Author Archives: Karen LOON

Brave boards in a new world: What can gender diversity contribute

Date
Posted by
Brave boards in a new world: What can gender diversity contribute

OECD-CFA Institute Webinar in collaboration with INSEAD IWIB Club

By Marina Niforos, IDN Ambassador France and Non-Executive Director

On 29 June 2020, the CFA Institute and OECD co-organized a discussion on the challenges that boards are facing in the aftermath of this unprecedented crisis we are going through and on the lessons that can be learned for ‘building back better”. IDN Ambassador France, Marina Niforos participated in the discussion that aimed to address the role corporate governance can play in navigating the “new normal” and how board diversity can contribute to the reconstruction phase.

Josina Kamerling (Head of Regulatory Outreach, CFA Institute) opened the panel, stressing the following: Despite codes metrics and consistent efforts to increase gender diversity at Boards over many decades, change remains slow and does not always trickle down to action. Will this crisis present an opportunity for Women in Leadership? Uncertainty is the new normal: A Threat or an Opportunity?

While the participants came from different board backgrounds (regional, supervisory board, corporates, funds, insurance, infrastructure, sovereign funds) there seemed to be consensus on the nature of the crisis and the impact:

  • The nature of the COVID19 crisis is unprecedented, of a much larger magnitude that the 2008 financial crisis. People are questioning the fundamentals on both a professional and personal basis, as they are confronted with a threat on their own wellbeing and of the things they value most. A ‘grey swan’ or a ‘black swan’, the recent crisis has ‘put in question many past orthodoxies and shown boards that we cannot solve unpredictable challenges without increased diversity of thinking at board level.  As Georges Desvaux (Axa, Chief Strategy Officer) noted:

”Boards will require a new skillset, that goes beyond from the typical profile of a another CEO that was the preferred candidate of choice for board seats”.

  • In practice, according to Marina Niforos (NED, HCAP), corporate governance is facing opposing forces: on the one side, boards are thrown by circumstance into a crisis management mode, firefighting role that pushes the perception that ESG and general sustainability considerations are a luxury for “when times get better”. On the other hand, there is increasing pressures from stakeholders (customers, employees, investors, regulators and citizens at larger) that are stressing the need to address these issues as strategic in establishing trust and ensuring that economic recovery is perceived as possible and equitable by all. Boards and companies who are unprepared to provide credible answers and scenarios will be subjected to public scrutiny and reputational risk. McKinsey’s report Diversity Still Matters makes the compelling business case that companies with more gender diversity and ethnic diversity outperform their peers, contributing to the resilience and long-term performance of the organization.
  • Franca Ruhwedel (Professor and NED) stressed that, despite the focus on short-term risks, a positive development has been the change of tone and new culture of ‘discussion’ in Supervisory Boards in two tier systems, allowing SBs to move beyond a compliance, tick the box modus operandi to a more hands on, strategic approach and has fostered stronger ties between supervisory and management boards.
  • This crisis can be an opportunity to advance in the diversity and sustainability of boards and the companies they serve. Whether NEDs or executives, Boards need to seize the opportunity as to address these issues as a strategic medium-and long-term objective that will define their competitive advantage. The complexity of the new challenges, ESR ones at the front, and the agility required to adapt now call for new profiles, more connected to the market reality, the ones that will be able to figure out resilient scenarios and better solutions for long term sustainability.
  • This need for a diverse skills set on the Board, a greater stakeholder management experience and empathetic leadership presents an opportunity to go beyond the traditional profiles and closed network where board members were co-opted and allow more professional women to enter the pipeline. According to Marina Niforos, this will require professionalization of board searches and a move from credentials of that “make the board look good to criteria that make the board do good”. “Strategical broader vision expected from board members requires not only technical or industry specifics competencies but also a more global mindset and open-minded collaborative attitude that let opportunities for more diverse talents” said Nicole Gesret (CEO, SITG).

The Link between Diversity and Sustainability: How to measure Impact?

“Boards are accountable to contribute to truly to their shareholders but also to the overall ecosystem of stakeholders and to the next generation: how can we use experience to measure board diversity on corporate sustainability?” (Josina Kamerling)

There is a lot of discussion since the COVID19 breakout on the need to put sustainability squarely on the agenda of companies. In the past, many companies made bold statements about the importance of sustainability but few addressed it as part of business strategy, relegating it to the realm of CSR policy. The crisis has made people realize the fragility of our ecosystems and the vulnerability this implies for us and our societies. There is increasing grass roots momentum as citizens are very concerned about the future and potential threats and are pressuring their own political representatives to take sustainability considerations and climate more seriously and customers are challenging companies on the origin and quality of the products they buy. In turn, governments are mobilizing to ensure that climate becomes a policy priority with specific conditionality for companies, as for example in the case of granting EU state aid for the post-COVID recovery, eg. Air France.

Additionally, mainstream investment funds and asset managers are clamoring to claim the space of ‘green investments’, to discredit perceptions of ‘green washing’, creating new funds and making capital commitments for green investments (Goldman Sachs, JPMorgan) Yet, in order to take advantage of this wave of good will and translate pressure from stakeholders into lasting results, certain critical success factors need to be at play:

  1. Metrics are key: “what get’s measured, get’s done”.
  2. Convergence around a common methodology that allows for progress checking and benchmarking is important to provide transparency across industries and sectors. Initiatives such as the Taxonomy for Sustainable Finance at EU level is intended as an effort to provide a market standard. However, if tools are too complex to apply, SMEs who do not have same resources as large companies may find themselves at a competitive disadvantage.
  3. At the same time, pressure for compliance to these demanding standards will push boards to search for the requisite skillset, opening up more board seats for women and men.
  4. Training and corporate culture change is a continuous process and needs to have investment by the board: The skillset regarding Diversity and inclusion culture, same as ethics, is something that should form part of the continuing education of Directors, so that their more openness of spirit at board discussions, tolerance for dissension and move beyond just the simple ticking the box.
  5. Accountability for results: Boards need to hold management accountable for diversity and ESG objectives. In an environment of post crisis pressure management will be risk averse and unwilling to take on less conventional profiles on their boards. The board a s collective should ensure that management stays on track and does not lose its focus. The example of a ‘living cv’ that is a public registry tracing the past performance of Board Directors was held as a practical example of an accountability mechanism accessible to all.
  6. Board self-assessments: Beyond management, boards should exercise their own self evaluation at board and/or committee levels, with external evaluators when possible, to encourage introspection and have specific action plans when weaknesses are identified. Those can be publicly disclosed on company websites for full transparency.
  7. Diversity is not just a Board issue: diversity is not just a question of board composition but of the company talent management strategy as a whole, a strategic objective squarely under the Board’s oversight. It is important to ensure that a culture of inclusion is reflected is senior management and the different management levels of the company to ensure a robust pipeline.

Key Recommendations for policymakers and companies

  • Boards “Need to walk the talk”, to show demonstrable and measurable results not just paper. Demonstrate by example, as we have seen Danone in changing their legal status to a ‘purpose-driven company’. This type of public commitment then becomes a process for delivering results.
  • Policymakers should actively engage with private companies to encourage positive outcomes through the right incentives. This exercise should not be about format, but about a continuous dialogue and will require flexibility and persistence
  • Companies should not wait for the regulator to impose quotas or similar measures but should actively have develop their own self-governance initiatives to encourage diversity. • Setting quotas might work for some countries and cultures while others will be more resistant to top down approach.
  • Go beyond the compliance approach. You can comply with the law and still not do a good job. The important thing is to ensure transparency, report on what you are doing on diversity, have it on the board agenda, report on how do you do the selection and then let the market do its work.
  • Regulators should ensure, where they can, that boards have sufficiently trained and certified board directors and ask that it becomes the standard, thereby creating a market for these skills.

