For too long, board directors have been dragging their feet in making crucial changes with regards to their board’s role, composition and work processes. Geopolitical unrest, digitalisation and climate change didn’t seem to escalate any sense of urgency. And then came Covid!
One shouldn’t use the word POSITIVE, but at least I’d say that one GOOD thing the pandemic has brought about, is the total turn-around that was forced to take place in boardrooms globally.
With the speed of light, board meetings shifted from the comfort of the cosy board rooms to – literally – open space. And, as we are slowly adjusting to the fact that some things have changed forever, it is high time to discuss the role the board should play, how it should work and how it is composed. And it’s urgent! This is what I call the boardroom revolution!
For example, the UN Sustainable Development Goals (SDGs), which set out to create a better and more sustainable future for all, can only be reached if board directors and top managers take on a leading role.
If they choose not to lead, these same companies will have to be governed in a far more volatile and unpredictable world than we have seen to date. Companies are expected to be accountable, not just to the shareholders, but also to the society in which they operate. This mega shift requires a whole new set of skills, and, even more important, a shift of mind-set of those in charge.
The traditional capitalistic growth model, that has been a zero-sum game for people and the planet, is increasingly being questioned. And fortunately, the general consensus that the business of business is not just business anymore, is actually embraced by a growing number of corporate leaders.
Norway’s Approach
The Norwegian government has decided that the SDGs are the framework through which national, regional and global challenges are to be addressed. Furthermore, the UN Secretary General has re-appointed Norway’s previous Prime Minister, Erna Solberg to co-lead the UN Advocates Group for SDGs.
This places Norwegian companies in a unique position to take on a leading role. Yet, if this springboard is to be taken advantage of, sustainability needs to move higher up the board agendas. And, if boards don’t listen and act, regulators will do what regulators normally do; they will regulate.
That brings me to the European Commission’s recently closed public consultation on sustainable corporate governance, which worries the leaders of the Nordic employers’ organisations. In a letter published in the Financial Times, they claim, among other things, that the proposal is detrimental to the companies’ ability to operate efficiently.
Their biggest concern is that board members will be held accountable by ‘an undefined group of stakeholders’. In an interview in rett24.no, Professor Beate Sjåfjell, chair of the EU SMART project, characterises the reactions as ‘premature and emotionally charged’.
It is also worth noting, though, that in the responses to the EU consultation, while NGOs are predictably in favour of most of the proposed measures, individual companies tend to be more positive towards regulations than their business associations.
From my perspective, one of the most interesting aspects of the consultation is in regard to enhancing sustainability expertise on the boards. Quoting the summary report: “Overall, respondents considered a requirement for the board to regularly assess its level of expertise on environmental, social and/or human rights matters and take appropriate follow up.”
Altogether, around 40 per cent of the respondents would like to include consideration of such expertise in the nomination processes, and a similar number would like to require such expertise among a certain number of board directors. While corresponding numbers for NGOs are 84 per cent and 69 per cent, I would hold that this is a strong signal to investors, nomination committees, as well as board directors themselves to get up to speed on sustainability competence and integrated thinking.
I’m also pleased to note that my good friend and chair of FutureBoards advisory board, the rock star of corporate governance, Professor Mervyn King is strongly in favour of the proposed measures. And he is in good company with Paul Polman, former CEO of Unilever, and Kerrie Waring, CEO of International Corporate Governance Network (ICGN), in their ‘call to action on sustainable corporate governance’.
In Norway, the government has taken action through the white paper on its ownership policy, which explicitly states that companies in which the state has ownership interests must have an overall plan for sustainable value creation. Furthermore, it is clarified that this plan must be specified in clear goals and strategies for the companies.
“IF BOARDS DON’T LISTEN AND ACT, REGULATORS WILL DO WHAT REGULATORS NORMALLY DO: THEY WILL REGULATE”
Additionally, the Norwegian Committee for Corporate Governance (NUES) has recently made ground-breaking changes in the recommendation for good board work in companies listed on the Oslo Stock Exchange.
The amendment clearly states that: “The board of directors should define clear objectives, strategies and risk profiles for the company’s business activities such that the company creates value for shareholders in a sustainable manner. When carrying out this work, the board of directors should therefore take into account financial, social and environmental considerations.”
