IDN Webinar: Board Dynamic Capabilities in Disruptive Times

Over the past year, boards have become increasingly more dynamic.  However, it is important that the use their energy positively.

By Karen Loon, IDN Board Member and Non-Executive Director

How have boards and their directors been adjusting their approaches to board work since the COVID19 pandemic started?  How have board practices changed?  What digital tools are being used to facilitate ideas, debate and support decision making?

These were the questions which members of the INSEAD Directors’ Network (“IDN”) discussed as part of breakout sessions held during an exclusive session for IDN members held on 16 October 2020, after the INSEAD Directors Forum.  The webinar was facilitated by Liselotte Engstam with support from Hagen Schweinitz, both IDN board members.

The session was opened by IDN President Helen Pitcher OBE, who shared with members details of the key initiatives which IDN have been working on over the past year, followed by IDN board member Thomas Seale who announced the winners of the Inaugural IDN Recognition Awards 2020.

IDN members highlighted a number of interesting trends in board dynamics over the past year.

Boards have become more dynamic

All members agreed that their boards have become increasingly more dynamic since the pandemic started.  Experiences however between boards have varied – for example, in China boards are now meeting in person, whereas in Europe most boards are still meeting virtually.

  • Focus of discussion is now on longer term strategies – For the first three to four months after the pandemic started, many boards were focused on securing the future of their businesses (for example immediate crisis management, stabilising their companies, cutting costs, improving cash flow management). However, in more recent months, boards have focused on their longer-term strategies and survival.
  • More frequent and intense discussions – Members shared that their boards have been having more frequent discussions, are under more pressure as there have been more emergencies to work through, and are having more intense conversations. Whilst boards are meeting more frequently, the meetings have generally been shorter, although in some cases in Financial Services, due to regulatory pressures, meetings have been longer.
  • Improved communication, in more depth – Communication amongst members has also changed, with boards increasingly using of digital technology, and having less formality. Many believe that their board discussions have improved, with some sharing that time has been found to explore in more detail areas such as staff welfare, diversity, team spirit, and proactive reinforcing of corporate culture.  Many directors however acknowledge that virtual meetings are more tiring.
  • Decision making processes have been impacted by not meeting in person – From the outside, it appears that boards are working well. With less travel time and more discipline, board meetings are starting on time, members are more prepared, and discussions are shorter and more to the point.  However, some questioned whether this may be “form over substance”, and whether boards are suffering in other ways due to an absence of physical meetings, and whether some important discussions are not taking place, which would have taken place, for example over coffee.  Decisions at times are taking longer, having been somewhat impacted by the inability of directors to network in person.  Maintaining trust and relationships have become more difficult.
  • Dynamism and innovation vs compliance – Some board members indicated that their boards have been struggling to find a balance between dynamism and innovation vs compliance. This is especially so in highly regulated industries, such as Financial Services.

Not all boards may have become more effective

As to whether boards have become more effective since COVID, there were mixed responses.

For the most capable boards there was a reflection on areas such as:

  • How inadequate the recovery and resolution/ disaster recovery policies were
  • The ability of people to innovate in times of crisis (Apollo 13 mentality) far exceeded expectations
  • The opportunity the crisis created to make a step change in the way the business functions and for some reimagining the purpose.

For the less capable / less diverse boards, there has been lots more stress, centralising of control, dysfunctional blame culture and general myopic behaviour.

There was a view that boards need to ensure that they find a balance between progress vs being dysfunctional.  As Helen Pitcher highlighted “… boards are working harder, some boards are stressed, that’s bringing about some dysfunctional behaviour in some, and some very positive behaviour in others”.

Directors need to find time for personal reflections

  • Mental health and wellbeing – Members also shared that mental health and wellbeing of both management and the board in a Zoom world continues to be important, with management still under significant pressure, as are the board. Board members need to be supportive of their CEO and staff, and thoughtful on when to intervene.
  • Find time to reflect – Board members also need to find reflection time to allow themselves to slow down and think away from the Zoom calls. More time may be required to be spent in out of camera sessions with other board members to seek to defuse tensions.
  • Be careful not to be over boarded – In recognition that directors are generally spending more time with each board, members shared that now may not be a time to be over boarded. Directors should think seriously about whether they want to be on boards given the time investment and energy required in situations such as at present, and that one cannot opt out of boards when things are too busy.

IDN’s next webinar for members on “Sustainability and Climate in the Strategy and Board Agenda” will be held on 18 November 2020.

Distinction-cum-baggage: The board director’s track record

By Pamela Ravasio, IDP-C and IDN Board Member

A recent Bloomberg article found the following as they analysed the past and present professional affiliations of more than 600 directors and executives of the world’s 20 largest banks: Only few individuals had experience in renewable or sustainable industries. Far more had ties to polluting industries: At least 73 individuals even have at one time or another held a position with one or more of the biggest corporate emitters of greenhouse gases, including 16 connected to oil or refining companies.

More specifically: Of the four (4) banks where the boards directors offered some expertise in renewables or sustainability, every single one had significant links to ‘greener’ companies – notably in electric & utilities. The opposite held true for the remaining 16 of the 20 analysed boards.

In more succinct words: the study found that board expertise and prior affiliation of board directors correlated very well with the extent of investments into ‘emitting’ or ‘renewable’ energy companies.

Ironically, it is precisely the directors’ prior track record and experience, one of the very reasons why they got (s)elected onto the board, that could jeopardize their board’s forward decisions. Because – as the Bloomberg study showed – there are very, very few directors or even senior executives, with sufficient experience and track record in either renewables or sustainability. No matter their industry background.

…there are very, very few directors or even senior executives, with sufficient experience and track record in either renewables or sustainability. No matter their industry background.

To that point: there are even much fewer, if any, board directors in circulation that have a track record on how to marry the prosperity of a (their) company with business models that go above and beyond the traditional ‘growth model’, to just name one example. Hence, there is a tendency in relying on their past winning strategies to tackle the challenges in the wait for us to experience – globally as well as within individual businesses. This is like taking to the skies of the 21st century with technology from the era prior to the industrial revolution.

Track record bias: what is it, and why does it matter?

Track record bias is the unintentional bias directors introduce onto the board precisely through the very genuine, authentic and well-earned achievements of their prior career experiences.

