More than ever, boards are being judged as much by what they’re planning to do in the future as what they are doing now. From cybersecurity liabilities (the recent revelations around web hosting firm GoDaddy’s multi-year breach being one prominent example) to perilously large diversity gaps to demonstrating auditable progress on climate initiatives, the expectation on boards to maintain accountability is higher than ever before. With proxy advisors and institutional investors calling for more robust board evaluation processes, building a future-ready board is top priority. And directors themselves agree.
Three quarters of directors say board responsibilities will expand in the next three to five years, according to the Diligent Institute’s 2023 What Directors Think Report. They also feel the pressure to ensure greater expertise at the boardroom table, with nearly a quarter of respondents stating that their next boardroom hire needs to fill a vacant skills gap, such as cybersecurity expertise. Additionally, directors cited an increased reliance on functions such as internal audit, which has placed greater pressure on the audit committee and informed the strategic decision-making process.
At a time when success in business often comes down to the finest of fine details, these new challenges and demands require a new way of operating at the board level.
The Time for Change is Already Here
The way a board works in 2023 is markedly different from how a board worked as recently as 2020. It’s no secret that the COVID-19 pandemic and regulatory changes have driven directors to modify their working methods. Today’s directors are more heavily involved with day-to-day practice, spending more time with management teams and leaders of key business units as they seek closer oversight – not just to protect the organization but to shield themselves from personal liability.
Consequently, there is a new willingness to bring in external experts on issues where internal knowledge is lacking. Climate disclosures are one example, with 51% of directors noting that their boards were bringing in consultants to help them prepare for upcoming regulatory changes. Directors are also reaching out to legal teams for advice on complex, evolving risks like data protection and privacy, with 48% of respondents identifying cybersecurity briefings from legal teams as a proactive step their boards are taking.
Rigorously Evaluate Your Board’s Effectiveness
Only by acknowledging their own gaps in expertise and experience, and identifying proactive ways to fill those gaps, will boards future-proof themselves. Refining board assessment infrastructure is crucial in this regard.
Board composition should be reviewed regularly, in light of both internal demands and wider shifts in the market, the relevant industry and society. Is the board being damaged by short-sightedness? Left behind by a reliance on old methods? Does it have the baseline knowledge necessary to comply with new regulations?
They must also set benchmarks against peers and competitors – where have they succeeded? What impact have their changes had on the perception and success of their companies? Boards must always be willing to measure and refine their approach. The board assessment process is a necessary – and critical – tool for ensuring continuous improvement and to build board resilience.
The board recruitment process requires the same level of rigor and refinement. Instead of relying on the same networks of the same candidates, defining and filling skills gaps must be a critical part of recruitment. Healthy boards already do this, but others still lag behind.
With digital transformation more integral than ever, recruitment decisions in that area will prove particularly important. Indeed, despite 42% of directors saying digital transformation is a top priority in the What Directors Think report, 35% were open about their struggle to oversee the implementation of new technologies in their businesses. Organizations invite stasis and decline without a more forensic approach to board composition; as nearly a quarter of directors noted in the report, traditional board structures no longer align with today’s increasing areas of risks and opportunities.
Don’t let the evaluation process itself become stale or stuck in old ways of doing things. Typically conducted annually in order to meet regulatory requirements, forward-thinking boards recognize that more regular evaluation periods are integral when it comes to driving continuous improvement of performance.
Accordingly, boards should look to broaden evaluation remits and expand their criteria for improvements, while moving beyond evaluating board performance to consider individual and committee performance too. Give thought to the benefits of third-party board evaluation, where insights from a neutral and impartial external source can highlight failings that may otherwise go unnoticed. Reframe and refine from the ground up.
Expand Your Board’s Scope
The days of the board operating as a siloed entity are a thing of the past. As the risk landscape continues to shift, the impact of those risks permeates across all teams and threatens the organization at every level. Today’s board must be equipped with the right information to make more informed decisions.
There is a real need for cross-functional teams to present information to the board. With common issues likely to affect many teams across the business, including the risk, audit and compliance departments, these groups should seek to present those issues to the board as a group. Boards should, in fact, insist on it. When presented with these interconnected risks, preferably translated into their potential material impact, the board can make data-driven decisions to adjust strategies or free up resources to more effectively remediate those risks – from data privacy to modern slavery – before their impact becomes impossible to control.
In tandem with this, boards must explore ways to continue engagement beyond the confines of the boardroom while balancing their overall level of involvement in day-to-day company operations (a topic explored in more detail in a recent episode of Inside Today’s Boardrooms). Frequent and open engagement with management and key leaders within the business is a simple but effective way of nullifying potential crises. A board equipped with intelligence, data and analytics from relevant parts of the organization will be able to conduct their own research independently, giving them a much fuller picture than they would otherwise have access to.
That theme of regular engagement should extend beyond the boardroom. Building trust with stakeholders both inside and outside of the organization is necessary for future development. Indeed, nearly half (49%) of directors said that customer satisfaction is the best indicator of a company’s performance in today’s environment – ahead of shareholder returns or exceeding earnings guidance. A forward-thinking board should consider formalizing the process of capturing stakeholder feedback, enabling customers and employees to become a key element of any boardroom debate.
Ultimately, a successful board in 2023 must realize one thing above all others: a company’s value is now much more than just its bottom line. How a board adapts to this reality – or doesn’t adapt – will reverberate with force. Forward-thinking boards are taking action now; standing still simply means that others will overtake you.