It is not enough, but it is a big step in the right direction.
From an investor point of view, these proposals for increased professionalisation in the boardrooms are welcomed. Active investors have long been involved in companies’ strategic and operational work to improve environmental, social and corporate governance practices. This is done, not just because it’s the right thing to do, but also because most investors now know that more sustainable companies create greater value for shareholders. To varying degrees, companies are willing to listen, but with clear rules and requirements from the authorities, it is believed that progress can come faster.
Nevertheless, a recent survey conducted among the board members of the 75 largest listed companies in Norway, Sweden and Denmark shows that boards lack the necessary knowledge and experience related to sustainability.
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<p>This is in line with the results of a survey among European board members, which shows that although sustainability is high on the agenda of top management and the board, they are struggling to integrate sustainability thinking into the overall strategy.</p>
<p>A major challenge also lies in measuring and communicating the results. The gap between what the boards perceive as important, and what they actually do, is actually quite alarming.</p>
<p><strong>Better Thnking</strong></p>
<p>It is crucial that the board members of the future integrate sustainability thinking into the company’s overall strategy, and it is critical that the company’s value creation is measured and reported in an integrated and understandable way.</p>
<p>Board members must not primarily be sustainability experts, but they must know enough to be able to ask the right and critical questions – and to ensure the quality of the answers. This means that the board members must change perspective: from just focussing on shareholders’ return to a broader stakeholder perspective; from short-term profit to long-term value creation; from silo thinking to integrated thinking.</p>
<p>At the same time, investors must have the guts to look at a broader range of board recruits and to re-define what makes a ‘good’ director, both with regards to competence, experience, gender and ethnicity. And, yes, we also need younger faces into the boardrooms. Not because they are younger, but because they represent new mindsets, other attitudes and more up-to-date education.</p>
<p>What we really should be looking for is diversity of mind – cognitive diversity. And this train is moving fast: while the UK regulator, the Financial Conduct Authority (FCA), is encouraging companies to have a minimum of 40 per cent of women on their boards, investors too, are stepping up their game.</p>
<p>A powerful example is the newly published <em>Position Paper On Board Diversity</em> from the Norges Bank Investment Management, one of the world’s largest sovereign wealth funds, which states that:</p>
<p>The board should ensure that it can bring a <strong>broad range of perspectives and approaches</strong> to its decision-making process. The board should have a diversity of competences and backgrounds.</p>
<p>The board should have an <strong>appropriate gender balance</strong>. Boards where either gender has less than 30 per cent representation should consider setting targets for gender diversity and report on progress.</p>
<p>The board should have a formal nomination process to identify potential candidates who can contribute to diversity on the board. The process should include a rigorous search extending to a broad range of people with different backgrounds.</p>
<p>And positive change is indeed happening, but the pace is depressingly slow. In my opinion, a worrying number of board directors seem to be elected based on their connection rather than their competence and perspectives. Therefore, I’m hugely excited that EU Commission President Ursula von der Leyen has made breaking the deadlock of the EU Gender Directive a priority.</p>
<p>While many countries in Europe have introduced various forms of gender quota legislations, the so-called ‘gender directive’ has seemed to slowly simmer to a dry death at the European Council of Ministers, blocked by Germany and the UK since 2012.</p>
<p>So, with the UK out of the picture, and while the German government is backing the EU proposal setting a goal for at least 40 per cent of non-executive company board members to be women, we are one step closer to bringing to an end a deadlock that has lasted 10 years. Still, a delicate political process, involving the EU Council, the Parliament and the Commission, has to take place before the final decision is made.</p>
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“THE KEY MESSAGE IS THAT CHANGE IS NOT GOING TO HAPPEN BY ITSELF, AND REGULATION SEEMS, UNFORTUNATELY, TO BE THE KEY TO UNLOCK THE BOARDROOMS FOR WOMEN”
Nevertheless; the key message is that change is not going to happen by itself, and regulation seems, unfortunately, to be the key to unlock the boardrooms for women. In turn, that will, hopefully, open the doors to board directors from other walks of life than the usual suspects.
So, if you are planning for your company to survive and thrive in what the United Nations has dubbed ‘the decade of action’, you’d better start shaking up your board!
