The COVID-19 pandemic has highlighted the fact that no organisation is divorced from the challenges and crises that wider society is confronted with. In fact, it’s becoming clear that organisations cannot operate without appropriately responding to the social issues that communities face. If they fail to do so, they can lose their social license. To stay on track and be able to lead the organisation through these complex terrains, boardrooms need to rethink traditional practices and replace them with a more progressive outlook.
The Governance Institute of Australia’s (GIA) ‘Future of the Board’ report, based on a study of 550 directors and executives, focuses on how boardrooms must restructure in order to tackle modern challenges. This blog discusses one key aspect of the report: how can boards become more effective.
The report found culture, values and diversity are vital elements that future boards must embody. This idea is reinforced by the findings below:
Interestingly, culture is ranked highest on the list. Values such as transparency, trust and diversity are seen to be the pillars of a positive organisational culture. However, the tension that arises here is that culture itself is difficult to define and measure and the values which are seen to be essential to culture are equally difficult to evaluate. The GIA research attempts to deconstruct this very issue. Survey respondents offer a useful starting point to understand how companies can begin to understand what their culture is and how to improve it.
Another extremely interesting insight comes from the impact of ESG issues becoming more prominent. As issues of social responsibility become more central, organisations are developing innovative methods to understand social issues as well as how to deal with them. An example of this is of the Climate Disclosure Standards Board developing guidance for companies on how best to report on social issues. These initiatives could give boards the tools they need to begin to understand the culture in their organisation.
Culture, as mentioned, opens up a discussion riddled with obscurities. And while in no way can this aspect be underestimated, it’s also equally important to focus on other practical steps board members can take to make their role more effective. One of these includes ensuring a positive dynamic between the board and both the Chair and the CEO. As boards become more diverse, the Chair needs to mediate these varying interests and perspectives. The Chair should also act as a mentor to the CEO, communicating vision and values so, in return, the CEO allows for this culture to pass on through the organisation.
It's also important to note that the pandemic and increasing focus on ESG issues has allowed for a tighter alignment between the board and management. Another indirect cause of greater communication is technology and the accompanying expectation that organisations will offer ‘fast-solutions’. This expectation accelerates the decision-making process and to make sure everyone is on the same page, the board must align with the management. This is not to say that lines have been completely blurred but rather that the social climate has enabled greater collaboration and coordination. This provides a useful indication for how the traditional distinctions are certainly evolving.
The study also highlighted a key governance risk which is sure to undermine effectiveness: overboarding. This refers to both a board member holding too many positions and staying in position for too long. As the report states, ‘the central challenge is defining what we understand to be an overcommitted director’. The ASX Corporate Governance Council states, ‘the interests of a listed entity and its security holders are likely to be well served by having a mix of directors, some with a longer tenure with a deep understanding of the entity and its business and some with a shorter tenure with fresh ideas and perspective’.
Tenure closely links to another aspect which is discussed in Diligent’s report: renumeration. It is argued that executive pay needs to be radically rethought to account for greater diversity at board level. Positions in the boardroom shouldn’t be reserved for the wealthy. Board members should also reflect on what constitutes ‘fair’, in terms of renumeration. The report states, ‘higher pay for NEDs could be a factor in addressing overboarding and could help to recruit board members from under-represented backgrounds. More appropriate pay for CEOs and other senior executives could help to address inequality, rather than embedding it’. This offers an important angle to think from to build effective boardrooms for the future.
There are a multitude of factors, many tangible and others intangible, that influence the dynamics of the boardroom and make it more effective in its operations. However, one conclusion to be drawn is that boards need to fundamentally change in response to the fast-evolving social climate.
The Governance Institute of Australia’s (GIA) ‘Future of the Board’ report, based on a study of 550 directors and executives, focuses on how boardrooms must restructure in order to tackle modern challenges. This blog discusses one key aspect of the report: how can boards become more effective.
The report found culture, values and diversity are vital elements that future boards must embody. This idea is reinforced by the findings below:
Interestingly, culture is ranked highest on the list. Values such as transparency, trust and diversity are seen to be the pillars of a positive organisational culture. However, the tension that arises here is that culture itself is difficult to define and measure and the values which are seen to be essential to culture are equally difficult to evaluate. The GIA research attempts to deconstruct this very issue. Survey respondents offer a useful starting point to understand how companies can begin to understand what their culture is and how to improve it.
Another extremely interesting insight comes from the impact of ESG issues becoming more prominent. As issues of social responsibility become more central, organisations are developing innovative methods to understand social issues as well as how to deal with them. An example of this is of the Climate Disclosure Standards Board developing guidance for companies on how best to report on social issues. These initiatives could give boards the tools they need to begin to understand the culture in their organisation.
Culture, as mentioned, opens up a discussion riddled with obscurities. And while in no way can this aspect be underestimated, it’s also equally important to focus on other practical steps board members can take to make their role more effective. One of these includes ensuring a positive dynamic between the board and both the Chair and the CEO. As boards become more diverse, the Chair needs to mediate these varying interests and perspectives. The Chair should also act as a mentor to the CEO, communicating vision and values so, in return, the CEO allows for this culture to pass on through the organisation.
It's also important to note that the pandemic and increasing focus on ESG issues has allowed for a tighter alignment between the board and management. Another indirect cause of greater communication is technology and the accompanying expectation that organisations will offer ‘fast-solutions’. This expectation accelerates the decision-making process and to make sure everyone is on the same page, the board must align with the management. This is not to say that lines have been completely blurred but rather that the social climate has enabled greater collaboration and coordination. This provides a useful indication for how the traditional distinctions are certainly evolving.
The study also highlighted a key governance risk which is sure to undermine effectiveness: overboarding. This refers to both a board member holding too many positions and staying in position for too long. As the report states, ‘the central challenge is defining what we understand to be an overcommitted director’. The ASX Corporate Governance Council states, ‘the interests of a listed entity and its security holders are likely to be well served by having a mix of directors, some with a longer tenure with a deep understanding of the entity and its business and some with a shorter tenure with fresh ideas and perspective’.
Tenure closely links to another aspect which is discussed in Diligent’s report: renumeration. It is argued that executive pay needs to be radically rethought to account for greater diversity at board level. Positions in the boardroom shouldn’t be reserved for the wealthy. Board members should also reflect on what constitutes ‘fair’, in terms of renumeration. The report states, ‘higher pay for NEDs could be a factor in addressing overboarding and could help to recruit board members from under-represented backgrounds. More appropriate pay for CEOs and other senior executives could help to address inequality, rather than embedding it’. This offers an important angle to think from to build effective boardrooms for the future.
There are a multitude of factors, many tangible and others intangible, that influence the dynamics of the boardroom and make it more effective in its operations. However, one conclusion to be drawn is that boards need to fundamentally change in response to the fast-evolving social climate.
Media Highlights
Environmental, social and governance (ESG) issues have become more complex and multifaceted than ever before. At the same time, ESG continues to ascend on board and leadership agendas.
In this buyer’s guide, we explore what a market-leading ESG solution should look like and highlight the key areas organisations should be prioritising as they embark on their search.