Example: The former country manager of a large Aluminium firm with an excellent reputation for engagement with indigenous peoples and H&S joins the board of a major synthetic polymers company.

  • Pros: The new board director is very familiar with extractive industries, their environmental profile, the challenges around labour conditions and the global nature of such a low-margin business.
  • Cons: It may be tough for this new board director to consider viable alternative technologies based on renewable and/or recycled materials of origins, and the respective differences in client relationships, partnership models and global sales and logistics approaches.

Track record bias is something every director brings to the table once joining a board. In itself it is neither negative nor positive. In fact, consciously managed (key word: board thought diversity) it can add tremendous value by directing the board’s discussions into new, and so far unfamiliar terrain and in this way contribute to the resiliency efforts underway.

However, unsurprisingly the opposite it true if a board is not put together with clear priority given to thought diversity, as can be seen in the results of the Bloomberg research mentioned above.

And there is a somewhat simplistic reason for those results: Most board directors are or have been reasonably successful CEOs and CFOs, or else high-flying executives, of large(r) companies. Often in industries that are traditionally considered ‘adjacent’ to the company on whose board they are sitting.

Successful they may have been. But until very, very recently their role would not have required them to understand the implications of the Paris Climate Agreement, the SDGs, or the scientific consensus around climate adaptation for example. For most, such insights were allocated to the job descriptions of their sustainability speciality staff, or possibly the communications team, who in turn would have been required to pitch the traditional business case for any initiatives they saw necessary.

Board Diversity and Complementarity: The Origin of ESG[1] success and capability

In other words: not only do today’s board members by and large have very little practical experience when it comes to renewables, sustainability, or economic models that do not rely on pure and simple GDP growth. But they also have often built track records in industries that since decades are shown (and known) to be among the largest emitters, and thereby at the root of the current climatic challenges.

Therefore, unless such board directors are aware and accepting of the baggage they bring to a board table, and are willing to question the modus operandi of their industries of origin, their industry track record will only lead to more of the ‘old same’. And in this way merely perpetuate and replicate the issues found in precisely those emitting industries.

Once more: this is not to diminish such directors genuine track record acquired through hard work.

It is to point out that their track record on its own is incomplete. Their board is in needs of a complementary skill and knowledge set for proactive decision taking in the decades to come.

[1] ESG / Sustainability is one area where board diversity is of utmost relevance because the world we shortly will be living in will be unrecognisably different from the one we live in now. This is not to say that other subjects – digitalisation for example – do not require it. They do. The difference is fundamental however: ESG / Sustainability requires a fundamental different economic modus operandi made possible by new, so far unknown business models. Digitalisation in contrast will certainly result in new business models, but may not necessarily affect the fundaments of the economic system as such.

Holding the moral compass – Boards social responsibility

By Florence Kaminska, IDP-C and Non-Executive Director

The COVID19 crisis led to the abrupt halt of an economic model, increasingly challenged in the past decade with climate and social warnings. Faced with such unprecedented situation, in varying degrees, consensus around the world was to choose health over economy, humanity over profit. The speed of reaction and solidarity – displayed by individual actions, state intervention to protect employment, companies adapting their production to produce masks, gel, ventilators … gave us a glimpse of what ‘the world of tomorrow’ could look like, demonstrating the impact of citizenship and value driven decisions.

It also raised expectations on the way companies create value in future and address the social impact of the decisions they make.

The pandemic broke out in a period of great existing instability and unrest resonating across the world through social media. Citizenship pressure is likely to increase and have a louder voice, as the economic consequences of COVID19 crisis massively impact employment. It will present great risk for society and business, but equally a great opportunity for companies that are delivering value for both shareholders and stakeholders (1). In this context, the Board’s role in keeping a moral compass whilst ethically charged, short and long-term, decisions are made and their consequences managed, is key.

What value does the Company create and for whom?

Beyond their responsibility to the long-term sustainability of the company, the current context is a compelling call for boards to drive, as part of their duty of care, the value the company is creating to society at large. Such commitment will increasingly determine the company’s ability to access market capital, attracting and retaining talents and ultimately impacting brand reputation and Investors Relations. Private investors increasingly want to see their savings and investments to produce as much good as dividend and are becoming more demanding. Equally, many people not just millennials, want to work for an organisation whose philosophies and actions resonate with them intellectually and emotionally. As the debate on shareholder Vs. stakeholder primacy is gaining momentum, the ‘S’ in ESG is gaining a new prominence in the Boardroom, accelerated by the COVID19 humanitarian and economic impact on businesses, communities and people’s lives. The way boards chose to approach cash and liquidity will have both social and governance implications and, as such imposing social responsibility at the highest strategic level. (2)

Are we moving towards new dimensions of leadership?

Much publicised heads of state, New Zealand, Germany,  as well as CEOs from Danone, Unilever, AirBnb, to name a few, have demonstrated, beyond they undoubted ‘technical’ talent and experience, a form of moral authority and leadership attributes already emerging as differentiators such as accountability, humility, transparency, proximity as well as empathy and compassion. These new leadership attributes will equally impact the board profiles and composition, as such public examples raised the level of awareness on ‘purpose leadership’. (3)

How does it impact the Board?

The social impact of decisions made by companies, imposing a form of moral compass to navigate these complex times, is likely to determine the levels of trust from stakeholders, and ultimately impact the bottom line and the shareholders.  Holding the moral compass is not about holding management accountable for vague, all being righteous principles. It is about maintaining a dialogue with shareholders whilst collaborating with executives to manage the complexity and conflicting needs of the multiple stakeholders, assessing risks, opportunities and trade-offs, setting priorities and measuring purpose-based decisions.

Holding the moral compass is not about holding management accountable for vague, all being righteous principles. It is about maintaining a dialogue with shareholders whilst collaborating with executives to manage the complexity and conflicting needs of the multiple stakeholders, assessing risks, opportunities and trade-offs, setting priorities and measuring purpose-based decisions.

