Ensuring a healthy corporate future - part 2: boards fit for tomorrow
It’s the role of the Board and Executive Leadership to ensure a healthy future for the company. With the UK Government recently serving notice on the EU, the enormity of the challenge facing corporate Boards is evident, as is the importance of identifying opportunity. Without a doubt Board responsibility and accountability have grown sharply in recent years; while complexity and change have increased even more dramatically. As a consequence, Boards run the risk of presiding very effectively over yesterday’s business while failing to meet the challenges of tomorrow.
Fidelio brings the perspective of a change agent as we build and develop Boards fit for the future. In the second of two Overtures, we highlight the speed and scope of change which Boards have to embrace in order to secure a healthy corporate future.
Duty & Accountability
Back to basics is a good place to start. In the UK, the second Director’s duty under the Companies Act 2006 sets out the requirement for the Board to promote the success of the company with regard to the:
- Likely consequences of any decision in the long-term
- Interests of the company’s employees
- Need to foster the company’s business relationships with suppliers, customers and others
- Impact of the company’s operations on the community and the environment
- Desirability of the company maintaining a reputation for high standards of business conduct
- Need to act fairly as between members of the company
Additionally, under the UK Corporate Governance Code, Boards in the UK are tasked with furnishing a viability statement – effectively a commitment to the medium-term survival of the company and are required to “state whether they have a reasonable expectation that the company will be able to continue in operation and meet its liabilities as they fall due […] drawing attention to any qualifications or assumptions as necessary.”
Both the general duty to ensure the success of the company and the viability statement focus the mind, particularly given the heightened risk facing business in 2017. Cyber-attacks can pose an existential threat, as can the potential loss of important trading markets and the disruption of supply chains. The healthy future of the company cannot simply be assumed.
The magnitude of risk facing companies has increased substantially over the last 18 months. At a time when a reasonable risk appetite is essential, there is increasing concern that Boards and senior management of public companies are becoming too risk averse.
Undoubtedly Boards are increasingly in the public eye. High profile corporate scandals have attracted the attention of the media and regulators alike. In addition the thorny issue of executive pay has become interwoven with the rise of populism and anti-business sentiment.
The UK Government issued the Corporate Governance Reform Green Paper in November 2016 with the purpose of improving corporate governance, setting out possible next steps and soliciting recommendations. Business was certainly wrong-footed, at least initially, by the Government’s seeming fondness for elements of corporate governance, such as employee representation, which seem more at home in the EU than in an Anglo-Saxon form of governance.
With limited Government and public support, quoted Boards are understandably cautious. Moreover the increased burden of governance reporting has led to a focus on process, including with regard to risk management. This focus is not conducive to innovation and bold leadership. And some Boards fear that it also shapes the Executive’s approach to strategy thereby reinforcing risk aversion.
The biggest risk is not taking any risk […] In a world that’s changing really quickly, the only strategy that is guaranteed to fail is not taking risks.
Mark Zuckerberg, Co-Founder, Facebook
Boards are mandated to promote the success of the company over the long-term and in line with the requirement to ensure viability. Outlined below are the practical steps effective Boards are taking to achieve this as complexity and disruption gather pace.
The Value of Board Composition
Clearly, ensuring the optimal mix of skills around the Boardroom table is a powerful advantage in securing the future of the company. But what does that look like? By definition, in facing the challenges of tomorrow, future Boards will undoubtedly not look the same as they do today.
At the recent ‘Securing the First (Corporate) Board Appointment‘seminar co-hosted by Harvard Business School Club of London and Fidelio, Vindi Banga, Senior Independent Director, GlaxoSmithKline and Marks & Spencer, argued that an important consideration for a new appointment to the Board is experience. Have they faced tough situations? Will they know how to navigate a crisis?
These attributes are critical and arguably extend beyond specific corporate experience. Resilience is essential. Sitting at the top table of a public company is an exposed position and alongside skills of competence and ethics, backbone is critical.
Defining competence also requires further attention. Yes it’s important to have Board Directors with relevant sector and functional skills but this must be forward-looking. Given the extent of cyber risk and digital disruption, technology and digital skills are now imperative at the Boardroom table. Yes an ability to contribute across the overall Board agenda should be expected of any Board Member but we must be careful that in insisting upon this we are not precluding prospective Board Directors who are able to view the Board through a different and valuable lens.
Fidelio recently held a Board breakfast on “Board Effectiveness in the Digital Age” with Dr Stephen Page, Non-Executive Director, BSI Group and the National Crime Agency. Dr Page highlighted that, in the digital age, business success increasingly depends on how well we collect, manage and exploit data.
