Always on Duty: The Future Board
The Institute of Directors and MinterEllisonRuddWatts paper “Always on Duty: The Future Board” explores trends, challenges and opportunities facing directors, today and into the future. We summarise the key points from the paper below.
“Boards have a critical role in leading sustainable success for business and society – but increasingly they are under pressure. They are weighed down by often voluminous board papers, compliance and risk, without sufficient time to discuss and debate critical strategic and performance issues. It’s vital therefore that we consider the cumulative effect of these and other emerging issues and what they mean for the future board. Technology has the potential to assist many aspects of the ways Boards operate.”
The paper notes five key themes for the future-focused Board:
1. Shareholder primacy and stakeholder theory
Shareholder primacy now requires companies to take into account broader stakeholder interests.
2. The importance of purpose
Purpose beyond profit is key to remaining competitive and sustainable in the long-term, and needs to be led by the Board.
3. Trust and transparency
Building and retaining trust should be at the forefront of the future-focused Board.
4. Increasing responsibilities and accountabilities
The breadth of matters Boards are expected to be across has increased, as have their legal responsibilities.
5. Game changing technology
Technology creates opportunities and threats for all organisations. Boards need to navigate their organisations through them.
Traditional model under challenge
The traditional operating model is under pressure as Boards seek to adjust to the new demands upon them. Boards may need to innovate their processes, policies and procedures to allow directors to add value and fulfil their core governance role.
The time dilemma
The expectation on directors to be across everything, whether realistic or not, is a reality. Boards set, drive and oversee an organisation’s strategy to help create long-term value. However, strategy is just one part of the equation and it is often a challenge to balance strategy and performance issues with other elements such as compliance and risk management. In balancing this delicate tightrope, time pressure often becomes an issue. Nonetheless, there are many ways boards can maximise their efficiency under such pressure including:
- Moving from monthly to two-monthly meetings, but meeting for longer, which allows for ‘deep dives’ on particular issues
- Splitting board work over two days when meeting so management, staff and the Board can spend more time together
- Separating content into different meetings
- Meeting at different locations and incorporating opportunities for stakeholder engagement
- Using committees to undertake some board work and relying on expert advice.
The Board itself remains responsible in all cases and needs to engage meaningfully with committees and experts, including by testing their recommendations.
Understanding the business and getting the right information
Although information relayed from management remains one of the main sources directors can gain an understanding of their business, the days of being purely confined to the boardroom are over.
The practice of ‘walking the floor’ has become more common since the introduction of active duties and obligations on directors through the Health and Safety at Work Act 2015. Furthermore, many directors are doing their own research to remain at the cutting edge of their field. All this allows a director to maximise the knowledge they have of their business, which makes for more effective decision making.
The importance of getting the right information from management cannot be understated. It is an issue of quality not quantity. Too much volume and detail can waste valuable time that the Board could use on other pressing matters. Too little information can create gaps for directors which may lead to poor decision making.
Information needs to be sufficient, accurate and timely. Bad news also needs to be relayed with the good. The Board is “dependent on a small number of key individuals to filter and curate the information on which they rely to perform their duties”, so there is a risk that biases skew the information presented. Bad news may be sugar-coated by managers trying to impress those above – this can lead to highly problematic information asymmetry. Boards globally have tried to counteract this by engaging with employees at operational levels of the organisation.
The stakeholder voice and shareholder engagement
Stakeholder expectations of boards and organisations are increasing, and they are becoming more vocal about their concerns and aspirations. There are many advantages for a company in recognising their interests including:
- the development of new markets and business opportunities together with a more accurate understanding of existing operations
- having a competitive advantage over those not attuned to stakeholder needs
- being seen as a responsible and responsive company – with the social licence to operate.
Hearing presentations from customers, supply chain and other business partners is just one way boards have made an effort to hear more from stakeholders.
The way boards engage with their shareholders could also be revolutionised in the future. While AGMs remain an important aspect of the yearly cycle, since 2012 New Zealand companies have been able to conduct virtual online shareholder meetings. With advancements in technology, it’s possible that AGMs may be abandoned entirely in the future.
Working with management
Traditionally, there has been a strong separation of governance and management within companies, with the role of the Board being strictly confined to the former. However, boards need to be sufficiently engaged with the business to adequately supervise management and meet the standard of care expected of them.
As the operating environment becomes more complex, coupled with greater stakeholder expectations and accountability for performance, it is likely that boards will be more engaged. This should not however cross over into management, but it does mean that the days of having a governance career as a retirement option are gone. Rather governance should be seen as an active career.
Technology and innovation in the boardroom
Technology has the potential to fundamentally change the way boards meet, breaking down global barriers for directors such as location and language. The rise of ‘Al’ or the ‘robo director’ raises questions on the value of the “human director”.
Another potential disruption to boards is blockchain. These organisations, sometimes referred to as DAOs (decentralized autonomous organizations), follow computer code and are controlled by shareholders without the need for boards.
Both these technologies challenge “human directors” to demonstrate the additional value they bring so that they are seen as remaining relevant.
The learning board
Board and director evaluations provide a powerful tool to hold the Board accountable and help improve performance. Boards should set aside time for quality reflection, introspection and learning.
Directors of tomorrow
With the changing nature of work and expectations of different generations, some prospective director candidates with desirable backgrounds may not be attracted to governance roles, especially with the growing workload. Furthermore, the trend of more laws and regulations extending directors liability is likely to deter prospective candidates.
The need to properly remunerate directors is also a live issue. To attract the skilled and reasonable to governance roles, they need to be properly rewarded for the work they do.
Diversity and inclusion are also important factors when considering the directors of tomorrow. Boards are at their best when they are distinguished by diversity of thought and capability. Although there are many dimensions of diversity, including age, ethnicity, skills and professional experience, tenure and independence, the primary area of board diversity under scrutiny around the globe is gender.
In forecasting the future some things are more certain than others. Boards will always have governance and stewardship at their core and be focused on creating long-term value. Tomorrow’s directors need to always be learning and always on duty.