How Boards Work

1. Corporate boards face an existential crisis in a rapidly changing world

Corporate boards, like corporations, will face an existential crisis if they do not change with the times.

Boards must evolve or perish. The 21st century presents unprecedented challenges for corporate boards, including rapid technological change, shifting societal expectations, and economic uncertainty. Boards that fail to adapt risk becoming irrelevant or ineffective in guiding their companies through this turbulent landscape.

To survive and thrive, boards must:

• Embrace a more assertive and proactive role in shaping company strategy
• Diversify their composition to include a wider range of perspectives and expertise
• Develop a deeper understanding of emerging technologies and their potential impacts
• Balance short-term pressures with long-term value creation
• Engage more directly with shareholders and other stakeholders

Boards that successfully navigate these challenges will be better positioned to ensure their companies remain competitive, innovative, and socially responsible in an increasingly complex global environment.

2. Boards must actively shape company strategy, not just approve it

Reimagining this process could mean that board members work on the company strategy parallel to management, during separate and concurrent working sessions.

From rubber-stamping to co-creation. Traditionally, boards have primarily reviewed and approved strategies proposed by management. However, this approach is no longer sufficient in today's fast-paced business environment. Boards must take a more active role in shaping company strategy to ensure long-term success.

Key steps for more strategic board involvement:

• Conduct separate strategy sessions independently of management
• Develop alternative strategic proposals to compare with management's plans
• Engage in robust debate and discussion of strategic options
• Focus on long-term trends and structural risks, not just short-term performance
• Seek additional third-party information to complement management's perspective

By taking a more hands-on approach to strategy, boards can provide valuable insights, challenge assumptions, and help companies navigate complex challenges more effectively.

3. CEO selection should prioritize ethics and values alongside performance

A more assertive board could alter its recruitment process so as to place a prospective CEO's ethics and values at the very heart of its evaluation, equal in importance to financial performance.

Character matters as much as competence. In light of recent corporate scandals and growing public scrutiny, boards must place greater emphasis on a CEO candidate's moral compass and ethical standards during the selection process. This shift reflects the increasing importance of corporate culture and social responsibility in today's business landscape.

Strategies for evaluating CEO ethics and values:

• Incorporate specific metrics to gauge a candidate's values and decision-making processes
• Ask probing questions about past ethical dilemmas and how they were handled
• Assess a candidate's track record on social and environmental issues
• Consider how well the candidate's personal values align with the company's mission and culture
• Implement more rigorous background checks and references focused on character and integrity

By prioritizing ethics and values alongside performance, boards can help ensure that their companies are led by individuals who will navigate complex moral and social issues responsibly.

4. Boards need to diversify and adapt to address emerging challenges

The most effective boards will be those that populate their ranks with specialists and people who are knowledgeable about the specific shifts and trends most likely to affect corporations in the years ahead.

Diversity of expertise is crucial. As companies face increasingly complex challenges, boards must evolve to include a wider range of skills, experiences, and perspectives. This diversity goes beyond traditional measures like gender and ethnicity to encompass expertise in emerging areas such as technology, geopolitics, and sustainability.

Key areas for board diversification:

• Technology and digital transformation expertise
• Environmental, social, and governance (ESG) knowledge
• Geopolitical and global economic insights
• Cybersecurity and data privacy experience
• Expertise in emerging markets and non-traditional business models

By broadening the range of expertise on their boards, companies can better anticipate and respond to future challenges, capitalize on new opportunities, and navigate an increasingly complex business landscape.

5. Cultural oversight is a critical board responsibility in the 21st century

Boards are increasingly expected to make judgment calls on matters of morality, fairness, and ethics involving worker advocacy, pay equity, gender and race parity, data privacy, and the inevitable advances in AI and bioengineering.

Culture shapes corporate destiny. In today's socially conscious business environment, boards must take a more active role in overseeing and shaping company culture. This includes addressing a wide range of ethical and social issues that can significantly impact a company's reputation, employee engagement, and long-term success.

Key cultural oversight responsibilities for boards:

• Establish and monitor ethical guidelines and corporate values
• Oversee diversity, equity, and inclusion initiatives
• Address issues of pay equity and worker advocacy
• Guide the company's approach to data privacy and AI ethics
• Ensure alignment between corporate culture and business strategy

By taking a more proactive approach to cultural oversight, boards can help their companies navigate complex social issues, build trust with stakeholders, and create sustainable long-term value.

