In the realm of corporate governance, a board of directors plays a vital role as a governing entity that oversees and supports management in maximizing value creation for shareholders and other stakeholders. To draw an analogy, if the CEO is likened to the lead singer of a band, the board of directors serves as the rhythm section, providing direction and oversight to ensure the interests of shareholders and broader stakeholders are effectively addressed. While the CEO leads the company’s day-to-day operations and execution of strategy, it is the board that lays the foundation and sets the tone for governance.
In today’s fast-paced and ever-evolving business landscape, effective board governance has become increasingly crucial. Traditionally, boards focused on CEO succession and financial strategy, providing support and approval for management’s proposed strategies. However, the role of the modern board has expanded significantly. In addition to strategy oversight, boards now proactively provide guidance on areas such as risk and opportunity management, sustainability, talent management, leadership succession, organizational culture, and even brand management and marketing.
A typical board of directors for publicly traded companies consists of executive, nonexecutive, and independent directors who are elected by shareholders. This structure, known as a one-tier board, often includes the CEO and sometimes the CFO of the company. Nonexecutive directors may include interested parties like shareholders or employee representatives, while independent directors are external subject-matter experts who offer an impartial perspective. Independent directors face the challenge of staying well-informed about the companies they serve on the boards of, as well as the broader ecosystems in which those companies operate.
Some organizations adopt a two-tier board structure, which entails a clear separation between the management board and supervisory board. Although the overall responsibilities of both boards are similar to those of a one-tier structure, the two-tier model may limit information access for the management and supervisory boards.
While most boards operate within the one- or two-tier structure, various countries and ownership structures may exhibit deviations from these models. Family-owned businesses, for instance, often have unique board structures tailored to their specific needs.
Facilitating board activities is the chair, whose role encompasses ensuring productive meetings, fostering a positive dynamic, encouraging constructive debate, and overseeing the implementation of strategy. In many cases, the chair works closely with the CEO, and in some instances, these roles may even be combined.
The board of directors plays a crucial role in steering organizations toward success by providing guidance, oversight, and strategic direction. As the business landscape continues to evolve, the board’s ability to adapt and embrace its expanded responsibilities becomes paramount in driving sustainable growth and ensuring the long-term viability of companies.
Key Elements for Establishing a Strong Board of Directors
When it comes to building an effective board of directors, there are four essential areas that require attention and focus. By addressing these areas, organizations can enhance board performance and drive long-term success.
- Expand the Board’s Scope
Traditional boards often limit themselves to overseeing the management team. However, exceptional boards take a more active role by providing valuable input and constructive challenges across a range of strategic areas. This expanded scope may include corporate strategy, risk management, sustainability initiatives, technology and digitization efforts, potential mergers and acquisitions, and fostering a strong organizational culture. To fulfill these responsibilities, directors must possess a higher level of digital literacy to effectively contribute in today’s rapidly evolving business landscape. - Deepen Directors’ Commitment
As boards broaden their scope, directors need to increase their level of involvement. This entails dedicating more time to their board duties, developing forward-thinking agendas, and actively participating in discussions and decision-making processes. It is crucial, however, for directors to maintain a clear distinction between their oversight role and the operational activities managed by the executive team. Striking the right balance preserves the necessary separation while enabling directors to contribute meaningfully to the organization’s strategic direction. - Clarify Responsibilities and Board Composition
A well-functioning board requires a clear understanding of the roles and responsibilities of each director position. The appointment of a capable and ambitious chairperson is pivotal, as they set the tone for board dynamics and effectiveness. A skilled chairperson facilitates productive meetings, fosters a culture of trust and open feedback, and invests in director training and development. Board composition is equally important, with directors bringing a diverse range of experiences and expertise relevant to the organization’s strategic objectives. While directors should have a broad perspective, they should also possess specific areas of specialization to provide valuable insights in their respective domains. - Foster Trust and Invest in Board Dynamics
Effective boards prioritize open communication, trust, and collaboration among directors. Developing strong board dynamics is crucial for fostering healthy discussions, encouraging critical questioning of management decisions, and driving effective governance. Directors must possess a deep understanding of the company and its industry ecosystem, enabling them to challenge management with insightful inquiries and advice. Continuous learning and skill development are vital for board members to stay abreast of industry trends and best practices.
By addressing these four key elements, organizations can establish a strong and high-performing board of directors. A well-rounded board that embraces a broader scope, cultivates strong relationships, and possesses a diverse skill set will be better equipped to guide the organization toward sustainable growth and success.
The Impact of the COVID-19 Pandemic on Board Operations
The COVID-19 pandemic has brought about unprecedented challenges for organizations worldwide, requiring boards of directors to adapt and evolve their approach. Even prior to the pandemic, effective collaboration between directors and management was crucial for a board’s success. However, in times of crisis, this collaboration becomes even more vital. According to a biannual 2021 McKinsey Global Survey involving over 800 board directors and executives, boards have largely risen to the occasion and embraced new ways of working that may have long-lasting positive effects.