To do so, some fundamentals will require attention, such as:

  • Defining or revisiting the corporate social purpose – 2008 Financial crisis led to new governance framework and enhanced regulations but did not address social unbalances. COVID19 crisis is accelerating societal impact in governance through by-laws and legislations. Proactively embracing the trend and using existing best in class examples will determine the sustainability of a business starting with access to capital and talents (4). The ability to measure the authenticity and results of their actions will impact the reaction of both stakeholders and shareholders, as will the Board ability to drive an ESG culture.
  • Aligning scorecards and KPIs – Driving an ESG culture implies revisiting governance, scorecards and KPIs. Finance may have neglected qualitative and quantitative assessment of management in the past. As the concept of the Triple bottom line expands (5), there is likely to be more effort from the investors side in understanding how to manage companies well in future and pushing their goals under the OECD agenda or reference the UN’s SDG agenda (6). Remuneration committees will consequently need to reflect these new imperatives in the Executives compensation & incentives, including those of the Board.
  • Enriching the composition of the Board – The Chair brief is expanding as his/her effectiveness will be determined by the ability to interpret complex ESG landscape and implications of shifting social, political and regulatory expectations and their associated risks. The pandemic situation has also revealed new skillsets required among the non-executive board members, such as technology, HR, alternative financing, restructuring, and critical leadership attributes such as collaboration, agility, humility and courage. Leading by example will become an integral part of the role of the Board, promoting agility to adapt fast to new challenges whilst never conceding on the violation of core ethical principles related to the corporate social purpose. The Nomination Committees are likely to revisit the needs, profiles as well as the selection criteria, methods and breadth of candidate pipeline.

An opportunity to shape the ‘world of tomorrow’

Company boards will play a key role in creating the ‘world of tomorrow’ as they guide and hold management accountable to rethinking the company social purpose, embedding it in their decision making as they navigate the complex post COVID19 economic landscape.

The writer George Sanders used the following analogy for the current COVID19 moment, ‘we’ve slipped on ice but haven’t hit the pavement yet. We are caught in a suspended state between losing control and feeling the full impact’.

Companies will be faced with tough dilemma. Cost savings and profit motives, which may have served them well in the past are likely to backfire (7).  Without a moral compass in making tough decisions and building a more sustainable model, in the way wealth is created and redistributed, the prophecy of the French writer, Michel Houellebecq , ‘the world after will be the same…in worse’ may well materialise. Yet, ESG has raised in awareness and reaching an inflection point. The priorities Boards drive, the courage to do ‘the right thing’, the moral authority they hold and their leadership in shaping sustainable and equitable long-term corporate strategies will define the, much hoped for, ‘World of tomorrow’.

References
(1) https://corporatefinanceinstitute.com/resources/knowledge/finance/stakeholder/
(2) Fidelio partners. Cash is King! ESG? May, 10 2020
(3) https://hbr.org/2020/03/a-time-to-lead-with-purpose-and-humanity
(4) Examples such as B Corp certified companies, https://bcorporation.eu/ 

(5) https://www.business.com/articles/triple-bottom-line-defined/
(6) http://www.oecd.org/dac/sustainable-development-goals.htm  https://www.un.org/sustainabledevelopment/sustainable-development-goals/
(7) When Crisis strikes lead with Humanity. Harvard Business Review April 23 2020, Doug Sundheim

 

Human behaviour – Why does it matter to effectively manage risk?

By Luc Albert, Ard W. Valk and Déborah Carlson-Burkart

Organisations are exposed to risks

In September 2011, Kweku Adoboli was arrested, after having caused a loss of over US$ 2 billion for UBS by unauthorized trading at the group’s investment bank. In the following month, the bank’s CEO admitted that the computer system at UBS had detected Adoboli’s unauthorized trading activities beforehand. Although the system had issued a warning, the bank had failed to act upon it.

Over the past two decades, the financial industry has been regularly shaken by cases of such nature. These occurred despite strong regulation, as well as the existence of robust risk frameworks. Underlying causes included fraud or bad intentions, but also human mistakes and mis-interpretations of duties and responsibilities.

In April 2010, the Deepwater Horizon Drilling rig exploded in the Macondo Prospect oil field about 40 miles southeast of the Louisiana coast. The explosion resulted in human casualties – 11 workers died and 17 were injured – an oil well fire and a massive offshore oil spill in the Gulf of Mexico. A BP-report, released in September 2010, revealed a series of design errors, operational malfunctioning and human mistakes as main causes for the catastrophe. In September 2014, a US District Judge ruled BP was guilty of gross negligence and wilful misconduct. Transocean and Halliburton, two other companies involved, were fined alongside BP, which was apportioned the bulk of the blame.

The oil industry is known to apply rigorous risk management, given the nature of its operations and potential exposures to its environment. In this industry as well, multiple examples can be found of significant accidents, major pollution and human tragedy, which couldn’t be prevented despite these frameworks.

The Enron scandal publicized in October 2001, resulted in substantially more regulatory scrutiny and led to the implementation of the Sarbanes-Oxley Act. The downfall of Enron was caused by wilful human misconduct, incentivized by asymmetric compensation schemes, creative accounting facilitated by the firm’s auditor and a corporate culture focused on misleading internal and external stakeholders.

Risk management framework: a foundation for risk mitigation

A sound risk management approach provides a framework, which typically allows to identifying particular events relevant to the organization’s objectives, assessing them in terms of likelihood and magnitude of impact, while determining a response strategy and a monitoring process, including regular reporting on its design and operating effectiveness. By identifying and proactively addressing risks and opportunities, organisations can protect and create value for their stakeholders, such as owners, employees, customers, regulators, and society at large.

The company’s executive management is responsible for the establishment and implementation of an appropriate risk management framework. Ongoing oversight is sometimes enforced via a dedicated risk management function, led by a member of the executive management team. Today, this is a standard approach for strongly regulated sectors like the financial industry. Internal audit provides assurance.

The board, which has ultimate fiduciary responsibility for determining the company’s strategic direction, plays an important role to assure that risks are appropriately identified and effectively mitigated. After being inducted into the firm’s risk management framework, board members merely receive regular reports from executive management, the internal audit function, as well as external auditors, including ongoing risk assessments, identified exposures and mitigating actions. Applying its collective expertise and experience, the board facilitates identification of oversights and blind spots.

Does this allow the board to effectively fulfil its supervisory role in risk management?

A survey conducted among our IDP 29 cohort members about their own experience revealed a wide variety of risk management  approaches in the companies they are engaged in as board members. Not surprisingly, regulated industries appear to have more robust risk frameworks than non-regulated ones. The same applies for larger, more mature companies in comparison to start-ups or smaller companies. Information received is different in quantity, quality and regularity. Moreover, it is often not easy to assess. The amount of time boards dedicate to risk management also differs between companies and industries. Developing a thorough understanding of the company’s core processes as a pre-requisite to fulfil the board’s role turned out to be a common denominator.

