Monthly Archives: September 2021

Governance of Corporate Renewal and Sustainability

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Governance of Corporate Renewal and Sustainability

Sustainability is increasingly moving to the top of many company agendas. As a result, investors increasingly require reporting on their ESG (Environment, Social and Governance) agenda with concrete actions to follow. What is the board’s role in guiding companies on this new path? What are the better practices that are emerging?

By Karen Loon IDP-C and IDN Board Member

In an increasingly fractured world, many of the significant global risks which the world faces relate to sustainability risks. These risks include climate action failure, human environmental damage, biodiversity loss and extreme weather. These risks, in addition to other challenges arising from the increasing adoption of technology, the pandemic and geopolitical risks are having a significant impact on companies and their boards.

What is the role of company boards to guide their companies on this new path? Further, what are some of the better practices which are emerging?

In a session facilitated by Liselotte Engstam IDP-C and IDN Board Member, INSEAD Directors Network (IDN) members, together with members of the INSEAD alumni Community Impact Challenge recently learnt more about these areas from Mats Magnusson, Professor in Product Innovation Engineering of the KTH Royal Institute of Technology, and Ludo Van der Heyden, Emeritus Professor of Technology and Operations Management, and the INSEAD Chaired Professor of Corporate Governance at INSEAD.

Increasing pressures require boards to better guide companies to renewal

Companies need to renew themselves more and faster than ever before.

“This renewal [is not] actually about becoming slightly better at things – it’s about changing things quite radically,” noted Mats Magnusson.

These changes are not only due to digital – organisations also need to address new values, with sustainability being one of them.

Mats added that various studies by academics and consultants have shown that companies have reacted differently to these challenges, with some trying to innovate, and others struggling because of the present pandemic. However, what is common to most of them is that companies realise that if they just continue the way they have been doing things the last few years, they will not be successful in the future. As a result, there is a huge need for innovation.

“Actually, a large part of that innovation has to address sustainability”, he added, something which is not new to boards.

Sustainability and climate change require all companies to revisit their purpose, strategy and business model.

Based on research, most board members and directors agree that they spend a lot of time discussing governance about risk, regulation, and reporting, which is necessary.

However, there are several aspects that boards are not discussing enough. These includes sustainability, as well as culture and new technologies. Finally, boards need to spend more time on their strategy, value creation disruption, innovation.

These are not new findings; however, boards do need to improve their level of discussion on these areas to ensure that they are addressing them.

 

The importance of sensing, pivoting and aligning by boards

Three dynamic capabilities that boards can adopt are sensing, pivoting and aligning. Both sensing and pivoting have a positive correlation with innovation performance. Further, aligning positively impacts firm performance. However, pivoting can also harm firm performance.

Areas which boards can work on:

  • Sensing – Look at the external world and understand what is changing and impacting us, whether technology, business, customers or the environment. Become better at scanning the horizon for changes with an open mind. Observe changes in the broader environment, not only in your own industry but adjacent and completely different industries. For example, technology-wise, this may mean that companies need to consider completely new technologies that they have not considered before. However, Mats notes that “what we should not address is to focus on our purpose. If we focus on our purpose, then we’ll have some kind of limitation once we are actually looking.”
  • Pivoting – is about taking the right opportunities, taking action and daring to make strategic changes that include some form of innovation. Develop your company’s risk and opportunity profile by looking into the things disrupting your companies – perhaps new technologies, the new business models, or new companies. This information should be used to inform the company’s strategy.
  •  Aligning – This is about combining the new and the existing capabilities and business models. Find a good balance between the short-term value pressure – companies do need cash as well as longer-term value creation. It is essential to ensure that the innovation strategy is a key part of the business strategy.

 

Boards need to discuss their approach and capability to guide their company’s ESG agenda

Mats shared that more can be done by companies to integrate sustainability into their strategies. Of companies recently surveyed by SISU Boards:

  • Lack of integration of sustainability into strategy – Almost 45% actually do not yet integrate sustainability into their strategy. Companies need to become more granular – set goals for the sustainability action and find ways of evaluating if the things they are doing are the right ones.
  • Lack of board accountability for sustainability – As many as 60% of boards have not yet discussed how to engage and consider sustainability. For instance, should they have a committee focusing on this or several committees, and in what areas?

Boards can improve their sensing, pivoting and aligning capabilities

Boards can do more work to improve their capabilities when it comes to sustainability.

  • Sensing – 46% don’t have good processes to foresee changes and impacts on sustainability and business. Additionally, 48% don’t actively monitor new solutions that expedite their business sustainability towards their purpose.
  • Pivoting – 49% aren’t good at taking balanced risks towards ensuring corporate renewal. Further, 56% do not ensure that their strategy harnesses and reshapes the ecosystem for better sustainability and differentiation.
  • Aligning – 51% are not yet good at balancing short- and long-term value creation. In addition, 61% have not yet implemented a clear and effective innovation system, monitoring innovation activities and culture.

Board best practices to experiment with

Ludo Van der Heyden suggested some case studies and best practices for board renewal on sustainability around sensing, pivoting and aligning.

