Tag Archives: Boards

Getting your first board position

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Getting your first board position

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

What are the key actions that will increase the likelihood of getting your first board position?

INSEAD Directors Network (“IDN”) members recently had the opportunity to learn more about experiences and insights into the board recruitment process from four experienced IDN members:

in an exclusive webinar for members held on 1 December 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.

Participants heard from the panellists about their experiences getting their first board roles and growing their board portfolios.  They also had the opportunity to also to learn more about how an executive search firm can help directors.  Key advice by the panellists included:

  1. Invest in ongoing board education
  2. Have a clear vision on what roles make more sense to you
  3. Do thorough due diligence
  4. Build your board experience by collecting different facets of experience
  5. Don’t go it alone – find a mentor and a tribe to share and learn from
  6. Build your networks

Invest in ongoing board education

  • Continuous board education is important for all directors, even if you have had board roles as part of your executive career.
  • For international directors, consider both board education in your local market(s) as well as continuous education from programmes such as the INSEAD Directors’ Programme (“IDP”) and subsequently via the INSEAD Directors Network. The IDP programme provides participants with new perspectives including on the values and capabilities which they needed to act as independent directors and allows them gain greater perspective on the role of the board.
  • Keep your governance knowledge up to date but keep it practical and fit for purpose.

 Have a clear vision on what roles make sense to you

  • Do upfront research on what are the geographies, sectors and companies where you can and wish to best contribute. What is your unique selling proposition?  How many boards do you wish to be a director on?
  • Choose your targets by doing your research – what is the story behind the story i.e., what are they really grappling with at the boardroom table?  How might the current composition of the board be playing out?  Form a hypothesis and climb into the mind of the Chair.  What value do you bring both to the scenario and the different thinking styles and experiences of the board?
  • Get clear on your positioning so that people can easily remember you, build a networking plan (see below) based on the above research.
  • Prepare well for your interviews.
  • Collect your war stories for example from your executive, particularly crises requiring a collective with backbone to work through the issues, or influence across authorities – indicators of how you might perform on a board.

Due diligence

Be thorough on your due diligence on potential board roles.  Understand red flags and the culture of the organisation.

Build your board experience by collecting different facets of experience

  • Build your board experience by collecting different facets of experience to broaden your value offering for example industries, types of transactions/corporate actions, different stages in the life cycle etc.
  • Be willing to start on non-profit organisations and advisory boards.

Don’t go it alone – find a mentor and a tribe to share and learn from

  • Don’t go it alone, find a tribe to share experiences with and learn from (for example IDN, your local director association, Women on Boards).
  • Find a personal mentor (for example, a senior board director) who can help a new director to fine tune their communication styles for effective board decision making, taking into consideration personal values and styles. This will help you increase your confidence to look for further roles.  Consider joining IDN’s mentoring programme.

Networking externally and within your boards

  • Make yourself visible and able to be found. Ensure your LinkedIn bio is up to date.
  • Let people know that you want board roles (both your close contacts and more broadly).
  • Consider doing some public speaking at events or associations or industry specific events, writing a column in a publication or starting a business blog to position yourself as an expert worthy of being considered to sit on a board. IDN members may wish to volunteer to contribute to IDN’s regular blogs.
  • If you are not yet on a board, and still in an executive role, see if you can find opportunities to present in front of your current board to get familiar with the board rooms, dynamics, and structure.
  • Seek active endorsement and references from people who have seen you presenting and interacting in a boardroom.
  • Finally, if you are already on a board, don’t forget to focus on building strong personal relationships with your director peers and management.

IDN’s mentoring programme which is available exclusively for IDN members will be accepting applications in early 2021.  

 

INSEAD Directors Network, IDN – An INSEAD Global Club of International Board Directors.
Our Mission is to foster excellent Corporate Governance through networking, communication and self-improvement. IDN has 1500 members from 80 countries, all Alumni from different INSEAD graduations as MBA, EMBA, GEMBA, and IDP-C. We meet in live IDN webinars and meet-ups arranged by our IDN Ambassadors based in 25 countries. Our IDN website holds valuable corporate governance knowledge in our IDN blog, and we share insights also to our LinkedIn and Twitter  followers. We highlight our member through quarterly sharing of their new board appointments and once a year we give out IDN Awards to prominent board accomplishments. We provide a peer-to-per mentoring and board vacancy service and we come together two times per year at the INSEAD Directors Forum arranged by ICGC. We also engage with ICGC on joint research.
About INSEAD Corporate Governance Centre.
Established in 2010, the INSEAD Corporate Governance Centre (ICGC) has been actively engaged in making a distinctive contribution to the knowledge and practice of corporate governance. The ICGC harnesses faculty expertise across multiple disciplines to teach and research on the challenges of boards of directors in an international context and to foster a global dialogue on governance issues with the ultimate goal to develop boards for high-performance governance. Visit ICGC website: https://www.insead.edu/centres/corporate-governance