OECD Representative, Mathilde Mesnard (Deputy Director, Financial and Enterprise Affairs) closed the conference stressing that the crisis is perhaps creating a paradox. Women at the bottom of the pyramid are disproportionately impacted and data indicates that violence against women is on the rise since the outbreak, but on the other hand, we might have an opportunity to make a a difference for women in leadership and women on boards, if we manage to maintain momentum and put in practice some of the lessons learned.

We did not see it coming

Date
Posted by
Comments1
We did not see it coming

By Xavier Bedoret, IDP-C, IDN Belgium Ambassador and Consultant in Corporate Governance

The arrival and subsequent impact of the current coronavirus crisis has taken many organizations and states unaware.

This phenomenon can be best explained as the appearance of a metaphorical “black swan”. The theory goes that human beings will assume that, because all the swans they have seen in their life are white, all swans must be white. It is a classic error of induction resulting from one’s limited experience in life (I have not seen it) or from one’s cognitive biases (I do not want to admit that I have seen it).

As a matter of fact, the error arises from an individual or entity having been blind, having been unprepared “not having seen it coming”, or not having considered “unknowns”, as Donald Rumsfeld put it.

Nassim Taleb, Researcher and Risk Analyst, identifies three reasons why we do not see these events coming:

  • The world is too complicated and random to understand what is really going on;
  • We are very good at making sense of events after they have happened; and
  • Putting elements into categories (which we do to make sense of things) always oversimplifies reality.

As we can see from the events unfolding today, this blindness can have a severe impact on human society.

How can companies avoid these “black swans”?

First of all, let’s make the distinction between (1) risks – that are manageable; and (2) uncertainties – that are unpredictable.

  • Let’s define risks as events that may be predicted, monitored, hedged, insured or avoided. In today’s corporate world, risks are studied, measured, and even exploited. The risks that fall into the category of “high probability and small impact” are considered part of the daily management of operations. These are the responsibility not only of the risk manager but of each front-line manager who is in charge of dealing with those manageable risks.
  • Let’s define uncertainties as unknowns. By definition, we cannot know the nature, the size, the timing, … or anything, about these unknowns. Companies cannot find on the market an insurance policy that adequately covers events with a “very low probability and a very high impact”.

The audit committee today is in charge of risk monitoring. They establish a strong communication line with the company’s risk manager to ensure the board’s risk appetite and the field risk mitigation are aligned. This will ensure that manageable risks are well monitored through sound processes. As we know, moderate risks lead to good business and a healthy company.

As the Danish proverb goes “forecasting is difficult, especially when it concerns the future”. The audit committee should, therefore, approach the subject of uncertainties in a different manner:  leaving the path of prediction and taking the path of agility, seizing opportunities, and avoiding rationality and argumentation.

  • Maintaining agility means:
    • training the muscles of the corporate strategy: design various scenarios;
    • Ensuring the adaptability of the organization: encourage speed of reaction;
    • Promoting the flexibility of the people and systems: break silos and develop networks.
  • “Chance favors the prepared” said the French scientist Louis Pasteur. Opportunities are seized by companies that are vigilant. The board should foster the company’s exposure to positive contingencies that might be as beneficial as negative contingencies might be hurtful.
  • Avoid rationality and argumentation since, as Taleb explained, relying on it is the very reason why boards and audit committees do not see these “black swans” coming.

Xavier BEDORET is a consultant in corporate governance. Drawing on his experience as a certified accountant, financial controller, internal auditor and committee chair, he gives audit committees support and guidance for improving their actions.

The evolving role of the board in a COVID-19 environment

Date
Posted by
The evolving role of the board in a COVID-19 environment

Boards are spending more time on people matters, as stakeholder expectations change, according to IDN members

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

IDN members had the opportunity to share their recent experiences in the board room, including on sustainability in an IDN digital dialogue held on 30 June 2020.  The session, which was attended by 65 international board members from 26 countries, was facilitated by Liselotte Hägertz Engstam, IDP-C and IDN Board Member with opening remarks provided by IDN President, Helen Pitcher OBE, IDP-C.

COVID-19 has generally accelerated the change taking place in companies, however, it has refocused good companies of the importance of their people and the environment they operate in.  Members shared that, despite some focus on short term objectives, there was a sense that sustainability will become central to how things are done.

“The question which all boards need to ask themselves is, when times get tough, do you abandon good principles for short term gain, or double down for the long-term benefit of all?”– Jeff Scott, IDP-C, IDN Board Member.

Three key themes emerged from the breakout room discussions facilitated by IDN Board Members and ambassadors.

Increased people centricity

IDN members have been very busy in the past six months, given the rapid changes in some of their companies, yet recognise that there is a need to balance their oversight roles, and provide unconditional support to management, without getting in the way. Many boards were focused on supporting the physical and mental well-being of their people, particularly as working remotely becomes more customary.

For board members, having agility at the right time, empathy to thank management and staff for their responses to the crisis, and re-connecting with management through the purpose of the company was viewed as essential.

Continue to focus on the long term

Whilst the risks which companies need to manage have changed as a result of the crisis, many board members are increasingly focused on long term perspectives as executives are overwhelmed with shorter term priorities and challenges. This includes reflecting on the company’s purpose as stakeholder expectations change (especially people, customers and regulators, as differences arise between jurisdictions); ensuring there is more proactive communication between the board, management and stakeholders; and focusing on how companies can maintain a healthy corporate culture.

Keep sustainability on the board agenda

The views of IDN members on whether boards are focused on sustainability were mixed. A number of members were concerned that sustainability is being perceived by some boards as a luxury/nice to have, and it is dropping off the board agenda as boards focus on the survival of their companies.  Others felt that if it was not already engrained in the DNA of the company, it has crumbled during the crisis.

There was a general sense that it is important that sustainability is put back on the board agenda, given the increasing reputational risk and brand perception if nothing happens, increasing pressure from investors who are pushing for more “green performance” and new regulations which require ESG disclosure and reporting.  Others cited that customers increasingly are expecting that companies are sustainable.  Some believe that sustainability starts with us as directors and what we do at a personal and work level; we have a role to demonstrate commitment and should take the opportunity to “bake in” sustainability into the fabric of the companies we work with, so it is embedded in the culture and behaviours of the business.

 

Other discussion areas included the challenges for the remuneration committee given financial and regulatory pressures, and ensuring that companies learn from other countries and companies to enable a rapid response, for example China.

In her session recap, Helen Pitcher OBE said:

“The time flew by, the sessions were energetic and insightful demonstrating both the calibre and deep knowledge of the Directors present, as well as the excellent way they have risen to support their many and varied Boards through the pandemic. All Directors had maintained a focus on the long term, whilst responding to the immediacy of the challenges”.

She concluded that it is important for non-executive directors to maintain a balance when supporting their companies through a crisis.  This includes supporting long term performance (agility, results, and liquidity) of their companies, people (through empathy), and sustainability (transparency, purpose and ESG).

Why boards have a duty to reinforce resilience

Date
Posted by
Comments0
Why boards have a duty to reinforce resilience

By Didier Duret IDP-C, Non-Executive Director and Independent Adviser

Change is risky for firms and boards of directors must see beyond talk of disruption and innovation to ensure companies focus on their essential qualities and a handful of best practices

The current global lockdown, enforced by governments to minimise the Covid-19-led public health emergency, has led to the shelving of many firms’ multi-decade strategies to correctly allocate resources across different regions.

