This article is second part of ‘Board’s Opportunities and Challenges for Corporate Governance and Sustainability‘, which poses a series of questions to support thinking and discussion ahead of the 2019 London Global Convention on Corporate Governance and Sustainability.
What role should board committees play in contemporary corporate governance and what responsibilities should be allocated to them? Factors such as firm size and the proportion of independent directors increase committee activity (Chen and Wu, 2016). Are some issues delegated that should be addressed by the whole membership of a board? Do the committees mentioned and/or recommended in corporate governance codes correspond with current requirements? Are they dealing with issues such as sustainability and climate change that may impact upon the work of more than one committee and also require board involvement, direction and oversight? Do committees sometimes result in unnecessary delay without adding much value? Should some committees be temporary, perhaps an ad hoc response to a particular need for more detailed consideration, rather than permanent? Would a working party be a better option, or might this result in avoidance and procrastination?
Committees involve costs as well as offering benefits (Chen and Wu, 2016). How often should boards review the justification for their committees? How could committees be more effective, play more of a strategic role and add more value, for example in relation to the development of board policies, reviewing and ensuring compliance, and considering issues that require more time than is available at a typical board meeting? While some evidence is inconclusive, one study of large European firms has found a positive relationship between performance and female membership of board committees (Green and Homroy, 2018). In relation to nomination committees, why is there so little diversity on so many boards and board committees? Are criticisms of the value of audits and accounts, especially when companies fail for reasons that were not apparent in a previous year’s annual report and accounts, a reflection upon the work of the audit committees concerned? Should audit committees do more in relation to conflicts of interest and certain areas of risk? How could they provide better assurance and protection (Moran and Kral, 2013)?
Do or could boards and their committees provide opportunities for a wider range of people to become involved in the consideration of certain issues? In relation to coping, diversity and innovation, should more ‘outsiders’ be brought inside (Stevenson, 2017)? Might those who do not sit on a committee feel excluded? Can committees be a useful link between a board and management and other stakeholders, or are there better alternatives? How does the existence and operation of committees affect the dynamics of a board and stakeholder relationships? Do they divide a unitary board into sub-groups? Are they a barrier or an opportunity for further engagement? Might they result in less scrutiny of important issues by a board as a whole? Some boards are more effective than others at ensuring the effective operation of their committees and resolving differences of opinion between them. What do high performance boards do differently in relation to using their committees for discharging their responsibilities, in areas such as scrutiny, critique and control?
Non-executive directors and remuneration committees have not been noticeably successful in restraining executive pay increases that sometimes seem unrelated to improvements in performance caused by the beneficiaries of their decisions (Main et al, 2008). Given human nature and their dependence upon corporate clients for their incomes, should one have any expectation that many remuneration consultants will recommend below average increases in the pay of executives, regardless of how slow or incompetent they may have been or how many opportunities they may have missed? Is too much power vested in a single board of directors and its committees when complex networks of relationships have to be governed? Are new and more democratic mechanisms required? Should some or all board committees be opened up to stakeholder participation? Should a dedicated committee be established to better engage stakeholders and enable them to express their views? Should there be votes on important issues and choices as the need arises, either in addition to or in place of Annual General Meetings? Should the emphasis shift in governance debates from the notion of a company as a single hierarchy to network governance (Pirson and Turnbull, 2015)?
Sustainability: The New Business Paradigm and Global Dimensions
Many business leaders appear to be continuing along an unsustainable ‘business as usual’ path of growth and development, and accordingly discontent with elites is growing (Stern, 2019). Biodiversity and species are being lost at mass extinction rates and 90% of the world’s population lives with polluted air (World Economic Forum, 2018; ). Are too many boards focused upon sustaining current priorities, operations and practices rather than inspiring and adopting more sustainable approaches and business models? Do sustainability, social responsibilities and climate change need to be given a higher priority? Must rhetoric be matched by crisis action? How many boards are forging strategies to deal with their social and environmental roles and responsibilities as well as their economic ones? Are they addressing the drivers of long-term value creation in these dimensions of sustainability? Where the need for action to deal with climate change is clear and pressing, and the costs of delay may be increasing at an exponential rate, why are so many boards not taking more effective steps while there is still time (Stern, 2007 & 2015; UNEP, 2019)? What needs to be done and by whom to get more boards ‘on board’? Will Governments come under greater pressure to intervene?