He also noted that it is important to select a modern, ambitious and humble chair, and board members. Boards should also rethink their role and focus, using Fair Process Leadership as support.

It is critical to structure the board and the organisation for sensing, developing the capability of timely pivoting, and continuously aligning and re-aligning.

Finally, it is vital to have collective leadership at the board level, and that it is proactive and engaged.

 

INSEAD Directors Network (“IDN”) – An INSEAD Global Club of International Board Directors

Our Mission is to foster excellent Corporate Governance through networking, communication and self-improvement. IDN has 1,500 members from 80 countries, all Alumni from different INSEAD graduations as MBA, EMBA, GEMBA, and IDP-C. We meet in live IDN webinars and meet-ups arranged by our IDN Ambassadors based in 25 countries. Our IDN website holds valuable corporate governance knowledge in our IDN blog, and we share insights with our LinkedIn and Twitter followers. We highlight our member through quarterly sharing of their new board appointments, and once a year, we give out IDN Awards to prominent board accomplishments. We provide a peer-to-peer mentoring and board vacancy service, and we come together two times per year at the INSEAD Directors Forum arranged by ICGC. We also engage with ICGC on joint research.

INSEAD Corporate Governance Centre (“ICGC”)

Established in 2010, the INSEAD Corporate Governance Centre (ICGC) has been actively engaged in making a distinctive contribution to the knowledge and practice of corporate governance. The ICGC harnesses faculty expertise across multiple disciplines to teach and research on the challenges of boards of directors in an international context and to foster a global dialogue on governance issues with the ultimate goal to develop boards for high-performance governance. Visit ICGC website: https://www.insead.edu/centres/corporate-governance

 

The Unintended Consequences of Corporate Governance

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The Unintended Consequences of Corporate Governance

The ethical and legal drivers of stakeholder primacy

As an independent director, to whom are you accountable? Should law or ethics be defining your decision-making position at the board?

By Karen Loon IDP-C and IDN Board Member

Over the past 18 months, the debate between shareholder versus stakeholder primacy has come under the spotlight.

With a heightened emphasis on the collective well-being of stakeholder communities worldwide, corporate boards are under intense scrutiny to find a delicate balance between maximising shareholder and stakeholder value.

The COVID crisis has revealed that focusing on shareholder value alone is no longer a viable option. Business leaders and corporate boards have a critical role in creating sustainable value for economic performance and societal progress. While stakeholder capitalism is the key to unlock inclusive sustainable growth, corporate boards must not overlook the associated risks involved in stakeholder governance.

Why is this important to independent directors?

Directors who operate in common law countries would be fully aware of their “fiduciary responsibility,” and use it broadly when discussing their responsibilities as independent directors.

However, not all countries have principle-based laws, which impacts the role of independent directors.

With the rising need for companies to focus on sustainability and digital resilience, board members need to consider whether their companies can afford to wait for regulatory and legal frameworks to be implemented (reactive). Alternatively, should market-driven strategies be based on stakeholder expectations and ethical considerations driving decision making (proactive)?

IDN members recently discussed these critical topics in a session led by Helen Pitcher OBE, IDP-C and IDN President, and Cleopatra Kitti IDP-C and IDN Cyprus Ambassador held on 8 September 2021.

New realities for businesses, governments and societies

Climate change, the pandemic, social inequality and digitalisation have ushered new realities for businesses, governments and societies.

Helen Pitcher OBE noted that in the past 15 months, there has been increasing and wide-ranging debate about the unintended consequences of corporate governance.

“Up until, maybe five or six years ago, the view was boards were there, basically to look at, and ensure that the investors were being appropriately safeguarded … It [was] very much [focused on] fiduciary duty,” Helen noted. This is the reason why, in the past, there were more former CEOs and accountants joining boards.

“Now days, it’s a much broader agenda,” she highlighted.

The pandemic has now accelerated all of this, with the need for companies and their directors to address all of the environmental, social, and governance issues, as well as fiduciary issues.

Helen mentioned that some have debated whether boards could say that they are only there to look after shareholders.

There has been a change in views towards companies thinking much more broadly about their culture and values and doing the right thing for the environment, society, etc, within an appropriate governance framework.

Further boards have a fundamental role in overseeing the sustainability of their organisations instead of just the here and now.

Adding to this, she said, “the executive is there for the here and now, within the context of the longer term. But typically, board directors serve for longer than the average CEO or CFO, so they are custodians of the future.”

“There was a recognition that there needs to be a change in how we link remuneration to these goals, to make sure that attention is being paid to them because we know what gets measured gets done usually. [A question is] how we still take account of the fiduciary responsibilities within the broader context of all stakeholders, and not just investors.” (Helen Pitcher OBE)

Areas for boards to consider

  • Sustainability is no longer a choice – it is an imperative.
  • Shareholder and stakeholder interests are not an “either, or” option. It is an imperative.
  • The Business Roundtable has set its mission towards the welfare of all stakeholders (not just shareholders). How is that welfare defined? How is long term value defined?
  • How do boards reframe the agenda for executives in order to ensure “sustainability and stakeholder welfare?
  • Should regulation drive the agenda, or should leaders lead by values that frame strategic decision making in doing what is right for business and society?
  • What is the methodology for making trade-offs (decisions that serve the interests of shareholders vs stakeholders?).
  • Are some stakeholders more important than others? Who decides and by what criteria?
  • How does the board ensure the dividend and the long-term value for sustainable societies?
  • How does the board align executives’ compensations/incentives and interests towards what determines “sustainability”?
  • How do accounting rules adapt towards sustainability, and how does the regulator enforce disclosure on ESG rules?
  • Who does the board owe fiduciary responsibility to? Does “fiduciary responsibility” apply to all countries in all legal systems?

