Board Transformation: Changing to Stay Ahead

The changing demands of customers, increased scrutiny by regulators, fluctuating nature of supply chains, and growing pipeline of competitors make for a volatile and uncertain business environment.

How can boards ensure their long-term success?

Boards today have to plan, design and build tomorrow’s board as fast as the organisation itself is required to change. High performing boards have directors who walk the talk on transformation, with board renewal, succession and transformation as key items on their agenda.

It was not too long ago that directors were appointed with the intent that they would stay on that board until they chose to retire. Today, the adoption of board appointments with tenure has become the standard, with a rolling renewable contract. A presumption of three terms is the norm – the first to learn the ropes, the second to lead a committee and the third to be ready to assume chairmanship.

The model is elegant if we assume one thing, that strategic change mirrors the pace of board renewal. That assumption is now fundamentally flawed.

Be the change you want to see

Back then, the “three horizons” framework provided a structure for companies to assess potential opportunities for growth without neglecting performance in the present. With horizon one representing core businesses, horizon two encompassing emerging opportunities and horizon three containing ideas for profitable growth, the model imagined each separate horizon to be the unique domain of successive CEOs and management – each overseeing the success and transition of progressive horizons. Today, directors and CEOs are expected to recognise and impact all three horizons of future growth during their tenure.

Take the energy company whose core capability for success shifts from upstream oil and gas in one year, to downstream, and then online digital marketplace and distribution in the next. Or the apparel company moving from design and manufacture to ecommerce and retail; and the bank moving from branches to smartphones.

Board renewal can no longer be left to the calendar of director retirement. For the most successful boards, the era of perpetual, “evergreen” board design, development and renewal has arrived.

In a global board research study, Going for Gold, by Russell Reynolds Associates (RRA), the views of 750 chairmen and directors worldwide, from Singapore, China, India, Japan, Australia, the Americas and Europe, were tapped, to understand the ever-increasing pressures on boards.

High performance boards ask three questions:

1. What board do we need to be?

High performing companies can be measured by their ability to exceed total shareholder return industry benchmarks for two or more years.

RRA’s survey data reveal that boards of such companies are more likely to report weighting more time in forward-looking planning activities, such as strategic planning, board refreshment, CEO succession planning, and crisis management planning.

What makes a high performing board is summarised in the box, “Characteristics of a High Performing Board”.

This group was shown to spend more time during the year on strategic and forward-looking planning, and less time on operational review, compliance, and focus on financial control and audit.

Boards with the most effective culture for transformation to the new order behave differently. There is a significant difference between high and low effective culture on boards across nearly every observed behaviour factor. There was more reported trust between directors of high performing boards, and board discussions were felt to be more prioritised and focused, with directors on those boards more willing and effective in challenging management.

Interestingly, 98 per cent of directors on highly adaptive and high performing boards recognised their fellow directors engaging in all aspects of board responsibilities, compared with less than 50 per cent in boards seen as less effective. Proxy delegation of responsibility to committees or recognised “experts” on less effective boards are more common.

In the highly effective adaptive boards the characteristics of the board leadership were seen to be a significant factor for performance. Such boards had chairmen who were more active in facilitating and engaging their directors in high quality debate; they actively sought and embraced different points of view and they were capable in giving their directors regular constructive feedback.
 

Having a dominant and controlling shareholder or shareholders correlated with a negative impact on board effectiveness and culture, and such boards were less likely to rate themselves as effective. However, having a controlling shareholder did not appear to have any significant impact on company performance.

2. How is the board performing today?

Boards must increasingly learn to engage and understand what their stakeholders want and expect of the organisation. Not long ago, the board could be forgiven for prioritising the attentions and demands of the shareholder and regulator. These stakeholders have themselves fundamentally changed in character and power. New ones are increasing in voice, rights and power. These are some of the ways stakeholders are changing.

First, shareholders are demanding and expecting more transparency, disclosure, relevance, exposure of and access to the board directly. There is an increase in power, presence and entitlements of the many proxy advisers, activist investors as well as the “smart phone-armed” and easily displeased consumer shareholders. Shareholders of any scale have a louder and more influential voice to demand more of their boards. They are clearer that performance and evolution are not outsourced to management.