Although the examples at the beginning of this article derive from different industries, human behaviour seems to be a decisive factor in all three of them. Whilst risk management frameworks are hardly comparable in quality, rigor and attention, their effectiveness heavily depends on how these are applied by the people involved on a daily basis.

So, why should human behaviour be of interest to board members?

Let us take a step back. The board has ultimate fiduciary responsibility for determining the company’s strategy. This includes stress testing a long-term business plan, its underlying assumptions and main risks. Whilst executive management is mandated to seek growth opportunities, drive innovation and strengthen the company’s market position, it is the board’s responsibility to ensure that the company’s going concern is not put at risk. Or as Timothy Rowley likes to put it: “An effective board acts as an anti-inflammatory, not a growth hormone.”

Once the strategy for a given time period has been approved, the board’s role moves to regular “health checks” which are to a large extent defined by the company’s risk management framework. However, as it appears, it is not enough to have a cognitive understanding of the risk management, processes and controls, as their operating effectiveness ultimately depends on how “risk management is being lived” in daily operations.

As Plato stated in 340 BC: “Good people do not need laws to tell them to act responsibly, while bad people will find a way around the laws”. A crucial element – besides tools and systems – therefore is human behaviour, which is best captured in the risk culture that the company has developed. A vast majority of employees go to work with the best of intentions, using their skills and talents to contribute to the company’s going concern. Setting aside those few who engage in wilful misconduct, fraud or even criminal activities, staff and executives at all hierarchical levels will use their intelligence and judgment to “do the right thing”. At the same time, mistakes are inherent to any human intervention.

Understanding the human factor and risk culture in a company is crucial for the board to effectively operate. Some of the questions that board members should keep in mind: How does the human factor affect risk management in the company? Are mistakes openly addressed and useful lessons learned, leading to improvements of risk management behaviour? What do I, as a board member, have to know about human behaviour and risk culture across the organisation?

In a second article on this topic, we will further assess how understanding human behaviour and risk management culture can be captured as a crucial element for board effectiveness.

Luc Albert, IDP-C is an Independent Board Member.

Ard W. Valk, IDP-C, is a risk manager, Independent Board Member and Independent Risk Advisor.

Déborah Carlson-Burkart, IDP-C, is a lawyer and Independent Board Member.

IDN Webinar: Can Digital Committees solve board challenges?

Digital committees can help solve current board challenges

By Karen Loon, IDN Board Member and Non-Executive Director

With boards facing challenges including financial, sustainability and digital with increasing speed and impact, can digital board committees help?  Why are they set up and how do they work?  Who works on them, how do they integrate with board work, and why don’t more boards have them?

These were the key questions which IDP-C panellists and Non-Executive Directors Mary Antenen and Dimitri Chichlo, both based in Switzerland gave their personal perspectives on in an INSEAD Directors Network (“IDN”) webinar on “Digital Board Committees – Supporting the boards’ challenges and responsibilities” held on 29 September 2020, which was facilitated by IDN Board Member, Liselotte Engstam based in Sweden with Q&A support from Hagen Schweinitz, a fellow IDN Board Member based in Germany.

Following an introduction by Liselotte Engstam, the discussion covered a number of broad areas.  Key areas discussed included:

1. Digital is key to business in the future.

Digital is a tool and an instrument which cannot be ignored.  The pandemic has accelerated clients using digital channels, and has led to more staff working remotely.  Companies are increasingly partnering with third parties such as FinTechs for scalability and products, improved client service, profitability, and operations.  Digital allows organisations to enhance their business capabilities, simplify processes and improve customer experience.

Participants agreed that the recent pandemic had increased digital initiatives at their companies:

2. Digital is strategic

Boards and management need to understand the various digital options available to them. Their role is much more than creating a digital culture – they also need to be aware of the marketplace around them. Further, digital impacts an organisation front to back, is a key business driver and is more than IT which is often looked as outside of the business so difficult to integrate.

3. Digital transformation requires IT transformation and different ways of looking at things 

In digitising their businesses, companies need to not only look at their IT platforms but the impact on areas such as cybersecurity, operations models, risk management, and compliance. Increased digitisation also requires strengthening of internal controls and access to data and enhanced data usage capabilities.

As Mary Antenen commented

“Digitisation and IT transformation projects are complex and impact all areas of the organisation and often require specific governance around these initiatives.  The board and board committees need to adapt to this”.

For example boards need to address what the impact is of digitisation on the organisation’s strategy and business model and risk assessment; and how does the organisation look at partnerships, related models, and third-party risk, cybersecurity, and data protection.

4. There is no one right model of how the board should engage on digital.

The new reality is that boards need to deal with digital transformation and its discomfort.  Digital strategy and risk need to be integrated into the board discussion, and the board engaged and focused on it at the appropriate governance levels.  Further, digital and IT transformation is expensive.  How the board engages on digital may depend on whether the board has the right capabilities in digital or IT to deal with its initiatives taking into account the speed of change and disruption, and the need for faster and more effective engagement in the organisation on the topic.  Whether the company has diversity of experience from different industries and different domains of knowledge at the board and senior management levels will be a key consideration.

As Dimitri Chichlo said

“…the reason we should have such diversity at a board level is that each of us is framed by his or her own specialty. If you have only bankers sitting at a supervisory board, they will be thinking as bankers. If you only have operations, or lawyers, they will think in their frame … Diversity ensures that everyone is able to bring his or her own point of view when going digital”.

5. Having a digital advisory board, or subcommittee, may suit some organisations and allow some flexibility.

Webinar participants generally agreed that some form of digital subcommittee could enhance their board’s governance.

However, surprisingly few had discussed with their board the opportunity to complement the board’s work with a digital committee.

Participants learnt about some different approaches using digital subcommittees. One approach was organised as a formal subcommittee of the board and included both Operations and Digital, with members from about half of the board together with the CEO, CIO, CRO and COO from management’s side. This group met approximately 6 times per year.

The other was arranged as an advisory board, not a formal subcommittee. This involved both internal members (a supervisory board member, CEO, CRO, CIO) and a number of external advisors.  This group met approximately 4 times per year, and are now considering nominating one of the advisors to join the supervisory board.