 

Increasing focus by larger investors, and other stakeholders on ESG and longer-term sustainability rather than shorter-term returns mean that boards need to openly and frequently discuss what this means for them.

Cleopatra Kitti added that boards also need to consider that stakeholders have increasing expectations of transparency. So, an important question for directors is how their companies track what they define are the right things to do, considering, for instance, the tensions between shareholder value and stakeholder value, sustainability and profitability, or cashflow preservation and sustainability.

She also noted that the upcoming COP26 (UN Climate Change) Conference in November 2021 is likely to increase investors’ focus on transparency and robust accounting mechanisms, leading to more clarity on how companies explore these areas. Further, the expected European Central Bank taxonomy on banks’ risk of capital may increase the cost of capital for certain types of industries.

“Not every legal system recognises fiduciary responsibility as a board obligation or responsibility. So, it brings us back to the point that this is about ethics and culture, and setting the tone at the top, more than a compliance or regulatory, for a regulated decision-making process. So, it’s up to the board to define in practice values of what is sustainable and the right thing to do.” (Cleopatra Kitti)

Areas which IDN members discussed included:

  • Companies should do the right thing – pursuing sustainability and profitability and support shareholders and stakeholders need not necessarily be a trade-off.
  • It is crucial to get ESG into the mainstream board agenda. Responsibility for this rests with both the board and management.
  • Set the right KPIs as the wrong ones could lead to unintentional consequences. Some leading organisations now have integrated their ESG ambitions into their company ambitions and aligned this to the bonus system of executive committees.
  • Reset remuneration levels for non-executives, given the increasing levels of responsibility and accountability they hold.
  • Stakeholders will likely ask many more questions including on ESG at AGMs in 2022. Again, these are more likely to be in person rather than virtual.

In conclusion, as Helen Pitcher OBE summed up, “it is a hard topic but it’s not a topic that boards can avoid. It should be part of the strategic imperatives of the organisation.” It is a constantly evolving journey instead of a static situation on which boards need to go on.

Cleopatra Kitti added, “it’s an innovation journey. There is not a one size fits all and there are not prescriptive indicators or decision-making processes.”

 

Recommended reading and viewing

So Long to Shareholder Primacy

https://corpgov.law.harvard.edu/2019/08/22/so-long-to-shareholder-primacy/

Directors’ Oversight Role Today: Increased Expectations, Responsibility and Accountability—A Macro View

https://corpgov.law.harvard.edu/2021/05/10/directors-oversight-role-today-increased-expectations-responsibility-and-accountability-a-macro-view/

The Future of the Corporation: Moving from balance sheet to value sheet

http://www3.weforum.org/docs/WEF_The_Future_of_the_Corporation_2021.pdf

Measuring Stakeholder Capitalism: Towards Common Metrics and Consistent Reporting of Value Creation

http://www3.weforum.org/docs/WEF_IBC_Measuring_Stakeholder_Capitalism_Report_2020.pdf

Measuring Stakeholder Capitalism: Full List of Revised Core and Expanded Metrics

https://weforum.ent.box.com/s/ieauc14olfozu1k8d4i6qovscu42a4dz

Webinar – “The End of Shareholder Primacy?”

https://video.insead.edu/playlist/dedicated/122053032/1_l1rr6r52/1_utyenvtn

 

 

INSEAD Directors Network (“IDN”) – An INSEAD Global Club of International Board Directors

Our Mission is to foster excellent Corporate Governance through networking, communication and self-improvement. IDN has 1,500 members from 80 countries, all Alumni from different INSEAD graduations as MBA, EMBA, GEMBA, and IDP-C. We meet in live IDN webinars and meet-ups arranged by our IDN Ambassadors based in 25 countries. Our IDN website holds valuable corporate governance knowledge in our IDN blog, and we share insights with our LinkedIn and Twitter followers. We highlight our member through quarterly sharing of their new board appointments, and once a year, we give out IDN Awards to prominent board accomplishments. We provide a peer-to-peer mentoring and board vacancy service, and we come together two times per year at the INSEAD Directors Forum arranged by ICGC. We also engage with ICGC on joint research.

 

INSEAD Corporate Governance Centre (“ICGC”)

Established in 2010, the INSEAD Corporate Governance Centre (ICGC) has been actively engaged in making a distinctive contribution to the knowledge and practice of corporate governance. The ICGC harnesses faculty expertise across multiple disciplines to teach and research on the challenges of boards of directors in an international context and to foster a global dialogue on governance issues with the ultimate goal to develop boards for high-performance governance. Visit ICGC website: https://www.insead.edu/centres/corporate-governance