Cognitive Biases on the board & Corporate Climate Change Inertia

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Cognitive Biases on the board & Corporate Climate Change Inertia

By Pamela Ravasio, IDP-C and IDN Board Member

The influence of decision bias is nothing new when scrutinizing corporate governance. For good reason a not insignificant amount of time during INSEAD’s International Directors Programme (IDP) is spent looking into decision biases as well as learning about how to remedy them in the board context.

Further, we all are aware: The consensus that climate change is having already huge consequences not just for the planet but also on corporate operations, risk profiles and profits. And yet: by and large businesses continue to fail to adjust their strategic decision-making processes to become more climate viable. At best they have just barely started on their journey.

Why is that? As we look deeper into the corporate discourse on Climate Change, it becomes evident that one of the silent yet crucial culprits behind the climate change inertia lies in the cognitive biases at play in corporate decision making.

A recap on decision biases: What is it, and what types exist?

There exist a plethora of cognitive biases recognised in psychology and decision making theory. Only a subset however seems to be of practical relevance for the decision process on boards. Some of the most frequently encountered biases in this context are the Anchor Bias, the Loss-Aversion Bias, or Availability Bias – all of which are being looked into during the IDP.

Equally drawing from the IDP: A good part of the Fair Leadership Process is also intended to neutralise such decision biases, or at the very least to make them explicit and challengeable.

Decision Bias and ESG: Cause and Effect

A 2017 California Management Review article found that in the context of corporate decision processes related to Climate Change – notably on boards – four bias types are of particular relevance: Framing Bias, Optimism Bias, Relevance Bias, and Volition Biases.

What are those biases, what do they mean for boards in the context of strategic Climate Change decisions, and what can be done about it?

Bias 1: Framing Bias:

  • Definition: “Framing bias occurs when people make a decision based on the way the information is presented, as opposed to just on the facts themselves. The same facts presented in two different ways can lead to people making different judgments or decisions.” (Source)
  • Board decision impact: Already framing the issue for example as ‘Climate Change’ rather than ‘Global Warming’ or ‘Climate Emergency’ disguises the urgency with which actions are needed, as well as the extremely tight timelines, and concentrated actions and investments needed. Framing is often decisive in identifying how urgent, critical, and bottom line relevant an issue is.
  • What to do about it? Language matters. Choosing wording carefully is a good start. Spelling out underlying assumptions is another good way to get to a more realistic picture of reality.

Bias 2: Optimism Bias:

  • Definition: People tend to overestimate the probability of positive events and underestimate the probability of negative events happening to them in the future. (Source)
  • Board decision impact: An example of the optimism bias in action is the assumption that advances in technology and innovation will allow us to revert Climate Change at a later date. Through such assumptions, responsibility is shifted away from the current context, and leads to inaction in the present.
  • What to do about it: Brutal honesty is necessary – and some significant efforts around spelling out what worst case scenarios could and would look like. Can a company successfully survive a worst case? And how exactly?

Bias 3: Relevance Bias:

  • Definition: Our subjective understanding of how important and critical an issue truly is, based on what we know or think to know. (Source)
  • Board decision impact: An example of this bias in action is that we all know that temperatures will rise between 2 and 5 degrees Celsius still this century. And yet – subjectively those temperature rises seem to be inconsequential. The reason being that as human beings – and as a consequence also in the professional roles we embody – we are already primed to ignore it.
  • What to do about it: Investigate how the information is anchored. For example in the above case, a 2 degrees temperature rise would be perceived through a subjective lens and set of experiences. Next, work on replacing those subjective views through a more objective, data driven but equally tangible (experiential, pictorial) description of the same, with the intent to replace the subjective experiences through those rooted in objective knowledge.