Boards of directors must now re-focus on their organisations’ long-term resilience. This must not be confused with short-term crisis management, which demands quick reactions, analysed relentlessly across digital media.

Prudence and strength

Resilience is a mixture of prudence and strength before a crisis and should be ingrained in firms. It is defined as “the degree of freedom we can deploy to act on events we cannot control”, by Boris Cyrulnik, French psychiatrist, author and Holocaust survivor. For most firms, it derives from a mix of efficient risk management and organisational flexibility. In order to boost resilience, boards must question assumptions, nail down governance principles and adopt sound stewardship.

The idea of resilience in business was popularised by Nassim Taleb in his 2012 best-seller Antifragile: Things That Gain From Disorder, which argued that both humans and organisations are poorly equipped to cope with shocks that accelerate change and have cascading consequences. While hardwiring to think in categories has helped our species survive, most phenomena in nature and society follow non-linear patterns with little respect for categories. Although we can model risk from yesterday’s data, we cannot apply it confidently to tomorrow’s uncertainties.

In modern corporate life, despite a professional culture that has elevated disruption to a virtue, change remains risky and unpredictable. Many start-ups do not survive, and large firms struggle to adapt. Disruptive ideas facilitated by ‘agile management’ have limited impact once they encounter bureaucratic inertia. The board is in a key position to see beyond management techniques and reflect on the essential qualities of a resilient firm.

Focus on what works

Rather than being hypnotised into a reverie of ‘innovation’, it makes sense to focus on a handful of best practices. Of these, financial resilience and access to cash is the most important. Heavy debt and weak solvency ratios undermine resilience. Boards have explicit responsibility for their firm’s capital structure and access to finance, plus oversight of remuneration and dividend and share buyback policies. In a crisis, when survival is at stake, board members may seek access to new capital, renegotiate bank loans or seek being bought out by a larger firm. Board oversight is crucial for the firm to exit a crisis with resilient, if battered, financials.

Diversification of activities, markets, products and suppliers makes good business practice. Diversity of opinions, talents and skills among management, staff and board members also contributes to strategic resilience. A mix of genders, races, cultures, languages and expertise strengthens reliability of operations and leadership competencies. External advisers and independent board members can help identify new trends signifying a paradigm shift. They reduce groupthink and corporate bias, constructing a vision differing from the past. External think-tanks or business school experts can be valuable resources for the board to refocus long-term strategy based on short-term crisis-induced changes.

Discernment through judgemental resilience is a major governance skill exercised by the board. It can be reinforced to balance quantitative resource optimisation versus qualitative operational resilience. Better data-driven “dashboards” do not mean better resilience, just as last week’s stock price does not tell us what next week’s will be. The board can ask the CEO to review crisis planning and solidity of the strategy though a qualitative-scenario lens differing from traditional quantitative-scenario planning. which, most of the time, is consensual to the industry or macro environment.

ESG goes mainstream

Environmental, social, and governance (ESG) policies have become mainstream, reinforcing resilience by reducing financial, operational, and reputational risks through selecting reputable commodity providers or avoiding financing controversial industries. But ESG-driven governance does not guarantee resilience. Recent 20-year-low oil prices are just as disruptive for power producers using wind farms and solar panels in the transition to renewable energy as for shale oil firms, radically transforming capital spending plans. But today’s unprecedented economic crisis is impacting global social and political dynamics as well as consumers’ visions of the world and leadership expectations. Authentic ESG culture may yet prove a competitive advantage in the post-Covid-19 ‘new normal’.

Humility offers a hidden dimension to resilience, counterbalancing the excessive risk-taking and corporate hubris associated with charismatic CEOs. Would WorldCom have survived with board members questioning its overmighty CEO Bernard Ebbers more explicitly? Good practice involves yearly independent assessment of performance and behaviour of the board chairman, members, CEO and executive committee. Humility does not mean timidity, as it can be courageous. An advisory board I sat on during the early weeks of the Covid-19 crisis pursued investment in strategic areas that had suffered from heavy losses through massive disruptions, but gave the CEO wide latitude to implement high-level decisions.

I believe boards of directors, by focusing more on conditions for resilience, can help firms achieve better financial, ethical and environmental results. Resilience in all its aspects, has become a strategic requirement and unless boards take a more socially-oriented and strategic outlook for their organisations, billions of people will suffer, to the ultimate detriment of these firms.

Didier Duret IDP- C is a non-executive director, an investment committee member, and independent adviser to several private family offices and foundations. 

This article was first published in the Private Wealth Management Magazine from the Financial Times on 23 May 2020, and can be found at https://www.pwmnet.com/Wealth-Management/Business-Models/Private-View-Blog-Why-boards-have-a-duty-to-reinforce-resilience

Fat Cats or Heroes? The Dilemmas of Executive Pay

Date
Posted by
Comments0
Fat Cats or Heroes? The Dilemmas of Executive Pay

By Helen Pitcher OBE, President of INSEAD Director Network, Experienced Chairman, NED and Board Committee Chair

The world is focused on the tragedy of the Covid epidemic and the horror stories of death, financial hardship and vulnerability within communities and ethnic groups.  As companies battle to survive by rapidly changing their operational management processes, and responding fairly and ethically to the challenges, there are few businesses untouched by this crisis.

As we gain more traction and control in the disease contagion phase, government and businesses are turning their attention to the looming economic crises which will follow in the aftermath of this pandemic.

Executives in the depth of the crisis are experiencing a peculiar maelstrom around the issue of executive pay.  At the same time these executives have worked harder and longer than ever before, focused on sustaining their businesses, often taking voluntary pay cuts, questions are being asked about the levels of their current and future pay.  These questions are primarily being driven by the Investment industry and represent a triple whammy; questioning bonuses to be paid for largely last year’s performance, questioning the validity of any bonuses to be paid for this year due to crystallise next year, questioning the short- and long-term award of ‘Long Term Incentive Plans (LTIPs) designed to focus on business sustainability.

While Boardrooms have been supporting and guiding their executive teams through the immediate threats and issues for their workforces, customers, and the broader stakeholders, there has been a growing dilemma for Boards and Remuneration Committees, as to how effectively they respond to the thorny issue of executive pay in both the short and longer term.

Even before this crisis there was an increasing groundswell for the re-alignment of executive remuneration to reflect the realities of performance and to introduce a concept of fairness.  This focused on executive remuneration being more in line with a defensible stance on the actual performance of the business.  Being more critical about whether the executive performance actually made a difference to the business and considering the general equality of pay levels within the company and society.  The ‘Fat Cats’ campaign has been gaining momentum leading more and more institutional shareholders to question executive remuneration, particularly in the pensions field, where the ‘special’ executive pensions are becoming increasingly exposed and Remuneration Committees are focused on aligning these with the company’s general pension provisions.

In the turmoil of this debate and the immediate threats to the business escalated by the Covid crisis and in the face of the immediate threats to the business, executives have been stepping up to the plate.  We have seen reductions in their pay and bonuses, with pay cuts of 20-40% and bonuses forfeited whilst individuals are working significantly harder to minimise the impact on their businesses and quickly develop new ideas, processes and creative solutions to tackle problems.

The nightmare for the Chair of any Remuneration Committee is how to balance these new realities and pressures, whilst anticipating the short- and long-term outcomes.  Nobody wants to do a ‘Persimmon’ by introducing schemes which cause a crisis of reputation and credibility and then having to explain themselves to a Select Committee in 18 months’ time.  This vortex of reputation even encompasses the ‘Covid-free’ businesses which have ‘boomed’, such as big pharmaceutical and healthcare companies, who continue to pay executives ‘top dollar’ with potential bonuses on the way.  Will they be seen as the ‘hero’s’ who saved us or ‘carpet baggers’ who profited from our woes.