Second, regulators are under pressure themselves to demand and expect more effort to demonstrate compliance, support, and even collaboration in setting the standards of governance and ethics for an economy in concert with industry peers. The era of a passive “if not, why not” expectation on boards worldwide is now being replaced by the “smelling the smoke” mandate. The regulator’s role is morphing into that of setting and championing the standards, and not constantly policing and prosecuting them. Cooperation with and active attention to the regulator replaces just complying with and avoiding the regulator in transforming high performance boards.

Third, employees are an emerging stakeholder group in Asia. The aftermath of the US financial crisis saw employee groups assert significant controlling pressure on the boards of their organisations through leveraging shareholdings and proxy power through their pension funds as key shareholders. Today employees are as informed almost as much as the investing market. They are mobile, and constantly seeking career and experience mobility.

Fourth, society is changing. The smartphone turned everyone into an opinion leading, opinion broadcasting, self-researching and investigative commentator and consumer. The BBC’s own Nik Growing’s alarming work “Thinking the Unthinkable” makes essential a natural paranoia, vigilance and care in the control and truthfulness of messaging in our transformed future boards.

Leading boards are responding to this with effort but with confidence.

Fifth, the media is evolving. Until recently a corporate failure, scandal, or incident (especially success) was reported routinely from the office of the CEO. Today the informed and empowered mass consumer, whether investor or not, seeks social and moral justice when organisations fail to serve as declared and blame needs apportioning. It is the board now chased by media not management.

3. How are we going to close the gaps between tomorrow's needs and today's performance?

Boards seeking to transform must adopt a different perspective to board renewal and succession. A new format of evaluating and reviewing boards is leading the charge.

First, boards must make the leap from board review to board preview. What this means is the boards must internalise the process of first assessing what they want to be, before undertaking to evaluate their performance in achieving their goals.

Board reviews have, in most jurisdictions in the region, been a discretionary guideline or principle to follow. In Singapore, the evolution of expectation is reflected in the 2018 Code of Corporate Governance. Provisions 5.1 and 5.2 require: “…the process for the evaluation of the effectiveness of the Board as a whole, and of each board committee separately, as well as the contribution by the Chairman and each individual director to the Board”. With the company to disclose in its annual report how the assessments have been conducted, including the identity and relationship of its external facilitator.

Second, boards must move from board assessment to perpetual board development, in other words, adopt the RADAR approach (See box “Board RADAR”).

Board reviews have become an important tool, and increasingly required by regulation, for optimising governance effectiveness, confidence and capability. Increasingly, such reviews are being scrutinised by proxy advisers, shareholders and other external parties to gain insight and confidence in how their investments are being governed.
 

Phase one has been to increasingly accurately and confidently paint a picture of health and gaps by looking to the passing period. Phase two is now shifting to rapidly close those gaps through active individual and collective development. This period coincides with the emergence of the RADAR approach. The idea is to plan and design the transformation as a deliberate and controlled act of good governance, and not just react to the demand for change as it happens.

Third, and finally, board leadership must evolve to such that the role of the chair becomes that of a conductor of change rather than just a convener of board meetings.

The chair is key in facilitating board transformation. Whilst there is no algorithm (yet) for such change, a rule of thumb trusted by the most seasoned chairs is that the more their board is clear, capable and the board dynamic effective, the more they can and should be in consultation and facilitation mode. As soon as one or more of these conditions is compromised, the more directing and conducting they know that their board needs them to be. The shift towards the latter in these times of change is recognised.

The evolved Singapore Code of Governance August 2018 sets a valuable definition of such chairman behaviour that is inspiring way beyond the country’s borders by boards achieving their required pace of transformation: “..it is fundamental that the Chairman sets the right tone. The Chairman should encourage a full and frank exchange of views, drawing out contributions from all directors so that the debate benefits from the full diversity of views around the boardroom table. The Chairman should seek to stimulate and engender a robust yet collegiate setting, set the right ethical and behavioural tone, and provide leadership to the Board.”

Boards can ensure their continuing relevance by upholding these values articulated in the Code and delivering on transformation through board renewal, succession and regeneration.

This article first appeared in the Q3 2019 issue of the SID Directors Bulletin published by the Singapore Institute of Directors.