6. Short-termism threatens long-term value creation and board effectiveness

Boards must determine whether their companies will be able to survive in a new world order where the liberal, market-capitalist construct is replaced.

Long-term thinking is essential. The pressure to deliver short-term results can lead boards and management to make decisions that sacrifice long-term value creation. This myopic focus poses a significant threat to companies' ability to innovate, invest in the future, and adapt to changing market conditions.

Strategies to combat short-termism:

• Implement longer-term incentive structures for executives and board members
• Focus on long-term value metrics in addition to quarterly financial results
• Engage with long-term oriented investors and communicate the company's long-term strategy
• Invest in innovation and R&D despite short-term pressures
• Consider transitioning to alternative corporate structures that prioritize long-term thinking

By resisting the pressures of short-termism, boards can help their companies build sustainable competitive advantages, invest in innovation, and create lasting value for all stakeholders.

7. Technological disruption demands boards become more tech-savvy

Ultimately, boards must oversee these technological transitions by ensuring that their companies absorb new technologies and implement the best and most modern practices to maximize efficiency and mitigate risks.

Tech literacy is no longer optional. As technology continues to transform industries and business models, boards must develop a deeper understanding of technological trends and their potential impacts. This requires not only adding tech-savvy members to the board but also ensuring that all directors have a baseline level of technological literacy.

Key areas of technological focus for boards:

• Artificial intelligence and machine learning
• Cybersecurity and data privacy
• Digital transformation and e-commerce
• Emerging technologies (e.g., blockchain, IoT, 5G)
• Automation and its impact on workforce planning

By improving their technological expertise, boards can better guide their companies through digital transformations, identify new opportunities, and mitigate technology-related risks.

8. The global war for talent requires innovative board approaches

As corporations have begun to focus on greater female board representation, they have also looked to add ethnic minorities and to ensure that diverse ideas and thinking are represented on the board.

Talent is the ultimate competitive advantage. In an increasingly knowledge-based economy, attracting and retaining top talent is critical for long-term success. Boards must take a more active role in overseeing talent strategy and ensuring their companies can compete in the global war for talent.

Innovative approaches to talent oversight:

• Champion diversity and inclusion initiatives at all levels of the organization
• Oversee the development of robust leadership pipelines and succession planning
• Encourage investment in employee training and development programs
• Monitor emerging workforce trends (e.g., remote work, gig economy)
• Ensure competitive compensation and benefits packages that attract top talent

By prioritizing talent strategy at the board level, companies can build more resilient, innovative, and adaptable organizations capable of thriving in a rapidly changing business environment.

9. Rising investor activism is reshaping board-shareholder dynamics

Boards should expect to devote more time and attention to keeping the majority of their shareholders happy and dissuading them from moving their investment capital to private companies.

Shareholder engagement is crucial. The rise of activist investors and increasingly vocal institutional shareholders is forcing boards to rethink their approach to investor relations. Boards must be more proactive in engaging with shareholders, addressing their concerns, and clearly communicating the company's long-term strategy.

Strategies for effective shareholder engagement:

• Develop a comprehensive investor relations strategy at the board level
• Engage in regular, direct communication with major shareholders
• Address ESG concerns proactively and transparently
• Clearly articulate the company's long-term value creation strategy
• Be prepared to respond to activist campaigns and proxy fights

By fostering stronger relationships with shareholders and addressing their concerns proactively, boards can build trust, reduce the risk of activist interventions, and ensure continued support for the company's long-term strategy.

10. De-globalization poses new risks boards must navigate strategically

As power continues to move away from multilateral organizations—such as the EU and WTO—and devolves to national governments, global corporations will likely find it harder to maintain effective government relations across different countries.

Adapting to a fragmented world. The trend towards de-globalization, protectionism, and economic nationalism presents significant challenges for multinational corporations. Boards must guide their companies in navigating this increasingly complex and fragmented global landscape.

Key considerations for boards in addressing de-globalization:

• Reassess global supply chains and consider localization strategies
• Develop contingency plans for potential trade barriers or geopolitical conflicts
• Monitor regulatory changes across different jurisdictions
• Consider restructuring operations to create more autonomous regional units
• Evaluate the potential impact of capital controls and currency fluctuations

By anticipating and preparing for the challenges of a de-globalizing world, boards can help their companies maintain resilience, adaptability, and competitiveness in an increasingly uncertain global environment.

Last updated: September 13, 2024