In particular the Investment Association (IA) representing the biggest British Investors, has taken a very tough stance suggesting, “companies that have received government support to help them through the coronavirus crisis should cut executive pay and consider clawing back bonuses from bosses”.

The Remuneration Committee and the Board now have the responsibility under the revised ‘Code’ to consider all stakeholders in their decision making and are required to articulate and clearly communicate their approach.  So how will their actions look in the eyes of the shareholders, employees, suppliers, customers and broader society?  The government has also taken a stance; ‘a spokesperson’ for the government department for Business, Energy and Industrial Strategy warned that they would “expect companies to act in a socially responsible way and exercise judgment and discretion when considering executive pay”.

The reputational risk if you are furloughing people or making drastic salary cuts to rank-and-file workers while the executives continue getting big pay packages, is profound.  As always, timing is everything, with questions about this year’s bonus declarations, from last year’s performance occurring now and the equal dilemma of setting this year’s performance levels for bonuses to be paid in 2021 still being in flux.  It is perceived that the tone for bonus payments for 2021, will be pretty poor or possibly non-existent, just as executives should have a “maximum performance attitude” to deliver results and survive.  There is also a significant communication vacuum creating high levels of uncertainty for executives, with many boards saying, ‘let’s just see what it looks like’.

The granting of LTIPs is a particular dilemma at the moment.  Pervious grants have been dented due to the Covid economic winds, while new grants offered at a very low share price could potentially generate windfall gains, for little more than being there.  However, while there are challenges, Remuneration Committees do have much more ‘discretion’ written into their plans these days, which provides them with greater opportunity to fine tune bonuses and share grants more easily, never forgetting the imperative of effective communication to all stakeholders.

The bigger picture is also lurking in the background.  The Covid crisis will mean many businesses will be doing things differently with remote working as a good example.  They have been presented with the opportunity to radically rethink their approaches and processes with many grasping this will both hands.

Consequently, is it not the time to also rethink Executive Remuneration which has been stuck in a rut for many years with little innovation?  In particular as we respond to the gathering momentum for equality, inclusion, and diversity, the ‘old’ way of rewarding executives should be refined.  There is little resistance for true performance reward, but it is how you decide what is to be rewarded and the proportional scale of the reward that is crucial.  There is the sense that it is commercially and morally right for Boards to reduce very high levels of pay.  While many of the current actions on executive pay might be necessary they are a temporary measure in unprecedent circumstances, but could also be the trigger for a more permanent change in attitudes to both the levels and make-up of executive pay.

The following pronouncements have been made from the IOD, “Ideally, pay policy during a crisis would be designed to encourage the whole organisation to pull together” and the IA “During this exceptional period we expect companies to adopt an approach that is appropriate to their business and the specific impacts of Covid-19, being careful to ensure that executives and the general workforce are treated consistently. ”Where does that take us?”

Maybe this is the opportunity for Remuneration Committees to ‘move the dial’ by incentivising performance on a wider range of targets including, diversity, climate change, gender and team performance.  What are your executive doing which is different?  Have they grasped the new challenges and solutions for the future or just fallen back into their old ways?  While it is easy to be cynical that the IA for example, is taking the opportunity to ‘have a go at the executives’ their members such as Blackrock, have for some time been calling for wider changes in business, recognising the broader stakeholder responsibilities to society.

Never before have the ‘collective wisdom’ of Boards and the Remuneration Committees been of such potential value.  While there are no magic solutions, the careful communication out to all stakeholders and executives will be a significant performance factor for the Committee itself.   The challenge for executive teams is that people will need to make a huge contribution to the business during the crisis, and use innovation and ingenuity to navigate their companies through difficult times. The ability to sensitively reward key executives who will be the current and future sustainability drivers of the business is a key role of the Board and Remuneration Committees.

While there will be little commiserating with relatively well-paid executives in these testing times, it is however, the executives in the commercial sector who will lead our businesses to survive and flourish in the immediate post contagion economic crunch.  The commercial sector shareholders (pension funds), employees, and suppliers will be hardest hit during the financial phase of the crisis, this includes the executives of those businesses who slim down or fail.  Boards will need to continue to retain, motivate, and reward those executives who perform and innovate successfully to accelerate their business through this retrenchment.

Ensuring executive reward is effective, progressive and not just a slash and burn exercise on executive pay, will require Boards and Remuneration Committees to exhibit the ‘Art of the Possible’ and the ‘Art of the Wise’.

First published here.

How a post-Covid 19 workplace scenario looks like

Date
Posted by
Comments0
How a post-Covid 19 workplace scenario looks like

Geographic borders will be removed from talent acquisition and put us all in global competition in a possible workplace scenario post-COVID 19.

By Kolja A. Rafferty, MBA, IDP-C and IDN Switzerland Ambassador

COVID-19 has catapulted us to collaboration 2.0.

Remote working has become the new reality. Whereas scholars are analyzing the effects on productivity, social dynamics, emotional side effects, corporations are already engaging in their own, economic assessments. The Corona crisis has forced us, to let go of our legacy understanding of office culture, as the maturity of technology supports decentralized and remote collaboration. Once we will return to a new normal, parts of this new form of collaboration will stay and transform our way to work in the future. Yet, companies will not “forget” to call back their employees to office, but economic incentives will foster further decentralization.

Three drivers are identified.

1. Talent will be competing in a global market

Remote work eliminates geographic proximity as consideration for recruitment processes. Suddenly, a candidate from a rural community is just as eligible for a position, as the applicant, living two blocks from the corporate HQ. In parallel, this is leading to a democratization of opportunities. Privileged access to job openings, based on geographic proximity is a pattern of the past. Talent, living in remote communities or abroad will be applying for jobs, inaccessible for them, just a few months ago. Globally decentralized teams, as we witness e.g. in the software industry, will be normal, soon also in other industries. This increases the pool of potential candidates for new hirings, hence leverages the bargaining power of the employer.

For employers no reason remains, to pay the same upmarket salary to all employees, if geographies, hence the cost of living, vary widely. The national minimum wages are quickly obsolete if recruitment is seeking for the equilibrium between supply and demand in a global market. Purchasing Power Parity (PPP) adjustments as part of a firm’s compensation scheme are to be expected. Already Facebook has been seen, to have introduced cuts on salaries of remote workers, who live in rural areas.

The combination of these elements holds a very important message for the workforce: In a post-Corona work environment, near to all employees are acting and competing in a global market. The skills and cost of labor are not any longer subject to only local conditions. Protection by national labor laws will be weakened and diminished.

2. Talent management will be like Just-in-Time Supply-Chain-Management

Extending the scope for recruiting to the global market place for talent offers firms the opportunity to onboard specific skills much more flexible than when being restricted to a local talent pool only. The idea of “just-in-time” delivery gives the right direction.

Whereas the flexible onboarding of highly skilled experts for specific tasks, becomes available also for SME firms, the flexible “rightsizing” of the workforce delivers additional benefits. Analyzing labor laws, we find significant differences between different legislations. Whereas the protection of employees is high in one country, it might be inexistent under another legislation. As protection (= inflexibility) comes at a cost for the employer, engaging “free agents“, that are operating under a more flexible legislation makes economic sense.

Taking advantage of arbitrage effects between different markets will allow employers to be more cost-efficient. Freelance- and payment platforms like e.g. Upwork.com, provide already today the technical infrastructure to engage freelancers from a global talent pool. Operating through these platforms helps firms to void risk and complexity of international labor law.