The survey revealed that board directors significantly increased their time commitments in response to the crisis. Between 2019 and 2020, directors reported a nearly 20 percent rise in the average number of days dedicated to board work, with expectations of further increases in 2021. Boards also made structural changes to their operating models, such as investing in technology to facilitate digital collaboration and establishing crisis committees. Furthermore, boards modified their working relationship with management and introduced greater flexibility in their agendas. As a result, boards have taken on a more proactive role, serving as catalysts for change by asking probing questions and shaping the path forward.
These changes have proven effective, as nearly four out of five directors and executives reported that collaboration between boards and management has been successful or very successful during the pandemic, compared to two-thirds in the 2019 survey.
Enabling Digital Transformation: The Role of Boards
The significance of digital transformation for businesses is widely acknowledged, but many board directors may be unsure about their role in driving this transformation. However, as board responsibilities expand, there are opportunities for boards to adapt their strategies and tactics to create maximum value.
To have the greatest impact on digital transformation, board directors can consider the following five actions:
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Gain clarity on technology implications: Board members do not need to possess deep technical knowledge, but they should understand the implications of emerging technologies for the business. If there is a lack of expertise in this area, the board can seek relevant training or consider appointing a new member with the necessary experience.
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Ensure transformative value creation: Any digital initiative adopted by the company should have the potential to significantly impact at least 20 percent of operating profits. It may require a long-term commitment to fully realize the benefits of digital transformation.
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Track the effectiveness of digital transformation: Boards need to establish metrics that accurately reflect digital progress. Key metrics could include the speed of translating new ideas into practical tools and the percentage of talent working in agile teams.
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Broaden talent development: Boards typically play a role in hiring C-suite executives, but expanding their involvement to senior leadership and talent development is crucial in today’s context. Building a strong digital business requires nurturing talent at all levels, as these roles form the foundation of successful digital transformation.
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Recognize emerging threats beyond traditional sectors: As digital businesses expand into new industries, boards must broaden their perspective on potential threats. Identifying nontraditional emerging risks and understanding their implications is essential for effective governance.
By embracing these actions, boards can play a pivotal role in driving digital transformation within their organizations. As the business landscape continues to evolve, boards must remain agile, forward-thinking, and proactive in their pursuit of digital excellence.
How Boards Shape Talent, Culture, and Resilience in Organizations
Boards of directors play a crucial role in shaping an organization’s talent and culture, recognizing that strategy can only be successfully executed with the right people in the right environment. While boards traditionally focused on financial matters, the rapidly changing business and social landscape has brought questions of talent and culture to the forefront of board agendas.
CEO succession has always been a core responsibility of the board, but effective boards now extend their involvement to appointments and successions beyond the chief executive position. Boards are taking a closer look at strategy execution, assessing whether the organization has access to the critical skills needed for strategic shifts and evaluating the health of the leadership pipeline for key roles. Furthermore, organizational culture is gaining increasing attention. A strong culture, characterized by mindsets and behaviors that drive effective decision-making and work practices, has been shown to outperform peers significantly. Boards can role model culture by promoting individuals based on stated values and fostering lifelong learning, thereby setting the tone for the desired culture throughout the organization.
Building resilience is another crucial focus for boards. Resilience entails the ability to pivot and respond to disruptions effectively, both in the present and future. Previous economic downturns have demonstrated that actions taken by companies during challenging times can make a substantial difference in long-term performance. Boards can enable these actions by enhancing their speed and agility in decision-making, learning from the trial-by-fire experiences of the COVID-19 pandemic. However, despite the lessons learned, a significant percentage of corporate directors feel unprepared for the next major crisis. To address this, boards should engage in robust risk management strategies, including scenario-based exercises and the development of playbooks based on economic cycles, to ensure a focus on defense and offense.
Corporate purpose has gained heightened scrutiny, as organizations are expected to deliver measurable environmental, social, and governance (ESG) commitments. A well-defined purpose not only aligns with societal expectations but also enhances company reputation.
Boards can take specific actions to hone corporate purpose:
- Build and role model an authentic purpose narrative by engaging stakeholders on the company’s strengths, vulnerabilities, and possibilities.
- Own purpose in board practices, reflecting diversity and ESG competence while regularly incorporating purpose and ESG issues into the board agenda.
- Assess purpose commitments and ensure management sets clear, measurable goals, actions, and accountability throughout the organization.
- Reinforce a purpose-driven approach in core board decisions, using purpose as a lens to test and evaluate strategy, investments, risk management, HR practices, culture, governance, and external reporting.
- Drive organizational accountability for purpose through board and management evaluations, training, and reporting, including tying ESG metrics to executive compensation and celebrating purpose-related successes.
By actively addressing talent, culture, resilience, and purpose, boards can significantly contribute to the success and long-term sustainability of organizations in today’s dynamic and evolving business landscape.