It was shared that external advisors can bring to organisations different and complementary skills, for example customer experience and digitisation, data analytics and IT, cyber, technology architecture and knowledge and experience of agile transformation which can be tapped on from others who have gone through them, and led similar exercises.  They can also lift board competencies and bring fresh perspectives and understanding of future trends/market insights as well as new ideas.

Conclusion

As Mary Antenen concluded

“I think we recognise that this kind of transformation and discomfort is here to stay. It’s part of the new reality and we need to find ways of effectively dealing with it within our boards … whether it’s through subcommittees of boards (or) whether it’s through an advisory board.  I think the important thing is that digital strategy and risk needs to be integrated into the board discussion.  These discussions need to be in line with the speed of disruption and development that’s happening in the marketplace”.

Dimitri Chichlo further added

“Digital is not only about improving your efficiency or decreasing your costs, it’s about a strategy opportunity.  So, there are both sides here – it’s a tool and an instrument, but it’s also a way that shapes the behaviour of your customers or of your market. The board cannot afford ignoring it; you cannot be blind. So, you must have people who are willing to go in this direction and understand those options”.

IDN’s next webinar for members on “Board Dynamic Capabilities for Disruptive Times” will be on 16 October 2020 from 1345 to 1445 CET.

From risk to resilience: A new paradigm in board risk oversight?

By Regine Slagmulder (IDN alumna & former INSEAD faculty member)

The Covid-19 pandemic has been an unexpected shock that is creating extraordinary challenges for companies and their boards on how to navigate uncertain and turbulent times. Previous viral outbreaks rarely made it onto the busy boardroom agendas, but the sheer scale and impact of this crisis has called for undivided board attention. While high-impact/low-probability events are usually very difficult – if not impossible – to predict, it is never too early to start thinking about how to weather the next storm and come out stronger than before. This article argues that boards must spearhead companies’ transformative change in today’s business environment, which is characterized by high velocity, complexity, ambiguity, and unpredictability.

Risk management as a necessary but insufficient condition

As part of their oversight duties, the board of directors is responsible for making sure the company has put in place the necessary risk management capabilities to deal with the negative consequences of unforeseen events. Many companies have made significant progress in implementing adequate risk management systems and procedures, especially in the aftermath of the 2008 financial crisis. They are now better equipped than before to handle incidents through well-established risk registers for identifying risks, information systems that provide appropriate transparency on the downside impact, and contingency plans ready to be enacted whenever disaster strikes.

However, there is a major difference between risk events with well-known consequences, such as an industrial accident or a cyber-attack, and unprecedented disruptions, such as the Covid-19 pandemic. The former situations, as overwhelming as their occurrence might be, can be expected to return relatively quickly to the “old normal” after proper recovery measures have been taken. In contrast, the latter events typically do not lend themselves to an existing playbook approach to risk management and are likely to have a lasting impact – not only on individual companies but possibly on entire industries and geographies. While there are clear benefits to putting in place formal risk oversight arrangements, such as quantitative risk analysis and risk committees, to handle the “known” risks, these established mechanisms are insufficient in an environment of deep uncertainty characterized by “unknown unknowns”. Boards must, therefore, elevate their risk oversight role from a routine exercise in operational loss prevention and compliance, to acting as an enabler of long-term corporate resilience.

Boards must, therefore, elevate their risk oversight role from a routine exercise in operational loss prevention and compliance, to acting as an enabler of long-term corporate resilience.

Building resilience: from fragile to agile

While most companies suffer considerably from dealing with an external shock such as the pandemic, some organizations appear to come out of the crisis remarkably resilient. To achieve effective governance, the boards of directors must ensure that the necessary “resilience capabilities” are in place that allow the organization not only to bounce back from a high-impact disruption but also adapt to the new reality more quickly than their peers. These capabilities relate to two key aspects of resilience – preparedness and agility.

First, preparedness refers to the pre-crisis arrangements that the company and its board have put in place to anticipate and proactively mitigate the negative impact of risk events. Examples include information systems for monitoring risk indicators, robust business continuity plans, and slack resources. It also involves actively engaging the diverse set of professional experiences and backgrounds present in the board as well as regularly obtaining outside-in views from external experts. The board’s continuous outlook for what may be coming “around the corner” can significantly contribute to sharpening the leadership team’s sensing skills and detecting strategic risks before they spin out of control. Forward-thinking boards also pressure test management’s assumptions about the longer-term consequences of the virus. Combining these insights and foresights in strategic scenario planning exercises enables boards to take precautionary measures already at an early stage, thus making their companies more resilient to shocks.

Second, agility is required because it is impossible to fully prepare and plan for complex and dynamic situations, especially when it is unlikely that the situation will afterwards return to the pre-shock state of normality. Superior levels of in-crisis adaptation enable companies to take decisions quickly and get ahead of the disruption. The first stage in crisis response is usually one of creative, entrepreneurial problem-solving in real time as the events unfold to secure the company’s immediate survival. Then, as soon as the crisis is under control, the board should stimulate the management team to think proactively about introducing new business models in the “new normal”, for example by accelerating investments in digitalization. As such, it is important to make a shift from the classic mindset of mitigating downside risk to becoming more opportunity driven. Board members need to proactively engage with their executives to discuss how even highly adverse events, such as the Covid-19 crisis, might be leveraged into strategic opportunities to be exploited in the longer term. For example, companies might consider acquisitions targeted at growth in previously underdeveloped market segments, such as a specialty chemical company diversifying into the medical hygiene products business. Effective risk oversight in the context of a major disruption thus requires boards to rise above their traditional monitoring role and develop a strategic stance to dealing with risk. Companies whose board members consider risk as an integral part of their business strategy rather than as an after-thought, are bound to have a competitive edge in building resilience for the future.

Effective risk oversight in the context of a major disruption thus requires boards to rise above their traditional monitoring role and develop a strategic stance to dealing with risk.