Hiring foreign talent has just become as accessible as the local workforce. Any form of employer commitment and administrative hassle to hire or fire staff is been excluded from the process. On the good side, this means to further democratize job opportunities, as also, visa and work permit constraints, and the hurdle of commuting (or relocating) is removed from the decision process for the employee. Also, individual time management, work-life balance, etc. is fully at the discretion of the employee. “Testing” a job, bridging between two assignments, creating extra income, etc. becomes feasible, regardless of distance and location.

Yet, the degree of competition in the workforce is increased again. In the long run, this puts another element to the test. Today costs for social security account in western economies for a significant portion of labor costs. Under the rule of global competition, it can be expected, cost positions being gradually minimalized. This can lead to increasing rates of unemployment in “social security”-strong economies and potentially compromise the integrity of the social contract in these economies. This suggests also lawmakers stepping in at a certain point, and creating a regulatory framework for outsourcing and decentralizing the workforce of the firms.

3. Office space will become obsolete

With an increasing decentralization of the workforce, demand for office space will decrease. Flexible workplace policies, moving to shared workplaces, etc. may be practical applications. Real estate companies will potentially look in a less rosy future or will be required to adjust their offerings to a more flexible approach, less scoping long term economic rents but more moving towards scalable office concepts, where fully furnished, high end facilities, provide IT infrastructure and services, to address the value-creating part of employee presence. Strong connectivity, conference, and workshop resources, high-end technologies for e.g. video conferencing, may come more in the focus, than the beloved cubicles in the shared office spaces.

Opportunities for lower labor costs will be a key for competitive advantage

In a post-COVID-19 work environment, areas to decrease cost of labor include:

  • Reducing costs per labor unit, by including PPP adjustments and arbitrage effects into HR hiring strategies.
  • Removing idle resources through the flexibilization (JIT) of knowledge and human resources, adjusted to the current demand for projects and the organization.
  • Reconsideration of required facilities, and potentially downsizing of space and repositioning the remaining facilities to areas of collaboration, rather than to “(administrative) production facilities”.

These trends are likely to reduce the required permanent number of employees of a firm to a bare minimum of individuals with a high degree of relevant competencies, corporate memory, and decision-making authority, within the specific context of the company.

The flexibilization effect of this trend will be experienced by employees, so far rather untouched by efficiency and outsourcing initiatives. With the evolving IT systems, supporting remote collaboration, processes, and data can be shared, that was out of the picture of decentralization and outsourcing before.

Inefficiencies for productivity, associated with remote working models, are considered to be overcompensated by the economic benefits. As in many other trends, it is fair to understand these as temporary. Over time, organisations and individuals will learn, how to foster efficiency despite distance.

HR will transform to talent procurement experts, key for the adaptability of the organization

Also, a department with, so far, a Snow White-like existence may find a new purpose. Human Resources is notorious for having a bad reputation and only low respect among line managers. Under the parameters of the new reality, the Human Resources department can become a broker of talents, vital to the performance capabilities of an organization. This elevates the HR department from an administrative pain for everyone to a strategic asset for the CEO.

The change we are looking at is not only operational. Whereas many start-up companies are already operating in the described mode, companies in legacy industries are far from being ready for this kind of transformation. This creates vulnerability and also economic inefficiencies, that might be exploited by more flexible and capable market participants.

Make or break – the role of the non-executive-board

Make- or breakpoint, will be in the culture of a firm, hence, also under the influence (and responsibility) of the non-executive board:

  • Is change embraced or is the organization reluctant to adapt to new market conditions?
  • Is HR seen as an administrative department, or a critical instance, to help to create the future?
  • Is the firm driven by a culture of accountability, as a basis for strong project management skills, critical for decentralized collaboration?
  • Is a strong vision in place, motivating and engaging employees, and creating trust between employees and executives, sustainable enough, to bridge the distance?

Take away – The post-Corona workplace reality will transform the way we work and offer chances for SME firms to globalize.

The new workplace reality is based on technology and is taking advantage of decentralization.

Digital champions have better chances to adapt and survive.

Whereas this holds the potential for cost efficiency, diversification of the team, and fast iterations of the evolution of the organization, a strong culture is key to be successful.

For an infographic of this article, read here

Loader Loading...
EAD Logo Taking too long?

Reload Reload document
| Open Open in new tab

Download

Kolja A. Rafferty, MBA, IDP-C is an author, consultant and executive.  Kolja focuses on situations of rapid change, turmoil and economic distress. He is operating for Private Equity investors and Banks in Europe and the Middle East, helping to resolve distress situations in companies of different sizes and sectors.

Have you Done the Math? Or: Growth– the Elephant in the Boardroom

Date
Posted by
Have you Done the Math? Or: Growth– the Elephant in the Boardroom

By Pamela Ravasio, IDP-C, IDN Board Member 

We need new business models that are not predicated on selling more stuff to more people.

Source: World Resources Institute, WRI

And because of our ‘Here and Now’, there is truly not much more to say. I could finish this post with the above quote.

After all, the quote states a truth that is as much a fact as is the expansion of the universe.

Except that:
Those ‘new business models’ the quote talks about, are not reality. Far from it. They’re not even considered a possibility by most companies.

Therefore not by most CEOs.

And therefore neither by most board of directors (BoDs), who are in charge of hiring exactly those CEOs that are in charge [Note to remember: it is the job of the board to hire the most adequate CEO. At least in principle].

I cannot conceive a successful economy without growth.

Walter Heller (1915 – 1987), former Chairman of the U.S. President’s Council of Economic Advisers (1961 – 1964)

Instead of in depth discussions about ‘new business models’ suitable and functional within the physical limitations of our resources, what we hear and read in business newspapers, in academic papers, and in policy proposals, are the following terms:

Green Growth (the E in traditional ESG):
“Green growth can be seen as a way to pursue economic growth and development, while preventing environmental degradation, biodiversity loss, and unsustainable natural resource use.

By accounting for environmental risks that could hold back social and economic progress and improving competitive conditions in the economy, green growth policies can help spur transformational change and ensure that investing in the environment can contribute to new, more sustainable sources of growth and development.”
(Source: OECD work on sustainable development 2011, https://www.oecd.org/greengrowth/47445613.pdf)

Inclusive Growth (the S in traditional ESG)
“[…] fostering productivity growth and reducing inequalities”.
“[…] a virtuous circle where growth translates into higher well-being for all and inclusiveness underpins stronger growth in a sustainable manner”
(Source: page 4 and 5 of “Bridging the Gap: Inclusive Growth 2017 Update Report” by OECD)

Sustainable Growth – a fuzzy catch-it-all
This term is used to mean any of the following: ‘repeatable growth’, ‘ethical growth’, and ‘responsible growth’. Each of which of course has its own meaning yet again (Source: Rick Miller on Forbes) .

  • Repeatable Growth: Having and maintaining a business that is capable of repeating its successes and continue to existing going forward.
  • Ethical Growth: Achieving the above repeatable growth all while keeping within ethical guidelines and not resorting to false play.
  • Responsible Growth: Advocates a balanced focus on profit, people and the planet (triple bottom line)

The Elephant: so dominant it is typically overlooked.

Or would it be more accurate to say ‘so dominant it has become invisible’? Because it has always been there. And presumed to remain always there also.

The above ‘growth’ terminology makes it evident that despite numerous studies showing that we’re approaching planetary boundaries (both, of climate critical dimensions as much as of physical resources) fast: every single company keeps advocating for producing and selling more units of X. And forecasts continue to add Y% every year to the profit expectations of the year before.

