The current board of directors’ model that has become dominant in many countries emerged from the Cadbury Report, published in 1992. The report sought to reverse the growing trend of powerful CEOs who ended up controlling boards by recommending the appointment of a majority of independent board members and the separation between the chairperson and the CEO. It also took aim at the increasing presence of institutional shareholders with small stakes in the firm’s equity that frequently replace families as shareholders in Western Europe. These investors can lack commitment to being involved in firm governance.
The new paradigm was based on the notion that the board should govern the company and monitor the CEO and the executive team, as well as the firm’s performance. Key elements in its implementation included the role assigned to external, independent directors; the separation of chairperson and CEO roles; and the institution of several board committees that would monitor key functions such as audit, risk management and executive compensation. With the new model, structural board reforms would improve a board’s performance.
Yet while some studies suggest that some of the recommendations – such as a larger number of independent board members – have been positive, their overall impact on the quality of governance and performance remains unclear. Over the past 15 years, many companies that implemented the principles – including Boeing, Crédit Suisse, General Electric, Uber, Wells Fargo, Wirecard and others – have suffered major corporate governance crises. These crises were driven or aggravated by poor governance related to factors such as bad resource allocation, excessive diversification, board dynamics, chairperson and CEO roles, board culture and lack of strategic foresight.
Recent disruptions in the corporate world such as data management and AI, climate change and sustainability, and geopolitical tensions have increased the complexity of board responsibilities.
In this context, the IESE Center for Corporate Governance and the European Corporate Governance Institute (ECGI) organized the annual corporate governance conference centered on the theme “Towards a New Model of Boards of Directors” in Madrid on April 15. Here, I’ll summarize several takeaways in four key areas.
Purpose and Strategy. The board’s traditional job of overseeing the CEO and financial performance remains important. However, an effective board in this era of disruption, growing complexity and interdependence should focus its attention on a number of critical areas, as Ruth Aguilera (Northeastern University), Bruno Cassiman (IESE and KUL), Risto Siilasmaa (F-Secure) and William Connelly (Amadeus and Aegon) highlighted in their presentations. The first is the firm’s long-term orientation, future growth and value creation. The board should leave the CEO and management team to prepare and develop the firm’s strategy. This includes how the firm sets out to improve its approach to data management and AI; the definition of a clear sustainability strategy; and the analysis of geopolitical challenges affecting the firm and resulting actions. Strategy comprises the decisions the management team must make to meet the goals mapped out by the board for the next few years, while tackling challenges. This process requires close collaboration between the board and the management team in order to define goals and set the policies.
CEO and Leadership Development. The second key area is leadership development and CEO and management transition plans, including succession plans, as Herminia Ibarra (London Business School) and Mireia Giné (IESE) highlighted. Many firms say that people are their first priority, but their actions fall short. According to data available on CEO succession processes and CEO tenure, few companies implement effective leadership development policies. Addressing the complex challenges firms face today requires highly competent managers. Boards may need to boost their leadership development capabilities in order to effectively orchestrate management transitions.
Board Dynamics and Interpersonal Relationships. A board of directors is a human group. Consequently, group decision-making is subject to dysfunctions that boards should be aware of. Moreover, boards should perform as productive teams, fulfilling their duties of care and loyalty. Individual board member performance is not enough. Anneloes Raes (IESE), Amir Licht (Reichman University), Rodolphe Durand (HEC), Anne Bouverot (Cellnex), Sophie L’Helias (LeaderxxChange) and Carlos Torres (BBVA), among others, stressed the importance of creating positive board dynamics that facilitate deep discussions, help manage conflicts and eventually make better decisions. The role of the chairperson in this respect is critical, while the complementarity of board members’ expertise and skills and an adequate level of board member diversity are also vital. A well-defined and integrated corporate purpose can serve as glue and a reference for the board, management team and employees. Without these elements, board dynamics can falter, even if the board’s structure meets requirements in terms of board composition.
Boards and Shareholder Engagement. The board alone does not hold the power of final decision. In most jurisdictions, the board is appointed by shareholders. The board has the duty to protect and promote the company, as well as shareholders and other key stakeholders. An effective board listens to shareholders and understands their concerns. While they bear the responsibility for making decisions, boards act rashly when they fail to spend time understanding investors’ views. During the conference, Luca Enriques (Oxford University) and Dionysia Katelouzou (King’s College London) presented relevant frameworks for enhancing investor engagement.
A conclusion of the conference was that finding the right board structure and composition is not enough for efficacy. In addition, the board should work with the senior management team on strategy and leadership development. It should also assess its capabilities and competencies in the areas of strategy, board dynamics, “teamness,” and board culture. In a nutshell, boards should reconsider their long-term priorities to focus on creating value, while assessing how constructive they are as a group of people understanding complex problems and making effective decisions.
NEWS&TRENDS.
Companies have to navigate an increasing complex and disruptive environment that entails multiple risks and requires a high degree of flexibility and resilience. An interesting article published by EY reflects on the potential value creation opportunities for private companies that can be derived from proactive risk management strategies. Read more here.
Distinction between the roles within the board and their responsibilities is crucial for preventing conflicts of interest and working effectively. Deloitte has recently published the results of a survey that mainly focuses on board leadership structure and the importance of differentiating the role of the board, CEO, chair and senior management. Read the full article here.
ESG reporting regulations continue to move forward globally. An interesting summary of the recent ESG reporting regulations, key dates and their impact in areas across a company can be found in a recent report published by PwC. Read the full guide here.
IESE Prof. Mireia Giné discusses in a recent post published in the Harvard Law School Forum on Corporate Governance how common ownership can influence corporate innovation. This post is based on a paper that can be accessed here.
