Many directors and boards struggle to understand the multiple and inter-related challenges, opportunities, possibilities, developments, trends and unexpected events of our contemporary world. Do we have unrealistic expectations of what can be achieved by a relatively small group of very similar people selected in a previous era and who may meet for a relatively short time once a month or quarterly to consider agenda items set out in an annual calendar of meetings and topics of which they often have limited knowledge and experience? Can such a small group presiding over a large enterprise cope with challenges such as indexation, private equity and globalisation (Coates, 2018)? What about climate change and sustainability? This theme paper poses a series of questions to support thinking and discussion ahead of the 2019 London Global Convention on Corporate Governance and Sustainability.
Corporate Governance at a Watershed or Crossroads
Have we reached the limits of the ability of our current approaches to corporate governance to meet stakeholder requirements, unless new models and practices are adopted and better support is provided? Have we also reached a limit in terms of the information directors can handle without the assistance provided by the application of artificial intelligence (AI) and digital technologies to their roles and responsibilities? In relation to the organisational, governance and decision making possibilities created by digital technologies, what should the role of directors and other humans be (Tenner, 2018)? How can we ensure that legal, regulatory and governance frameworks are aligned with growing diversity, changing operational requirements and new business models, and that they do not inhibit innovation?
Much of formerly blue collar work is already automated. Increasingly, more of the work of professionals and knowledge workers is being undertaken by a combination of people and technology (Kaplan, 2015). Many business and management processes and models can be automated. In a growing number of companies they have been. The role of people can be minimal once rules, protocols and algorithms have been developed and agreed, and arrangements made for them to learn and develop as requirements and priorities change. If certain AI applications can outperform most doctors at complex diagnoses and be more reliable at drawing up treatment plans, might a governance application be better than directors at processing the mass of data generated by the activities of many companies and be better able to provide the 24/7 intelligent steering they too rarely provide? Where human intervention and judgement is still required, how can this best be provided and from whom?
Rather than referring ‘developments’ and ‘new’ issues to a board largely composed of generalists, would it make more sense for them to be first sorted and categorised by intelligent systems? Should they, along with disputes, complex trade-offs and moral judgements, be allocated to panels composed of those who are best equipped to deal with them? Rather than holding up adaptation, change and required decisions, should boards be the business governance equivalent of a judge or a bench of judges who are brought in to handle specific cases or act when special circumstances apply? In such situations and on certain matters, could the views of a wider range of stakeholders be sought by means of appropriate consultation mechanisms and/or voting systems? Given the possibilities, what paths should the future of corporate governance take and how can we future proof boards?
Future of the Strategic Board: Preparing for a Complex World
Current governance arrangements are already under pressure, without the challenge of preparing for an even more complex future. The nature and reach of organisations are changing. As they become networks of relationships, does board leadership increasingly have to span boundaries? Does it need to move on from leveraging corporate capabilities to those of wider value chains? In the face of multiple challenges and opportunities, and greater uncertainty, how can governance arrangements become more capable, flexible, representative and resilient? How might they remain current and relevant in a variety of arenas? Should the focus of governance now be upon behaviour and conduct rather than structures? Is culture change now a priority if desired changes of behaviour are to be achieved (FRC, 2016)? Alternatively, given the diversity of cultures that can exist across different functions and within stakeholder groups, is it a distraction and are there much easier ways of achieving changes of behaviour as and when required (Coulson-Thomas, 2015a & b)?
Do boards need to become more diverse and inclusive? Are new competences, practices and the systems thinking needed to analyze and understand difficult and interdependent issues required (Coulson-Thomas, 2018)? The UK Financial Reporting Council has been consulting on proposed revisions to the UK Stewardship Code, focused on how effective stewardship can deliver sustainable value for beneficiaries, the economy and society (FRC, 2019). Should more boards assume responsibilities to a wider range of stakeholders, and more explicitly take material environmental, social and governance (ESG) factors into account? Are many corporate boards and Governments overlooking the human, social and environmental impacts of current approaches to growth and development (Raworth, 2017, UNEP, 2019)?
How should one assess board performance? What criteria should be used? What constitutes a high performance board? Does it depend upon a company’s mission, vision, situation, context, opportunities, stage of development and the aspirations of its stakeholders? Is high performance about simultaneously achieving multiple objectives more quickly and affordably and in ways that are less disruptive (Coulson-Thomas 2012a & b, 2013)? What dimensions of leadership or combinations of them should be prioritised, for example: strategic leadership; ethical leadership; visionary leadership; cultural leadership; responsible leadership; learning, flexibility and adaptation; accountability and responsibility; or engagement and listening leadership? Is there a need to address the purpose of corporate leadership and how business value and social outcomes can be better aligned (Ahluwalia, 2015; Kempster et al, 2019).
The Evolution of Corporate Boards
In some jurisdictions boards are becoming smaller, but in other respects such as composition changes may be more limited. Globally, what are the trends in relation to board evaluation, roles and responsibilities, accountability and the rating of director and board performance? In more dynamic situations, does the emphasis need to switch from monitoring and compliance to inspiring creativity, encouraging and enabling innovation and supporting entrepreneurship (Coulson-Thomas, 2017a & b)? It may not be clear whether factors such as the age of directors, size of boards or attendance at meetings can be linked to board performance, but a healthy degree of challenge and tolerance of dissent has been identified as positive factors, so reviews could look out for openness to dissent and a willingness to challenge (Sonnenfeld, 2002). Guidance is available on the requirements for building an effective boardroom team and what higher performing directors do differently in key areas for corporate success (Coulson-Thomas, 2007a & b). Many boards require more than incremental improvement.
Why is there so little innovation in governance arrangements (Coulson-Thomas, 2018a)? Despite the many possibilities for bespoke approaches that better reflect the aspirations, context, situation and stage of development of individual companies and their networks of relationships, many boards are still reluctant to adopt new models of business, governance, operation, organisation and work. They cling to traditional practices and adhere to standard models that are often derived from those developed for listed companies whose numbers have declined in their countries of origin. Are many current corporate governance practices a hindrance rather than a help? Does this reflect complacency, their irrelevance or that a low priority and value is placed upon boards? Relationships with a wider range of stakeholders than just shareholders is another arena in which what curious and imaginative directors choose do rather than legislation and/or imposed structures could be the key to innovation (Freeman and Reed, 1983). Could better use of board committees help to share burdens?
Continue Reading: Part 2: Board Committees and their Composition: Getting it Right
Continue Reading: Final Part: Debugging Digital Governance: The Future Ahead