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Governance

Top actions for corporate boards to lead and provide oversight in the 21st century

Natalie Runyon  Director / ESG content & Advisory Services / Thomson Reuters Institute

· 5 minute read

Natalie Runyon  Director / ESG content & Advisory Services / Thomson Reuters Institute

· 5 minute read

As risks grow from geopolitical to cybersecurity and AI, corporate boards are looking to fill any knowledge gaps they may have with new directors that have the necessary skills

The risk environment, the intensity of competition in a dynamic business landscape, and the pace of change driven by technological advancements are confounding the leaders of many organizations today — and this could not be more true for corporate boards of directors.

The knowledge that board members are expected to acquire and how they are expected to provide oversight in the wake of an expanding agenda of geopolitical, economic, environmental, regulatory, supply chain, and data and privacy risk issues and technology shifts is challenging the collective performance of boards. The idea of how boards need to effectively manage risk has expanded immensely and has become a key topic in board discussions.

Currently, there are three major gaps in skills and knowledge that boards need to address:

1. Risk issues — This idea of how boards need to effectively manage enterprise risk has become a key governance topic for boards. Many boards are challenged by members’ lack of experience in critical risk areas, which include geopolitical, supply chain, environmental, and financial market risks, says Keith Meyer, Global Practice Leader of the board services practice at Major, Lindsey, & Africa. In particular, the external technology drivers of enterprise risk that companies cannot control, which include cyber, generative AI, and the disintermediation of business models that now may only be addressed during the board’s annual strategy review.

2. Human capital management concerns — Corporate directors need to focus more than ever on broad employee issues because of the number of factors stemming from the pandemic era, according to Cambria Allen-Ratzlaff, Managing Director and Head of Investor Strategies at Just Capital. Allen-Ratzlaff also sits on the U.S. Securities and Exchange Commission’s Investor Advisory Committee, which recently recommended that the SEC increase mandatory reporting for human capital management. “Board members need to make sure they have line of sight into how well the workforce is managed, including key information to help assess management quality in this area, because investors are going to ask you about it,” Allen-Ratzlaff says. Meyer agrees, adding that historically, “boards have narrowly focused on compensation, but now the human capital agenda is much broader.”

3. Governance effectiveness —Typically, boards in the past have evaluated their own performance, and some boards are finding out that they do not have the level of acumen necessary to accurately gauge their own effectiveness. “Boards are waking up to the fact that they need to access outside resources to help think through, at the board-level, governance effectiveness,” Meyer explains.

Guidance for boards to address deficiencies

The necessary actions for boards to take go beyond acquiring new talent to address knowledge gaps must include addressing shortcomings and changing board practices around continuous learning and performance.

Here are some ways this can be done:

Adjust committee structure to expand the scope of oversight — Traditionally, there are three main board committees — the nominating and governance committee, a human resources and compensation committee, and an audit committee. Outside of financial services companies, most boards do not have a risk committee, says Meyer. The increasing scope of enterprise risk issues winds up in the audit committee, but collectively “there is a skill gap on many boards, including within the audit committee, around how to even consider potential geopolitical or external threats,” he states.

Alter succession planning to address near-term needs — Boards are moving from a very rigid succession-planning process to a more flexible one, and they are shifting the priority of who they want to bring into the boardroom next, according to Meyer. To keep up with the pace of the external environment, this process needs to move more quickly to better add new capabilities and experience into the boardroom.

Involve company management in board evaluation and knowledge seeking — A small number of boards formally ask the CEO, CFO, general counsel, and other senior leadership team members who are in close contact with the board to annually participate in the board self-evaluation process. However, boards need to not only engage senior management in the process, but also should solicit feedback from major investors and key regulators on a regular basis, Meyer explains.

Involving company leaders in the process will help the board target specific areas for future development and prioritize skill gaps that need to be addressed, while external stakeholders will provide new perspectives on market risks and external threats and opportunities that can help shape the future board agenda.

Evolve board culture — The next generation of board members are changing the governance culture and expecting individual performance to be part of boards’ annual evaluation processes. While progress on diversifying boards over the last five years has been significant, it needs to speed up. The next generation of board members have advanced in their career by successfully growing, learning, and developing through receiving feedback, and they are bringing this expectation into boardrooms. “The relevancy in the boardroom for corporate directors who are no longer working day-to-day running companies and functions is on a faster decline rate than ever before,” Meyer says.

To help offset the trend, there needs to be proactive, continuous learning experiences for board members. And while adding ongoing learning on top of other board issues will be a challenge, it is critically necessary to maintain adequate board performance and oversight across a broadening and ever-changing boardroom agenda.

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