At best, each unit of X is created/produced in a somewhat less resource intensive manner.

A fact that normally is – again: at best – offset by the %-increase of units of X being produced and expected to be sold.

The total impact of the sum of all units X produced and sold (and then trashed) is still on a rather steep raising trajectory. How else could it be for a ‘prosperous economy’?

In the hope somehow, someone, somewhere will find the golden key, the silver bullet, our reality more often than not ignores, or maybe just forgets to apply to our businesses, the following key question:

Have you Done the Math?
[And applied it to you and your business?]

  • Have you looked openly and honestly at your dependency on natural resources and the associated limits on business growth as you define it today?
  • Have you calculated your return on stakeholder investment (RSI; more on this shortly on this blog) to see if you truly benefit the global society or if you in reality freeride on people, the planet, governments and communities?

For both of the above there are sufficient stats around – public and private – to come up with at least a reasonably appropriate, accurate and approximate number.

And: The role of the board?

Growth as we know it certainly has created prosperity, quality of life and to an extent happiness.

But only for the lucky ones of our global society, mostly in the so-called developed economies.

For far many others, the same holds not equally true. Rather, this ‘luck’ has come at the expense of the well-being of many citizens, mostly – but by far not only – in developing economies, as well as the planetary eco-system,

Growth as we know it is a thing of the past. Many have either not realised it, or simply choose to close their eyes to the blatantly evident facts of science (i.e. reality).

It does not require more than a simple act of insight to realise that infinite growth of material consumption in a finite world is an impossibility.

E.F. Schumacher (1911 – 1977), ‘Small is Beautiful’ (p.129)

When it comes to ensuring the long-term success of a business, the board of directors is the one who should be in possession of the sceptre and lead the charge.

Hence hire a CEO capable of tackling this elephant. And spear heading the take up of relevant KPIs (‘the math’) that will lead the organisations into the right direction.

And yet: it is a fact that hardly any board of directors has dared to approach this elephant in the room. For a simple reason: it is going against the grain of the currently acceptable and presumed to be ‘necessarily correct’ paradigm. A paradigm that says: without growth, no prosperity, no quality of life, no happiness.

Or more sloppily formulated: We lack sufficient imagination and innovation spirit to accept that there may indeed be a totally different approach, where ‘growth’ as we know it is irrelevant.

This traditional ‘growth’ paradigm must not only be called into question because it is outdated. But rather because as paradigm it is fundamentally wrong the way we have been trained and brought up to think about (see e.g. here, here, and here).

The new paradigm has at its core a minimum of two (mathematical, and therefore calculable) dimensions:

  • De-coupled dependence from natural resources and associated limits.
    • This would mean that availability and constraints related to scaling of the business are independent from any resources that available in finite supply.
  • Overall positive Return on Stakeholder Investment: the business is actually creating value for the stakeholder collective.
    • The stakeholder collective would encompass share holders, but also include communities, employees, local and national governments, the eco-system etc.

Any business model that ‘has done the maths’ accordingly to the above is a business model that at least in principle could be envisioned as a long-term viable undertaking.

For such businesses, there is and will be plenty of “room to grow’ – just differently than we can imagine it right now.

———————————————————————————–
Additional Questions worth asking your organisation:
– How exactly are you truly adding value, rather than just ‘stuff’, to the world? Are you adding value without making more ‘stuff’?
– If you still are making ‘stuff’: Is there a genuine, fundamental need for your product X?
– In other words: does the world, humanity, our global society really need more of X?
– Does product X, as well as its production, use any resources that are single-use and/or finite as at producing? If so, what is your fade out / replacement plan and deadline? How are you decoupling your product X from globally finite resources?
– Examples: coal, oil-based energy, petrochemicals, rare earths, precious stones etc?
– How do you measure your impact (the one of your organisation and all the operations and processes it relies on) on the well-being of communities you operate in?
– Examples: What are the outcomes of your stakeholder value calculations? Are you overall giving back more to society than you’re taking out? What about quality of life and ‘happiness’ with life in the communities? Do you contribute to reduce the material ‘needs’ gaps that truly needs closing? Or are you catering to the desirable ‘wants’ market? Is there an absence of blatant inequality of rights, power and wealth among members in the communities you work with and in? How small or big is the perceived (!) inequality in the communities you work in and with, and in the system? As how fair or unfair is the factually existing gap being perceived subjectively by the communities on an individual level?

First published on 9 June 2020 here.

The Board’s role in Cyber Resilience

Date
Posted by
The Board’s role in Cyber Resilience

Webinar with Katja Severin Danielsson and Dimitri Chichlo – 9 June 2020

On 9 June 2020, IDN members discussed the board’s role in Cyber Resilience with guest speakers, Katja Severin Danielsson, IDP-C, NED and Dimitri Chichlo, IDP-C, NED in a webinar facilitated by Liselotte Engstam, IDN Board Member, and with Q&A support by Hagen Schweinitz, IDN Board Member.

Cyber damage is accelerating

Katja shared that cyber damage has been increasing as companies are becoming more digital and has accelerated dramatically during the COVID-19 crisis. However, according to PwC’s 22nd Annual Global CEO survey, only 15% of CEOs strongly agree that their company can withstand cyberattacks and recover quickly.  Unfortunately, many boards are not engaged enough with cyber resilience, and need to increase their focus on it, and make it a key part of their agendas.  Further, Dimitri added that 76% of security professions are focused on detection and containment and not prevention.  For companies, it is not a case of whether they will be hacked, but when it will be hacked, and how much the magnitude of the impact of attack will be.  Dimitri notes that the 15% from the PwC survey is rather a grim figure, taking into consideration by how much senior managers are prone to overestimate their capacities.

Katja highlighted key messages on current status and what needs to be done of the World Economic Forum on cyber risk, and specifically emphasised that leaders need to create a culture of cybersecurity from entry level to top level of an organisation.

Source – World Economic Forum

Dimitri further noted that leveraging technology is an opportunity, however many companies were not prepared for the pandemic.

Five cyber risk governance principles

Katja shared the five cyber risk governance principles mentioned in the revised 2020 Cyber-Risk Handbook which was released out by the Internet Security Alliance, ecoDA, and AIG and which was supported by PwC Sweden.  This guide was developed for Europe, however, can be used by a global audience.  There are also specific handbooks developed for other markets for example the US and the UK market.

The first three principles are the responsibilities of the board, with principles 4 and 5 noting how the board should work with and expect from management.

The principles are:

  • Principle 1 – Directors need to understand and approach cybersecurity as an enterprise-wide risk management and strategy issue, not just an IT issue. Katja mentioned that cybersecurity should be integrated with business decisions, its assessment should be comprehensive, and it should consider the ecosystem of organisations (including third parties such as vendors and customers) which the company deals with.  Directors not only need to understand the technical IT matters but also operational matters which impact critical components of the business.
  • Principle 2 – Directors should understand the reputational and legal implications of cyber risks as they relate to their company’s specific circumstances. Katja noted that directors need to consider the industry that the company operates in and the type of company they have. They should note that the type of company impacts the standards which the company needs to comply with; some types of companies may need to maintain certain levels of security and comply with more transparency requirements, else face sanctions if they don’t comply with regulations.
  • Principle 3 – Boards should ensure adequate access to cybersecurity expertise, with appropriate reporting, at both Board and Committee level. Board members should be fully engaged, make enquiries and challenge management.  They also ensure that they have access to the right reporting, at an appropriate level of detail, in plain English which is understandable and easy to use.  Dashboards are often useful to follow trends.  They should integrate experts/competence into the board room for training.
  • Principle 4 – Board directors should ensure that management establishes an enterprise-wide cyber-risk management framework which encompasses culture, preventive, detective, and response capabilities, monitoring and communication at all levels.  Resources should be adequate and allocated appropriately by the strategies adopted. Katja stated that the cyber-risk management framework should be aligned to the organisation’s strategy.  Further, the risk management of cyber is an iterative process, whereby companies need to continuously update understand and act on the  changes in their threat profile and current risk position.  She highlighted the importance of understanding the company’s crown jewel assets, understand the current security posture – capture strengths and deal with the vulnerabilities, and ensuring that the controls and investment plans protect the right assets.
  • Principle 5 – Board-management discussions about cyber risk should include strategies on their management (mitigation, transfer through insurance or partnerships, acceptance, etc). Katja highlighted the importance of good reporting to allow directors to challenge management, and of the need to understand strategies that management plans to use to reduce/mitigate or avoid risk, considering the cost/benefit of the strategies. This to ensure investments in cyber security targets the company’s threat profile and contributes to the company being more secure. Ask the question to management “are we spending our money wisely”?