Sustainable development can be a source of competitive advantage (Pop et al, 2018). Could a sustainable approach to corporate governance, with a board addressing economic, social and environmental expectations, be a source of competitive advantage and a long-term success factor for more boards (Salvioni et al, 2016)? How could directors be more effective in ensuring that strategies for longer-term sustainable value creation are developed, adopted and implemented? What should be the key elements of such strategies? Who should be involved in their formulation? Are directors and boards able to determine and provide the collective responses and collaborative action required to address a global challenge such as climate change? Lord Stern (2019) believes that the pursuit of a zero-carbon economy will generate strong and inclusive growth that can result in a more acceptable climate and assist the delivery of the United Nations (2015) Sustainable Development Goals (SDGs).
What more could boards do to help ensure that India meets its obligations for achieving SDGs? How prepared is India to attain SDGs by 2030? How many boards are seeking to adopt and implement approaches and strategies recommended by the UN Environment Programme (UNEP, 2019)? Should more of them see climate change as an opportunity rather than as a problem? India, China and the US are the world’s major sources of carbon emissions. A variety of technical and potential solutions are available and areas where further innovation is required have been identified (Hawken, 2017; UNEP, 2019). Lord Stern (2019) believes the policies required to unlock a new, sustainable and inclusive model of growth can be identified and that the finance and technology required to make a rapid start is available. Young people around the world have demonstrated their concern about sustainability and the consequences of climate change (Maynard, 2019). Do complacency, the composition of boards and a lack of diversity in the perspectives of their members limit corporate responses?
The Diversity Differentiator: Managing Board Dynamics and Achieving Effectiveness
Responsible boards are recognising the need for wider responsibilities and engaging with a more diverse range of stakeholder interests. Caution is needed when identifying factors that cause some boards to more effective than others (Sonnenfeld, 2002). However, diversity, along with opening up and the removal of barriers, is associated with questioning, challenge, creativity, innovation and entrepreneurship (Coulson-Thomas, 2017a & b)? If it is beneficial, there is prima facie a case for exploring the potential advantages of diversity in relationships, approaches and business models, and various functional, project and other groups, including corporate boards. Boards that put a high value on consensus, unity, homogeneity, standards and structures sometimes struggle to cope with the dissent, dynamism, flexibility and variety that can accompany greater diversity. Yet in challenging and uncertain times complacency and groupthink can be fatal. What policies are required to achieve greater diversity?
Gender is an aspect of diversity that has long been studied. Inclusiveness, fairness, representation and other cases have been made for a greater proportion of female directors on corporate boards (Terjesen, 2009; Nielsen and Huse, 2010). While some earlier investigations have been inconclusive, a study of French firms has found a positive relationship between female directorship and both return on assets and return on equity (Bennouri et al, 2018). In some jurisdictions, Governments have taken steps to increase the proportion of women on corporate boards. If the desirability of this objective is accepted and given the challenge of identifying qualified candidates for board appointments, why are more boards not themselves seeking to widen their gene pool beyond the ‘normal suspects’ as recommended by the Tyson Report (2003)? What more should boards do to drive the change? What other steps are required in areas such as development, mentoring, selection, induction and support, the removal of real and imagined barriers, and the practices of boards, to ensure that the recruitment of women directors will lead to improved economic, social and environmental performance?
Given that diversity encourages creativity and challenge, and more of both of these would benefit many boardrooms, why are so many discussions of diversity largely limited to gender and to a lesser extent ethnic diversity? Why is so little attention devoted to diversity of thought, experience and perspective, or diversity of age, nationality or social class? The composition of many boards does not reflect the geographical reach of the companies concerned, the range of their activities, or the diversity of their customers and other stakeholders. Are family businesses overlooked in discussions of diversity? In general, should governance debates pay more attention to governance challenges in emerging economies where in some countries family firms are especially significant (Armitage et al, 2017)? How can the progress of unrepresented groups be accelerated so that they are ‘board ready’ and, once appointed, they feel included and are encouraged and enabled to influence?