Adopting a long-term view

While extreme circumstances require that the board’s immediate attention be directed towards ensuring the company’s survival, directors must also adopt a long-term perspective, with a clear focus on strengthening the organization’s resilience in a sustainable and purposeful manner. Maintaining a long-term perspective might entail a delicate balancing act to reconcile the interests of shareholders and other important stakeholders (employees, customers, suppliers and the broader community), as well as responding to calls for greater clarity on the organization’s ultimate purpose. Take, for example, the recent public outrage about several financially strong international groups that (ab)used governments’ emergency response to the Covid-19 crisis to defer rent payments on their shops, with potentially detrimental consequences for small store owners. In times of severe turbulence and existential anxiety, it is particularly important for boards not only to protect their company’s short-term financial and operational performance, but also act as a beacon with a long-term view for the future on corporate purpose, social responsibility, and reputation.

Is there an opportunity? Our life after Covid-19

By Konstantinos Yazitzoglou, IDP-C and IDN Greece Ambassador 

“In the midst of every crisis, lies great opportunity” –
Albert Einstein

We are undoubtedly experiencing one of the greatest crises in modern history. A crisis unlike any other and therefore with unknown consequences. “Experts” try to assess its effects on our lives and predict the new reality to come. If, like me, you are sceptical about futurism, the current situation certainly helps reinforce this view.

Most of us agree that, at some point, there will be “a day after”. Whether it will be a day with a vaccine or efficient medications, with a lot of social distancing or none, with fear or not, it is difficult to say.  We understand there will be a recession, but we hope that it will be controlled and reversible. We recognize that some companies, or even whole sectors will cease to exist, but we hope that ours will survive. Some of us even dare to foresee major changes in their personal and business life, but consider them manageable.

Economists often refer to the expression “ostrich effect”.  In simple terms it means that when faced with an unmanageable crisis, people tend to close their eyes in an attempt to ignore the problem they’re faced with, hoping that at some point, when they open them again, the problems will be gone, and everything will go back to being the same. As the philosopher Ayn RAND characteristically states, “You can ignore reality. But you cannot ignore the consequences of ignoring reality.”

“You can ignore reality. But you cannot ignore the consequences of ignoring reality” – Ayn Rand

It is true that during a massive storm common sense dictates we should do our best to minimize our exposure to any potential damage. At this point in the COVID crisis, our organizations’ ability to react is limited to trying to  “preserve the status quo”, which is surviving the storm with the least possible losses. Size adjustments, changes in production models, access to markets or products that until yesterday were not a priority are just some of the methods used. While there are various good practices and lessons we can use from past crises, there is clearly no “recipe for success”.

The upcoming economic recession is a given and all we are talking about is its magnitude – how much and for how long. Central Banks and Governments are already employing various financial measures to control the situation, but the degree of their success depends entirely on the duration and intensity of the pandemic.

The crucial question that business leaders need to answer now, is what the post-crisis era will look like. Even if we manage to overcome the health crisis, everyone agrees that some things will never be the same again. For instance, it is certain that for a period of time public spending in health will increase significantly. This, in turn, will deprive other sectors from funding. There are already discussions about “deglobalisation” so that, should we be faced with another pandemic in the future, we can have a “local” supply of markets. Such initiatives may change the rules of the game in the utilisation of raw materials and in logistics.

Business travel needs will be reassessed, with potential implications for fuel consumption, transportation, and infrastructure investment. The ability to do remotely things that until yesterday required our physical presence in a certain location, will reduce the need for such locations (offices, shops, etc.). On the other hand, working from home will require investment in both real estate and equipment. Even Wi-Fi and cellular networks will have to be significantly strengthened in residential areas, to accommodate the increase in demand generated by the new professional grade use made.

The term disruption was coined twenty years ago, to describe a state of rapid and unexpected change. The main characteristic of disruption is that no extrapolation of data from the past can give valid predictions of the future. COVID is a disruption of the disruption. Long before the current crisis, the academic community conducted dozens of case studies of large corporations (for example KODAK), which stubbornly refused to see the speed and intensity of forthcoming changes, leading to their disappearance. The current pandemic is simply accelerating this process, on the one hand because developments occur even faster and on the other hand because many of us, in complete denial of reality, will continue to “dream” of returning to a pre-pandemic state of things.

Having said that, we must not ignore that the same changes which led “dinosaurs” to their deaths have fuelled a series of greater or lesser successes for several agile organisations. The speed of adaptation to the new reality is nowadays the strongest competitive advantage for an organization. When the instinct of survival meets creativity, the result is always positive. Humanity will continue to exist even after COVID, the world GDP always finds a way to return to a growth trajectory after a crisis, developments in technology will be even faster and perhaps more focused.

“Do not think what you want from the future. Ask yourself what the future needs from you.” – Jeffrey Rogers

Clearly, for many of us, the loss of the “status quo” and the collapse of the “comfort zone” that we had painstakingly built on, are facts that we find difficult to manage. Wishing that it will all go away may be comforting in the short term, but it will not get us very far. Instead of being ostriches, let us follow the advice of Jeffrey ROGERS (Singularity University): “Do not think what you want from the future. Ask yourself what the future needs from you. ”

 

Beating the dragons: Fairy tales in the board room

Book Review – Telling Fairy Tales in the Board Room – How to make sure your organization lives happily ever after
Author: Manfred F. R. Kets de Vries, Distinguished Clinical Professor of Leadership Development and Organisational Change and the Raoul de Vitry d’Avaucourt Chaired Professor of Leadership Development, Emeritus, INSEAD
ISBN: 9781137562746

By Pamela Ravasio, IDP-C and IDN Board Member

 

 

 

 

 

 

 

Fairy tales is typically something for kids. Particularly young kids. Over the centuries they have been used fundamentally to convey social mores, warnings from danger, and to inoculate a shared understanding of what ‘good’ and ‘bad’ looks like. They have also found their use trying to make us all believe – maybe naively? – in the good of humanity, and in the ‘happily ever after’.

“If you happen to read fairy tales, you will observe that one idea runs from one end of them to the other–the idea that peace and happiness can only exist on some condition. This idea, which is the core of ethics, is the core of the nursery-tales” – G.K. Chesterton

The notably useful aspect of fairy tales is their approach to simplify all relevant ingredients to a good story: the characters (typically either good or bad), the context (often medieval-style kingdoms), the social standing of the main characters (nobles or paupers) and in particular the lessons to be learned.

This characteristics though make fairy tales an ideal, if very uncommon, vehicle to convey information and learnings also in management literature. And in a much more colourful, even memorable, manner than would be possible than through any of the coveted, but often rather uninspiring case studies brought forward by business schools around the globe. After all: a fairy tale to educate managers? Not an approach that normally would be seen kindly.