Too frequently Board appointments focus on Directors who are very good at viewing the company through the lens of legal and commercial structures. But how many newly appointed Directors are able to view the company in terms of flows of data, which is surely a new reality for the majority of businesses?
Diversity of experience is much cited but far fr om easy to achieve in the Boardroom. There are voices that argue that a narrow focus on gender diversity does little to promote a broader diversity agenda in the Boardroom. Fidelio’s experience is that progress on gender diversity is frequently an important first step in moving from a reliance upon narrow, traditional routes to the Boardroom. And this is essential if the Board is to remain forward-looking and fit for a challenging future.
Board refreshment is quite properly a long-term process reflecting the Board’s accountability for the ongoing success of the company. Given the pace of change, Board composition also needs to be continuously reviewed.
Indeed, the annual re-appointment cycle for UK public company Board Directors, while initially bitterly resisted, does now provide an elegant route for Chairmen to part with company Board Directors whose skillsets and experience may no longer have the relevance the company urgently needs. Chairmen are clearly tasked to ensure that the Board’s skills are fresh and current; the default setting for Board debate cannot be conventional wisdom.
Evaluating the Board for the Future
Once a tool required by regulators to ensure compliance, Board Evaluation has become a chosen intervention of Chairmen to draw upon the wisdom of the Board, confirm what is known and what is not known and to socialise new concepts and ideas. In recent months, Fidelio has seen external Evaluation used outside the three year mandated cycle as the Chairman seeks a different perspective and turns to the Board to take stock and prepare for the complexity and lack of visibility ahead.
Given the extent of cyber risk, this element of the Board Evaluation assumes critical importance. It’s an excellent tool for gauging the Board’s digital acuity and a key step towards enhancing the digital effectiveness of the Board as a whole. At the aforementioned Board breakfast on “Board Effectiveness in the Digital Age”, Stephen Page highlighted key questions Boards should be addressing, including:
- Does the Board understand the data model, and how it is being used? What are the ethical implications?
- In terms of cyber risk, what has the business chosen to protect, and what is the Board comfortable with not protecting?
- Has the full potential of digital been understood in terms of reshaping the core business processes, or is it being viewed solely in terms of marketing?
- Are cyber and digital projects adding up to something meaningful, or just a series of isolated innovations?
Directors will be more likely to make good decisions and maximise the opportunities for the company’s success in the longer term if the right skill sets are present in the Boardroom.
‘Guidance on Board Effectiveness’,Financial Reporting Council, 2011
Developing Today’s Board
Board refreshment is certainly a strategy in the longer-term for ensuring the healthy future of the company. Increasingly we are seeing Chairmen turn to Board Development to ensure that the current Board is prepared to deal with the complexity and rapid pace of change which has become ubiquitous in the corporate world.
Fidelio has experience of designing and delivering Board Development Programmes. Recent topics have included:
- The shareholder perspective on Executive Pay
- Shareholder activism
- Geopolitical risk
- Board effectiveness through the subsidiary Board structure
The themes of such modules provide insight into thorny topics on the Board agenda wh ere the Chairman recognises the benefit of external perspective from experts with practical experience, ideally bearing the scars!
For many leading companies Board Development now also extends to building the pipeline of future Directors, and ensuring greater diversity in tomorrow’s Boardroom. Fidelio fully recognises the business case for diversity which includes bringing a range of perspectives to the Board’s decision-making. Diverse leadership teams are better equipped to handle complexity and ambiguity and Fidelio’s flagship “A Seat at the Table“ development programme for senior female executives and Directors is an important contribution to build Boards fit for the future.
The importance of creating a diverse executive pipeline is a theme that Fidelio also explored this week with FTSE 100 Chairs, leading Board Directors and investors from Germany in a panel discussion entitled “Die Frauenquote – a year on. An update on diversity in UK and German corporates” on Tuesday 4th April 2017. The opportunity and appetite for different markets to learn from one another in order to actively move the dial on diversity was palpable.
As the world becomes more complex the demand for Directors who are comfortable operating cross-border, cross-sector, cross-function increases dramatically. Hence Fidelio’s clear focus on sourcing and developing Directors who meet this brief.
If Boards are to secure a healthy corporate future they have to ensure they are fit not just for today’s challenges but for tomorrow’s. Composition is critical and Search mandates need to extend to candidates well beyond the usual suspects, as highlighted in Fidelio’s collaboration with the Harvard Business School Club of London for the ‘Securing the First (Corporate) Board Appointment‘ event .
But there are also other tools at the Chairman’s disposal. Fidelio is heartened to see an increasing awareness among Chairmen and CEOs of the pace of change and scale of disruption facing their companies. The proactive use of both Evaluation and Development is a means for today’s Board to become more effective and forward-looking. It also enables the Board to achieve a healthy balance between opportunity and risk.