Comment: To survive the pandemic and other tectonic shifts of the 2020s, there needs to be a radical rethink in governance practices, including the current structure of four to six board meetings a year, argues Di Rifai of Creating Future Us
The digital age is upending the entire business ecosystem; from value chains and supply chains, to business models, stakeholder reciprocity, balance sheets, transparency and disclosure … all in real time.
This complexity and uncertainty is exacerbated by mega-vectors such as climate change, the space race, quantum computing and others that can suddenly intersect, creating multiple and massive tipping points. The current Covid-19 pandemic is one such vector.
Any boards hoping to sit in an ivory tower, ruling from afar, are in for a jolt. The “future-fit” board must lead the charge with agility, foresight and resilience, and demand the same of its organisation. It embraces change and puts self governance at the forefront, since regulatory change continues to lag market feedback loops. Furthermore, investors are actively demanding it, as evidenced by their growing, and robust, endorsement of environmental, social and governance (ESG) principles.
The progression of the pandemic happened most likely in between most board meetings. By the time those boards next convened, the world was almost unrecognisable
While the E in ESG has pulled focus thus far, S and G are overdue their time in the spotlight, as we pointed out in a previous whitepaper. Our current whitepaper: Governance Rebooted argues for putting an avant-garde G front and centre.
Digital age governance is a different beast from its analogue forerunner, bringing both risks and opportunities. To understand the risks, one need look no further than the current Covid-19 pandemic and Black Lives Matter protests as illustrations of how governance can make or break a business.
The progression of Covid-19 towards a global phenomenon happened in the first two months of 2020, most likely in between most board meetings. By the time those boards next convened – in a typical cycle – the world would have become almost unrecognisable. The recent global protests for George Floyd took 48 hours to coalesce after the video of his murder was posted online. How does a current structure of four to six board meetings a year anticipate such a dynamic digital age landscape?
Had such a pandemic event (or something similarly disruptive) been contemplated in prior strategy discussions and preliminary processes put in place for how to address it? For those companies who fired employees en masse, drew down unnecessarily on government funds while still paying bonuses or dividends, it would seem very little. Investors in companies most heavily impacted by the pandemic should be asking why dynamic scenario planning had not anticipated one, when it had been widely mooted to happen at some point.
The spotlight of social media and leaks allowed society at large to instantaneously judge firms. With Covid-19, heroes and villains were quickly identified, with those who showed short-term, self-centred focus vilified and the opposite camp lauded. Similarly, firms who hesitated too long or published what were seen as insincere statements on racism, received equally bad press. What financial impact did this have on these companies’ brand (intangible) value, at a time of low revenues? Investors should be wary of boards that approve their organisations’ values and post them online, only to act antithetically in day to day operations. They should be pressing boards to elaborate how they might act (and communicate) those values out under different stresses.
Even pre-Covid, many organisations were already in the midst of a structural shift to digital. Investors should be probing if their boards are operating from a pure “technological disruption” mind-set, or are they cognisant of the structural ecosystem change below the surface? Are they therefore implementing the equivalent of an upgrade from brochure to website, or are they re-evaluating their utility within the value chain as a result? The answers have a massive impact on the sustainability of that business.
Now, more than ever, a board must be the change it wants to see; agile and innovative
Investors should also be asking critical questions about a board’s composition: Are current board members mostly risk-averse, incremental thinkers, or are there enough risk takers who are open to complete reinvention? Do they see change as an opportunity to gain and grow, or one to resist? A board with no challengers to push at the boundaries of a slowly moving status quo is one that will inevitably fall on the sword of this disruptive age.
Digital age governance empowers and enhances companies’ abilities to differentiate and create new landscapes. Now, more than ever, a board must be the change it wants to see; agile and innovative.
Such a board’s ability to rebalance priorities as the landscape shifts ensures that the board agenda is not overly focused on business-as-usual or compliance-centric. Yes, compliance needs time allocation; however, time and thought given to ongoing strategy re-evaluation in this fast-moving age will keep the business nimble and growing. Investors and their proxies should be looking through minutes of board meetings parsing for this balance.
An innovative example of this quality is how some companies are using AI on their boards. One company (also an investment fund), DVK, says of its AI algorithm, Vital: "We treat it as a member of our board with observer status," he said. Likewise, Salesforce’s Marc Benioff has introduced IBM’s AI, Einstein, to his board and executive team meetings.
Stakeholder management is not an annual check-box exercise, but at the heart of firms’ value in the digital age. A digital age board understands the priority stack of its stakeholders and has a premeditated, nuanced and thoughtful approach to both engaging and managing trade-offs amongst them.
Take, for example, Facebook’s recent creation of its oversight board for content moderation. Even though experimental, it’s innovation in a new governance structure for a company where content (and its moderation) is a significant business driver. It might have created another board sub-committee to tackle this. Yet it chose an ostensibly independent board to appease stakeholders after much opprobrium. It’s a lesson for investors: ensuring that your boards have robust practices that keep them tuned into stakeholder signals, long before trust is lost and regulators intervene.
Now is not the time of incrementalism, but a radical reassessment of how ethical governance can become a business differentiator
Although the term ESG appears to put these three themes on par, we argue that G – governance – drives efficacy, as well as responsible outcomes from “E” and “S”. The advent of the digital age, with its tectonic tipping points and real-time speed exposes the cracks of inadequate governance, and is driving a serious rethink for new governance practices.
This is amplified by the responsibility boards now have to ever-widening stakeholder communities, underlining the importance of forward-leaning, value-enhancing self governance, versus mere regulatory compliance.
Covid-19 and the George Floyd protests will not be the last incidents to test companies’ short-term solvency, stakeholder management or long-term viability. ESG investors, shareholders and proxy firms need to therefore look at governance through a wider lens than that of gender diversity on boards and shareholder engagement, and reassess if the very foundations of current governance frameworks are fit for the digital age. We have identified a few key precepts as a starting point, in Governance Rebooted.
Covid-19 and the protests have bought us that much closer to the cliff’s edge on the E, S and G fronts. Now is not the time of incrementalism, but a radical reassessment of how ethical and future-fit self-governance can become a significant business differentiator – yielding longer term, sustainable outcomes, while remaining agile and nimble in the short term.
Di Rifai is founder and chair of Creating Future Us, a not-for-profit focused on digital age effects on E, S and G. An experienced chair, non-executive director & CEO, Di advises boards and leadership teams on transforming organisations for an agile future, via responsible digital, social and environmental governance. Follow Di on Linkedin: www.linkedin.com/in/diri and Twitter @creatingfuturus
Main photograph by Mike Blake/Reuters.
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