Over the past two decades, investors, scholars and other experts have been proposing the expansion of boards of directors’ areas of responsibility. In many cases, these changes reach far beyond the duties that national corporate law establishes for boards. Moreover, some proposals are based on assumptions about the work of board directors that are not always well supported with data.
With the aim of better understanding the main functions that effective boards of directors undertake, the IESE Center for Corporate Governance has created a survey to gather data on what board directors themselves consider their central contributions to better corporate governance. Asking board directors about their own views is just one approach for getting a more comprehensive picture of the governance landscape, and is highly relevant when complemented with perspectives that investors and experts hold about boards.
The survey asked board members their views on 29 questions grouped in four major areas: the role of the board on corporate purpose and ESG; the board in corporate strategy; the importance of corporate culture in governance; and board engagement and collaboration. The survey was answered by 197 board directors from 158 companies, based in 18 countries – 12 of them in Europe.
The IESE Center for Corporate Governance has recently published a report based on the survey [1] (Link to the Report). I will highlight four conclusions of this report. The first is that board directors seem committed to helping their firms develop a meaningful corporate purpose, because they consider engaging customers and employees to be very relevant. Nevertheless, they report two major obstacles to implementing purpose: a lack of connection of purpose with strategy, and a lack of connection of purpose with ESG dimensions. As recent articles in this newsletter have highlighted, corporate purpose should be integrated into both corporate strategy and policies to be fully effective.
The second observation is that boards understand the critical role that corporate strategy plays in the company’s long-term development. At the same time, there is not a clear model for how board directors can collaborate on corporate strategy with the CEO and the senior management team. This leads to a situation in which CEOs are in charge of strategy, as they should be, but the lack of a clear, functional role of the board in this area may not improve the overall strategy process. An additional observation is that, in recent years, boards have not paid enough attention to the changing geopolitical landscape. Today, we are seeing how the tragic effects of the war in Ukraine and the rising trade wars are having a deep impact on companies’ international strategies and global supply chains. Boards should spend more time discussing the implications of geopolitical, societal and industry changes.
The third reflection taken from the IESE survey is that board directors confirm that corporate culture is an important dimension of corporate governance. Unfortunately, most board directors admit that this factor is not well articulated at the board level, that boards do not pay enough attention to it and that the different ways to assess culture are not enough to capture its complex dimensions. This is also a stark reminder of how critical it is for boards to focus their attention on key areas that determine the firm’s long-term value creation process, beyond compliance.
The final conclusion relates to the role and impact of ESG factors on boards’ governance. A clear majority of directors confirm that boards increasingly are taking ESG factors seriously. In particular, they are growing more concerned about the impact of their carbon emissions and the need to move to net-zero as soon as possible. They also accept the positive role of institutional investors pressing companies to move forward in this direction, although this remains work in progress. Environmental and social factors should be fully embedded in the firm’s strategy and corporate policies. This is the only way to make them coherent, consistent with the firm’s purpose and strategy, and effective in changing the firm’s impact on the environment.
With this survey, the IESE CCG seeks to bring the views of a greater number of board directors into the corporate governance debate. Their perspectives shed light on areas that board directors consider truly relevant. Their views will enrich the debate on governance issues and open up new hypotheses for future research.