“As for fairy tales, he understood that they were reflections of the people who had spun them, and were flecked with little truths – intrusions of reality into fantasy, like toast crumbs on a wizard’s beard” – Laini Taylor in ‘Strange the Dreamer’

Unless the author of such fairy tales in none less than Manfred Kets de Vries himself. A renowned academic and coach of CEOs of all colours, with a track record in both psychology as well as an economics, he dared to depict in the fairy tale format the issues of dysfunctional leadership one can frequently encounter in the C-Suites of companies.

With two clear advantages:

  • A simplistic approach to complex dysfunctions: focused, sharp and clearly graspable description of the failing leader, and the reasons behind his failures.
  • The anonymity provided by the fairy tales to any one leader prone to such dysfunctional behaviour. Something even the most carefully written case study not be able to ensure.

Four Fairy Tales, Four Leadership Styles, Four Lessons

“The way to read a fairy tale is to throw yourself in” – W.H. Auden

The book, in addition to the introduction, offers the reader four stories about different types of (un)desirable leadership:

  • White Raven, or The Leader Who No Longer Knew Himself: A tale about self-delusion yet no bad intent. A tale that illustrates the disastrous results it can have on a society, and the difficult personal journey required for change.
  • The Bear-King, or The Price of Hubris: A tale about a leader’s arrogance and lack of sympathy (empathy?) for his people. A tale that illustrates how destructive and disruptive such behaviour is on thriving people and societies. And how – possibly – only a shock to the bones opens up opportunities for a different future.
  • The Kindly Crone, or How to Get the Best out of People: A tale about the gift to get the best out of people. A tale that illustrates how people willing learn, improve, and contribute under the right leadership. And also about how circumstances can lead to the exact opposite happening.
  • The Four Brothers, or How to Build an Effective Team: A tale about how successful leadership is a team sports. A tale that illustrates that knowing each other well, and trusting each other, cumulatively leads to achieving goals that individually would never have been possible to reach. And a tale that talks about paying tribute to everyone who made a difference and helped to achieve the results.

With just 125 pages the book is short, and its choice of language favours legibility over academic bravura. Every chapter ends with a set of pertinent questions that are suitable for boards and C-Suites to ask themselves about the current situation an organisation finds itself in. Or indeed the state of the succession funnel – be it for board memberships or the next CEO.

While the reading of this book is a rather straight forward task, the answering of the questions raised in each chapter is less so – if taken to heart and done seriously. Similar to the fairy tales, the questions are simple, and quick to understand. But they require a good amount of soul searching and – talking of methodological approaches – inquisitive (curious) enquiry into the DNA of an organisation and its people.

Summary

Telling fairy tales in the board room’ is a simple approach to illustrate and explain complex dysfunctional behaviours. The use of the Fairy Tale format allows life to be illustrated be black and white – and in this way separate the wheat of the desirable from chaff of the undesirable effectively, and in an easy to grasp manner that is graciously avoids the pitfalls of personalised scapegoating so common in published case studies.

First published here.

IDN Webinar: Tech for Good – What is the role of company boards?

Company boards have a key role to play in guiding organisations in the digital age.

By Karen Loon, IDN Board Member and Non-Executive Director

To celebrate the first ever digital edition of Global INSEAD Day on 12 September 2020, the INSEAD Directors Network (“IDN”) Global Club held a webinar open to all on “Tech for Good – What is the role of company boards”.

The global panellists were IDN Americas ambassador, Mary Francia, IDN Australia and New Zealand Ambassador, Helen Gillies and Dimitri Chichlo from Switzerland, who are all experienced Non-Executive Directors and INSEAD certified directors (IDP-Cs).

The panel was facilitated by IDN Board Member, Liselotte Engstam based in Sweden with Q&A support from Karen Loon, a fellow IDN Board Member based in Singapore.

Following an introduction by Liselotte Engstam, the panel conversation covered four broad areas:

  • How technology aligns to an organisation’s purpose and strategy
  • The increasing importance of stakeholder communication
  • How can boards best support management in the digital age
  • How can current and aspiring board members keep up to speed with developments

Technology should be core to your organisation

All three panellists agreed that today’s organisations must ensure that technology is an integral part of their strategies.  With companies facing increasing focus by external stakeholders, whether investors, clients or employees who are holding boards to account, organisations must have a proper purpose, and technology must support that purpose.

As Helen Gillies said, “Technology is just key – it impacts everything that we do; every interface that we have with our external stakeholders, clients, employees, every aspect of our business sales, so it’s just integral.  And so that means we must get that strategy around technology right”.

A challenge highlighted by Dimitri Chichlo which boards face is that few boards have people with technology and operations (including cybersecurity) experience, with the majority being business leaders.

Mary Francia added that a question boards need to tackle is how best to manage new risks which are much wider than financial risks – whether technological, geopolitical, environmental, social and governance.  “Without the right composition with other vital skills and expertise, you may not have the requisite depth to ask the right questions when it comes to technology, and to support and build what is driving tech for good” said Mary.

How can boards best support management in the digital age?

According to Helen Gillies, board members have a key role to ensure that the purpose of their organisations are reviewed regularly with management.

As board members, one thing that’s really critical is we have to be curious. So we have to be looking outside our organisation the whole time thinking what are our clients during, what are our competitors doing, how do we make our organisation better, so that that the concept of being hungry for information is really key” – Helen Gillies

A good practice which Dimitri Chichlo shared on how he supports management was to build rapport with senior leaders outside of the boardroom as soon he started his role to create some proximity with them, which was very much appreciated by management.

Because of increased pressure from investors and stakeholders, to enhance the competence of boards, in addition to more board education to support existing directors, Mary Francia sees more companies looking at their board compositions in detail, and  doing board assessments to look at the skill sets of the boards and gaps to identify whether new people should be brought in, committees created or advisors sought.  She highlighted the importance of boards having an inclusive culture for change.

The increasing importance of stakeholder communication

All panellists agreed that communicating more broadly about environmental, social and corporate governance (“ESG”) to stakeholders is becoming increasingly important.