The guide has five tool kits which directors/management can use to benchmark their cyber risk governance.

Participants then engaged in a lively Q&A session which covered a broad number of topics including aligning the cyber strategy to the broader company strategy and day to day operations; how directors and their companies can improve their cyber resilience; whether boards should participate in crisis exercises; the benefits of having a cyber resilience committee; that cyber resilience is as much a HR/people and process issue than a technical risk; the importance of focusing on all stakeholders and dimensions when looking at the risks of a cyber attack (including financial, customer, reputational/media, shareholders, third parties/ecosystem partners); understanding the crown jewels of the company; and how to have the right knowledge of cyber at the board level, and across the three lines of defence.

Summary

In her closing comments, Katja noted that cyber resilience is a board responsibility, and

  • Cybersecurity is one of the fastest growing threats to organisations
  • Cybersecurity is an enterprise wide risk management topic not an IT issue
  • The board needs to increase insights and guide their organisation
  • Boards need to ensure the investments are targeted to company context
  • Boards are responsible to address these threats

Finally, Dimitri concluded by stressing the necessity to have technology and cybersecurity experts in boards, and not only business experts and leaders.

 

Recommended reading

Cyber Risk-Oversight 2020 Handbook – https://ecoda.org/wp-content/uploads/2019/08/ecoDa-cyber-handbook-Final-15.4.20.pdf

Impact of COVID-19 on Cybersecurity (PwC) – https://www.pwc.co.uk/cyber-security/pdf/impact-of-covid-19-on-cyber-security.pdf

CEOs face test of resilience in 2019 (PwC) – https://www.pwc.com/us/en/services/consulting/cybersecurity/PwC_CEOs-face-test-of-resilience-in-2019.pdf

Cyber Handbook 2020 (NACD ISA) – http://isalliance.org/wp-content/uploads/2020/02/RD-3-2020_NACD_Cyber_Handbook__WEB_022020.pdf

WEF Cybersecurity Platform – https://www.weforum.org/platforms/shaping-the-future-of-cybersecurity-and-digital-trust

Cyberattack Map – https://cybermap.kaspersky.com

Create and believe in the future – INSEAD Professor Nathan Furr

Date
Posted by
Comments0
Create and believe in the future – INSEAD Professor Nathan Furr

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

Now more than ever, leaders and boards need to take charge and help create a new and better future.

“Innovation is the ability to see change as an opportunity not a threat“ –  Steve Jobs

We were fortunate to discuss leaders & boards roles for corporate renewal with INSEAD Professor Nathan Furr, even prior to the outbreak of COVID-19 and the following pandemic crisis.  What truly strikes you when you listen to the podcast is how well he described the needed actions and leadership treats, that is in even more demand now, that will bring companies into a better future.

”Transformation may be one of the hardest things leaders are called to do. By transformation, we mean seeing the possible, valuable futures for your organization and then successfully overcome the barriers to create that future” explains Professor Nathan Furr

You find the interview in podcast form with Professor Nathan Furr  here.

Nathan outlined an excellent and relevant process for leaders and board members to follow to ensure they lead the way, which is fully relevant for most companies going forward from the current crisis and the pandemic. The process entails:

  • Envisioning the future
  • Break the bottlenecks
  • Navigating the unknown

Envisioning the future

To envision the future, leaders and boards need to break out of the ordinary and IMAGINE what is possible. Take the time (fence the time for the board and leaders), ensure INSIGHTS (bring forward insights about the trends from technology, political, geographical and demographical changes) and ensure IMAGINATION (help the organization to explore a valuable future for both the organization and its’ stakeholders).

This need to be closely followed by creating a way to BELIEVE in the future (create narratives on how the future will look, and find ways to tell it in an engaging way). There are many ways and tools to do this, some are described in Nathan Furr’s book Leading Transformation, (Harvard Business School Press, 2018), based on years of research and client engagements, with some examples shared in the podcast episode including such novel ways as working with Science Fiction!

Nathan also points out that the process is as relevant for individuals as for organizations.

A great question posed by Nathan to consider is

“What stories motivate you to take action?”

Break the bottlenecks

Breaking the bottlenecks is both an internal and an external process. In many ways it is closely related to culture and the way that processes have been fermented in organizations with little flexibility to change even when needed.

Consider revisiting decisions maps both formal and informal, but also look into the language and adapt closely to your company (“Are you an engineering company or a design company?). How have you aligned incentives, or even better, taken care and protected your change agents?

Navigating the unknown

Navigating the unknown is about prototyping the future. You need to construct as best you can an artifact trail from the future and backwards, and try to map them out in as tangible actionable steps as possible. You also need metrics, so you know what outcome you are trying to get, and measure the progress. And to ensure that you have bias for action, and start acting today. Get going and make sure you allow for experimentation, as not all insights and solutions will be there from the beginning.

Keep your eyes on

Professor Nathan Furr believes there are many organizations to get inspired by.

He points out Amazon as one example, for the reason that innovation is about, people, process and philosophy, and that Amazon have ´managed to implement both impressive culture as well as governance structure to make innovation happen. This means that they are not dependent on individual top leaders for either facilitating new ideas, nor for evaluating the ideas.

Nathan also points to Pepsi, which through their purpose and sustainability focus has managed to start their shift to healthy foods.

Roles of boards and leaders

We discussed specifically the roles of board members and leaders. Nathan’s view is that the role of boards and leaders are very important, as they need to give the guidance and help the organizations to see further, get outside of their short term mindset and operational issues.

Nathan believes boards and leaders need to help push the organization by asking:

“What else is possible? Where else can we go?”

Boards and leaders need to know that there are new toolkits for innovation, to innovate in a digital world is different, and that you can get more innovation with higher throughput of valuable ideas to a lower cost.

Advice to Board Members and Leaders

Nathan believes all leaders need to be a bit more of a Chief Experimenter. To help create the environment in the organization where you can discover and nurture new opportunities. And to do the same for yourself.

“Where in your own environment can you discover and test new insights?”

Learn more

Read the books published by Professor Nathan Furr:

Innovation Capital (Harvard Business Review Press, 2019),

Leading Transformation, (Harvard Business School Press, 2018),

The Innovator’s Method (Harvard Business School Press, 2014) and

Nail It then Scale It: The Entrepreneur’s Guide to Creating and Managing Breakthrough Innovation (NISI Institute, 2011).

