granular understanding while keeping a very high-level view and not micromanaging. Fiduciary and social responsibility have increased overall, while meetings have become more frequent, especially with digital capability. In some cases, board members are given more support and resources to dig deeper, but this is also putting pressure on board members to be much more present.

Didier believes boards should consider the big trends against all the organisation’s activities and develop a view around which activities are exposed. They should increase the resilience of the organisation through integrating risk into strategic thinking. He sees much work being done by boards on human capital management, questioning whether organisations have the right culture and are sufficiently agile. This raises the issue of how to supervise a culture from the board, and the board’s needs to consider which KPIs are effective in overseeing human capital management or other new areas.

Didier describes how board members now have responsibilities and pressures (from all sides of society and regulators) that they did not have in the past. This raises a new issue coming under scrutiny – the effectiveness and quality of the dynamics within the board. Didier relates how psychological safety on boards has become an area of focus. Are members able to raise questions and discuss everything they genuinely want to and are concerned by? Is there a dominant actor somewhere that exerts pressure that limits the quality of the board discussions? Some regulators are now examining this. Clearly, this makes board work interesting and, to some degree, even more, engaging and powerful than in the past, but also much more demanding.

“The world has become too difficult to navigate for boards to be compromised in any way”

Didier reports that many boards are asking themselves how to future-proof the board. He believes there are four main areas of board failures. Firstly, classical risks, where organisations are not resilient or prepared and thus not able to pull quickly out of risk situations. He describes how the Russian-Ukraine situation has been one of these tests, but others include inflation, greenwashing and ESG at large, and boards need to prepare themselves.

Secondly, Didier describes the risk of board failure due to strategic blindspots, including the organisational context and the role the board takes in strategy work. Boards need to identify the right values and vision for the organisation, organisational alignment to the vision while also calibrating with the strategic context. Engaging with values is sensitive in today’s world, where views around ESG and diversity around national interests are engaging values in many ways.

Didier describes a third board risk in the quality of the relationship between executives and non-executives. He outlines the issues of how to foster deep trust while playing clear, separated roles, and believes that the board works almost as a team in supporting the executives while simultaneously understanding when to challenge and ask the hard questions needed. This is the very delicate balancing act the best boards manage, and the quality of the Chair is absolutely central to the success of the governance.

The final area of board failure that Didier sees (and that he finds concerning) is integrity failure. Organisations need to find a system for oversight of integrity failures, but more importantly, developing ‘speaking up’ capability of the board. Didier still sees conflicts of interest and tensions at the board level which are of concern.

“The best boards know how to prioritise”

Didier explains that boards can easily get swamped with regulatory compliance, preventing discussion of the most important topics for the organisation. Prioritisation is key, and Didier believes it is not the Secretary or Chair’s role to ensure prioritisation happens. Today, governance is not just about the board and executives, but also requires the active engagement of investors, owners, and shareholders. For example, investors’ pressure for ESG has been increasingly central to board engagement. His view is that investors’ pressures are increasingly informing priorities.

 

The three top takeaways from our conversation are:

• Governance has become a key driver of performance, and better-governed companies perform better. Good governance cuts some of the downside risks and increases some of the upside great opportunities.
• We are moving to a world of winners and losers, and governance will be the driver of difference. We will see greater difference emerging between best in class and worst in class.
• Governance today is transforming, creative, and in touch with society and stakeholders. It is inventing new practices around stakeholders, innovation, agility, and resilience. So, look at best-in-class boards for inspiration because governance will be the driver of the difference in the future.

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