Organisations should look beyond their local listing disclosure requirements, and share with employees, communities they work in, clients and investors more about what they are doing.  Further, they should understand the stakeholder concerns of their company’s most material stakeholders and ensure that they communicate messages clearly in a language which stakeholders understand.  Appropriate board level dashboards on the metrics which really affect the individual company’s business context are important as well as looking at the right outcomes.  Finally, having the right accountability, measures, and appropriate links between behaviours and remuneration (which are aligned the purpose of the organisation and its strategy) is crucial.

The panellists also highlighted that having technology and HR competencies on the board, and also ensuring that the management of HR and Technology partner together more closely is also going to be increasingly more important in the future, given that technology should be core to all organisations in the future, and often these two functions are not as aligned as they should be.

Mary Francia also reminded participants of the increasing importance of boards having an inclusive and ethical mind when looking at technology, and how it is applied.  Dimitri Chichlo added that this in particular needs to be considered when supporting employees as they adapt in the new world, as technology will impact different generations of employees in different ways.

How can current and aspiring board members keep up to speed with developments?

Our panellists were enthusiastic about the power of IDN’s network, its webinars and its mentoring programme to connect members which are excellent ways for IDN members to engage and keep up to speed.

“… the nice thing is to be able to just get on the phone and talk to one of your directors in Turkey for example or in India, and being able to discuss about a subject because the perspective is so different for every one of them; that that just only enriches and that you just cannot find anywhere” – Mary Francia

Liselotte Engstam highlighted that aspiring directors should seek broad experiences and try to get some P&L experience and run a business to become more familiar with dealing with complexity.

Mary Francia also recommended that aspiring directors gain experience early in their careers in more than one functional area, and “be brave enough to try something different”.

Dimitri Chichlo shared that “…if you work in operations, you will always touch technology, and you will learn on the spot.  Whilst books are great, learning with… IT people on the spot gives you an incredible amount of knowledge”.  He also mentioned that there are many shorter online programmes available which board and aspiring board members can do to help them keep up to speed with emerging trends and developments in technology.

When considering board roles, panellists however cautioned aspiring directors to ask specific questions to assess whether they are really comfortable with the risk of the organisation and how that organisation does things when things go wrong.

Final advice to board members

In their concluding remarks, the panellists highlighted that the rapid pace of change with technology, what organisations are doing now will not be what they are doing in another five or ten years.  Boards need to anticipate the technological changes and keep up with them.  Board members should also ask good questions about whether the organisation is innovative, sustainable, able to adapt to technological changes in the future, accountable and inclusive.

As Helen Gillies concluded, “…the current pandemic has challenged all of us thinking about everything…  How do we do things better? How do we challenge our thinking?  Because what was normal yesterday is not going to be normal tomorrow”.

A replay of this webinar will be available to INSEAD alumni shortly.  IDN’s next webinar for members will be on 16 October 2020, as part of the INSEAD Directors’ Forum.

AI Leadership for Boards – now a reality!

By Liselotte Engstam, IDP-C, NED and Chair, Communication, IDN Board Member

We are facing a period of disruption and disorder, and we need our leaders to show the way. Artificial Intelligence (AI) is one of the crucial technologies for solving our most critical business and society challenges for a more sustainable world. Board work is already a very challenging and complex task, and AI will bring that challenge to a new level.

When the National Association for Corporate Directors, NACD did a Survey of Public Company Governance 2019, prior to the pandemic, they found that three of the top five trends with the largest impact were technology related with growing business-model disruptions as the top trend.

Ref: NACD Public Company Governance Survey 2019

With an ambition to find insights to better guide boards, Fernanda Torre, House of Innovation at Stockholm School of Economics & Digoshen Partner, Professor Robin Teigland, Chalmers University of Technology and Board Professional, and I have pursued a two year academic and empirical research on the requirements of Boards Leadership of AI.  We found some unique insights on how boards can, without losing themselves in details or in technical jargon, move into the future of corporate governance.

To increase the impact, we decided to share our results in a bookAI Leadership for Boards – The Future of Corporate Governancewhich also holds guiding questions that can help boards move forward as they mature.

On 25 June 2020 we held our virtual book launch webinar and were fortunate to have some of our collaborators joining us, as the President of INSEAD Directors Network and Chair on multiples, Helen Pitcher OBE, CEO of Combient Mats Agervi, one of the founding faculty of Singularity University Kathryn Myronuk and MIT scientist researching digitally savvy boards and leadership teams, Stephanie Woerner.

The research was done in collaboration of companies like Combient, a unique joint venture of 30 of the largest Nordic globally operating companies, and FCG Group, a Northern Europe Governance, Risk and Compliance Advisory and Technology Services Company. We based the insights on literature review of both academic and practitioner literature, on deep dive interviews of more than 50 board members and chairmen and AI experts, on several board workshops including note debates notes and polls of 150 board members, and on surveys of 105 board members from across the globe, including the members of the global INSEAD Directors Network.

We have collaborated with INSEAD via guidance from Professor Stanislav Shekshnia and INSEAD Directors Network President Helen Pitcher OBE and with MIT via Dr Stephanie Woerner.

During the webinar we shared insights from the research that highlighted the need for boards to engage, and we shared example of cases and related board questions for boards to ask.

Dr Stephanie Woerner shared results from their research on the impact of Digitally Savy Boards and highlighted related insights of the new research of top teams.

Our findings identified that boards need to develop two competence areas to successfully steward their firms into the new normal. They will increasingly need to learn to balance the [1] guiding of Al operational capability and [2] supervising of Al governance capability.

The areas boards need to increase their focus and ambition on are within guiding of Al operational capability: 

1) Data Strategy and Management, 

2) Digital and AI-based Innovation 

3) Developing Digital Business Ecosystem

 

within supervising of Al governance capability:

4) Data, Ethics and Black Box Decision Making

5) AI Cyber Security 

6) Leadership in Digital Business Ecosystem

In the book, we have also summarized guiding questions that can help boards move forward as they mature.

Examples of questions in guiding AI Operational Capability

Examples of questions in supervising AI Governance Capability

The academic research project “4boards.ai”, has been run under the coordination of Chalmers University of Technology and Professor Robin Teigland, with contributions from Digoshen and House of Innovation at Stockholm School of Economics, in collaboration guidance of IMIT, an educational foundation ensuring increased cooperation between academia and industry to improve research validity and speed up the uptake of the results, and with funding from Vinnova – Sweden’s Innovation Agency.

The launch webinar was recorded and can be seen here.

The presentation deck can be found here.

A longer version of this blog can be found here.