 

You can also read related articles authored by Professor Furr

Growing resilience in uncertain times (INSEAD Knowledge 06/20)

Looking to boost innovation – partner with a startup (HBR 05/20)

Innovation Capital the secret ingredient behind the worlds most innovative leaders (Forbes 09/18)

 

INSEAD Corporate Governance Centre Executive Director Sonia Tatar shares insights on Corporate Governance Paradigm Shift.

This blog was originally posted here. 

The Evolution of Trust in the Era of Stakeholder Capitalism

Date
Posted by
The Evolution of Trust in the Era of Stakeholder Capitalism

By Beatriz Pessoa de Araujo and Julia Hayhoe

Enduring and sustainable corporate success hinges on trust. But trust is hard won and easily lost. This series of articles will explore the evolving “Trust Continuum” and how organizations can meet new expectations in the era of stakeholder capitalism [1]—not only of their shareholders and investors but all stakeholders—and build long-term trust based on purposeful, transparent and consistent actions and interactions.

We will examine global governance and the rule of law, the changing face of leadership, ethical technology and more in this series—uncovering the strategies that will enable corporations to become and remain trusted organizations. The purpose of business in society has not changed—the creation of wealth and job opportunities and making things or providing services people need. What is changing is the “how”.

In this post, we explore the evolution of trust in the seven years since Baker McKenzie’s last report on the state of trust in business. We find that efforts to build trust have continued, but the challenge today is greater and more complex as companies try to respond to the new demands of a complex ecosystem of customers, employees, shareholders, regulators and society at large, as well as externalities such as climate change and the ever changing political landscape.

In an environment where activism comes from all stakeholders, each with high expectations from boards and leadership, not only is trust a timeless concept, it is a continuum—where constant adaptation is a must for a corporation to build and retain its trust coefficient.

In Brief Way Forward
Trust will determine long-term sustainable commercial success. There are established links between trust, business performance and customer and employee loyalty. If trust is not already on your board agenda, ensure that it is now.
We are operating in the era of stakeholder capitalism in which society demands more from corporations and awards valuable trust based on actions and promises met. Whether your corporation is appropriately balancing the needs for a broader set of its stakeholders will determine the strength of its license to operate. Understanding your stakeholder ecosystem and meeting their expectations is critical.
Acting in accordance with business values and reporting transparently on performance underpins trust. Values are not a static set of promises. Ensuring they are aligned to organizational purpose, integrated into decision-making, reflected in compatible actions and that performance is transparently reported are the most effective ways for corporations to build trust.
Corporations need new strategies and systems to embed values, measure and report on matters of trust. Leaders need to look beyond the balance sheet and demonstrate a good governance framework, effective decision-making in the boardroom and across the organization and progress in their stakeholder engagement and action.

Why trust will determine success

Trust matters today more than ever before. In the era of fake news, online animus and political polarization, trust is the lens through which people make decisions about what they believe in and value. Research has also proven the connection between trust and commercial success—the most trusted organizations experience better financial performance [2] and build particularly loyal customer bases [3] and workforces. [4] Trust is currency—valuable, measurable and actionable.

In this environment, society is demanding more from corporations, leaders and investors on critical issues such as the climate emergency and rising global inequality, and its members award their trust based on whether companies are “doing the right” thing at this critical moment. This is the new contract of trust with business—its license to operate—and has given rise to the notion of stakeholder capitalism, in which organizational purpose balances the interests of customers, employees and communities with those of investors and shareholders. As people are using their voices, capital and the law to advocate for more ethical and inclusive business practices, they are pushing corporations to be more transparent as to how they honor their commitments. We have clearly moved from an era of words to one in which supporting actions are essential.

From implementing environmentally-friendly manufacturing processes and bringing clean energy to communities in need, [5] to creating inclusive workplaces and helping people to overcome barriers to economic opportunity, [6] corporations are seeking to deliver for a broader set of stakeholders. Similarly, the world’s largest corporations have rallied around a shared responsibility to people and planet as well as profit in the Davos manifesto and Business Round Table. [7] At the same time, guidance is shifting to legislation on issues including sustainability, pay, diversity and climate risk and opportunity reporting, as can be seen for example in the form of a “Green New Deal”. Yet indicators show that trust in business remains elusive. [8]

Turning values into trust

Business decisions and actions are increasingly visible through reporting obligations and via social media, making it easy to be called out for inconsistency and thereby eroding valuable trust. Society now demands that corporations play a positive leading role in addressing critical issues. The significant task for businesses in the coming decades will be to employ new strategies to embed values, measure and report on matters of trust. With trust and a strong supporting corporate culture, businesses can better balance the demands of all relevant stakeholders, including shareholders and investors.

An essential step for demonstrating consistency and transparency will be developing robust internal and external “logic”—a way of demonstrating how decisions are taken and clear lines of responsibility that aligns governance, employees, customers, technology and regulation. This is where corporate values become cultural and systematic norms—where consistent action and transparent reporting will be key to retaining and building trust. Leaders will need to look beyond the balance sheet to measure and demonstrate how they are progressing in their stakeholder engagement and action. This means deciding how to measure, collect and understand key nonfinancial data. Values-driven assets can include corporate culture, D&I measures, executive pay, and environment, social and governance (ESG) indicators. These and others are all potentially valuable assets that should be considered for inclusion in corporate reporting. Encouraging statements have also been issued by investors, indicating that these items will also be valued by them when they consider which companies to invest in and exit.

The way corporations are currently structured and organized can make this difficult to achieve. Ensuring corporate purpose, values and standards are integrated across large multi-national workforces, complex supply chains, vast networks of subsidiaries and outsourced interests—and that these are reflected in compatible actions, interactions and decisions—is perhaps the greatest challenge businesses face in relation to trust. While accomplishing this may create legal and reputational vulnerability for corporations, today’s radically transparent and rapid social media world mean that simply complying is not enough—how compliance is achieved is equally important. With aligned and effective governance, leadership, employee engagement and ethical sourcing alongside “green” investment decisions and responsible tax policy, business purpose will become an applied enterprise, not a static set of promises.

What’s next for trust?

Trust is no longer static or singular and there remain real challenges and practical considerations to retaining and building trust. Among the important questions we will explore in this series are:

How can non-listed companies build a higher governance standard for themselves to support values-driven action—in the absence of the strict frameworks that govern listed organizations?

As workforces, processes and interactions are increasingly augmented by technology, can they assure its ethical code? What is the changing face of leadership needed for the future success of the corporation?

Do incentives align with expected behaviors?

How can businesses effectively assess what if any risks and opportunities climate change brings for their organization?

As organizations balance shifts in globalization and protectionist trends with the rise of stakeholder capitalism, how can they establish practical global corporate governance frameworks which allow them to become more responsible and at the same time more nimble and efficient?

The organizations that survive and thrive sustainably in the long-term will be those that tackle these complex questions head on and seek to understand and operationalize trust: The Trust Continuum.

The financial imperative to do so is clear—trust translates into long term sustainable financial performance. But the societal imperative is also strong—companies’ license to operate is contingent on securing the trust of all their stakeholders, both internal and external.

Beatriz Pessoa de Araujo IDP-C is a partner and Julia Hayhoe is Chief Strategy Officer at Baker McKenzie. This post is based on their Baker McKenzie memorandum which can be found here, and has also been published by The Harvard Law School Forum on Corporate Governance.

Endnotes

1 Davos Manifesto, 2020 (go back)

2 Harvard Business Review, 2016 (go back)

3 Edelman Trust Barometer, 2019 (go back)

4 Edelman Trust Barometer, 2019 (go back)

5 Ikea Foundation, 2018 (go back)

6 LinkedIn, 2019 (go back)

7 World Economic Forum, 2020 (go back)

8 Edelman Trust Barometer, 2019 (go back)