An article in Forbes early into 2020 (pre-pandemic) highlighted that “corporate governance is going to have to change.” It cited the Blue-Ribbon Commission report from the National Association of Corporate Directors (“Fit for the Future: An Urgent Imperative for Board Leadership”), the 2019 Spencer Stuart Board Index and a New York City Comptroller’s Boardroom Accountability Project report. All shared a common thread of calling for board refreshment to meet looming business challenges and that traditional views on board qualifications may need to be re-considered.
In a 2016 Stanford Director’s College study, the average director believed at least one director should be removed from their board as ineffective, more than a quarter believed directors do not give each other effective feedback, and half believed that their board does not allow expression of honest opinions with only a few dominating discussion and decision making. Coupled with the most recent annual NACD survey that shows only 56% of directors believe that the information they receive from management is sufficient to support informed decision making and oversight, it is clear that the time for change in the boardroom is now. The same study shows that boards are largely hearing primarily from their CEO, CFO or General Counsel versus subject matter experts in areas of information security, human resources, stakeholder concerns, technology, risk and strategy. Additionally, Delaware courts, which set the standard for corporate law, continue to shift their opinions on director risk oversight liability, which means directors could be exposed to more liability for non-financial risks from which they were previously sheltered.
Back in 2015, the NACD annual survey reported the top priorities of board members:
Strategic planning and oversight
Corporate performance and valuation
Corporate growth/restructure
CEO succession
Executive talent management and leadership development
Notice that these are primarily company-centric, growth oriented priorities priorities. But, by the end of 2019, directors were most concerned about:
Growing business model disruptions
Slowing global economy
Increased competition for talent
Changing cybersecurity threats
Accelerating speed of advances in technology
Notice these are external risk-based factors versus company focused growth. Consider for a moment how drastically the top issues changed in just a four-year span, let alone what has happened this year. After the 2020 coronavirus pandemic and social unrest; health pandemics, new work environments, workplace culture, stakeholder values and uncertainty will be added to the list of top concerns by directors. The traditional five-year strategic plan on which boards typically rely for decision making is now obsolete when things change much faster than years ago.
Equally important is who you have in the room. The average age of a corporate board member is 63.1. Of directors added, 37% are current CEOs of another company – that’s more than one-third of board members out there currently serving as a CEO of their own company. A majority of new directors were previously a CEO or CFO, making top leadership and financial expertise still the most sought-after resume. This is understandable when you consider the history of boards and that the biggest reforms of the last twenty years dealt specifically with financial transparency and accounting.
But this is changing and the need of the board to understand disruptive business models, new technologies, a changing society and workforce along with cybersecurity means that same pattern of recruitment will not work anymore. In 2019, only 2% of new board members had expertise in cybersecurity, 2% were entrepreneurial and 3% were human capital or talent development experts. These are the three areas noted as top areas of concern for all boards as having the biggest impact on the boardroom of the future and yet only 7% of board seats were filled with these skill sets.
This is completely out of synch with the changing needs and demands of the boardroom. If everyone in the room has essentially the same resume, that doesn’t really make sense, does it? If one-third of board members are also still a current CEO of a similarly sized company, can the board dedicate the time and attention needed to understand stakeholder needs and new risks? You wouldn’t build out your senior management team with all the same skill set. You would want different skills to address different matters. It begs the question, does the board need to reflect the subject expertise of the c-suite? For example, security, technology, and human resources may be needed to help create the culture of the future. And, how much time will be necessary for directors to dedicate to their role in the future?
If you want to read more and learn how to add diversity of thought to your boardroom, check out my latest book: Disruption in the Boardroom. If you like the book, I always appreciate positive reviews! Let me know what you think: email me at JWolfe@consultwolfe.com.