Bias 4: Volition Biases:

  • Definition: Broadly, these are errors in judgement that result from deferring responsibility (‘it is not my problem’), and can come in many forms such as through deference to authority or the ‘others do it as well effect’. (Source)
  • Board decision impact: Being reluctant to act because of an absence of a legal enshrined ‘level playing field’ is one of the most frequently cited versions of a Volition Bias. Another example is when companies finger point other players in their industry, say for not paying a living wage, and in this way justify their own behaviour and inaction.
  • What to do about it: Ask the question “What should the company (the board, the individual) do if the responsibility for change was theirs, and theirs alone?”

Conclusion

Climate Change “is the predominant moral issue of the 21st Century” (James Hansen, NASA climatologist). And yet, a recent survey shows that only 17% of Board of Directors serving on Sustainability committees have sustainability expertise. (Source, page 12).

Hence, while we’re waiting for boards to get their sustainability literacy up to speed and at a level comparable to their financial literacy: taking concrete measures to recognise, and remedy existing cognitive biases and their impact on decisions related to Climate Change action, is an effective, reasonably simple to grasp and implement, low hanging fruit that no doubt bears a considerable harvest.

 

Chairman of the Future: Diversity at the Top

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By Helen Pitcher OBE, IDP-C, President of INSEAD Directors Network, Experienced Chairman, NED and Board Committee Chair

The sustainability of companies and businesses to contribute and benefit all of their stakeholders, is increasingly at the forefront of the minds of Politicians, Regulators, Society Pressure groups and Individuals.

Business of the future

The journey of Boards over the last 10 years towards greater diversity has seen a significant shift and we are starting to see the benefits of these more diverse Boards performing effectively in response to a wide range of challenges.  However, we also need to focus more fully on the diversity drive for the Chairman role, both to reflect these recent diversity gains on our Boards and to provide Leadership and a catalyst for increased change and action from our Boards.  It is time to stop the wastage of talent and get on with the job of facilitating women to achieve the top roles in our companies, we cannot afford to ignore 40% of the potential candidates.

The skills of chairman

The research from INSEAD suggests that there is very slow progress in this area, in the UK for example, if we do nothing, it will take until 2027 to achieve 20% of women as Chairman of our Boards (INSEAD Research by Professor Stanislav Shekshnia).  We need to accelerate the pace of change and ‘skip’ a male generation to drive the appointment of female Chairman more quickly and beyond that 20%.

As you look at the skills and expertise required to be an effective Chairman- the evidence for what makes an effective Chairman is very clear.  The skills that emerge as critical and defining are; an ability to influence others without dominating, having an engaged vision of the future, strong emotional intelligence and coaching skills. These Behavioural-Emotional skills are to the fore are with, the ability to build trust upon which people can rely.

“To be effective, Chairman must recognize that they are not commanders but facilitators. Their role is to create the conditions under which the Board can have productive group discussions. They should recognize that they are not first among equals. They are just the person responsible for making everyone on their board a good director.” (Professor Stanislav Shekshnia INSEAD-Leading from The Chair Programme).

Why do we need to accelerate the pace of change?

Without intervention the progress to women in the Chairman role is too slow; the target should be to get to 35% by 2025 and 50% by 2027.  While the general diversity debate has moved on, advancements towards Women Chairman are pitiful, with still too many active resistors, Headhunters, Chairman, Nominations Committees, and perpetuating stereotypes that you need 10 years Board experience to be considered.

More Women in the Chairman role can help rebuild the trust in our companies and build businesses that deliver business performance combined with social and environmental benefits, leading to greater sustainability in our society.  The social case for women Chairman is clear, ranging from societal benefits, to greater empowerment and inclusion of women, visible role models, as well as access to a broader talent pool and range of diverse skills.

There is a growing and enthusiastic enclave of advocates for the acceleration of progression of Women into the Chairman role across many influential groups, however there is still an inertia of action.  Consequently, in the UK we have started the ‘Diversity at the Top’ initiative as an advocacy group to focus on this Female Chairman issue.

Blockers to progress

Women themselves will also need to bolster their resolve, expressing the ambition to be Chairman and reducing their self-limiting belief that it is beyond their grasp.  They need to overcome the mind-set which causes them to seek to ‘over-qualify’ and be ‘over-capable’ before targeting themselves at the role.

Educating Nominations Committee members in how to formulate gender neutral job and person specifications is key, along with conducting a detailed skills audit of the Board with Diversity as a core dimension. This is best practice, but not universally applied.

Also, a shift needs to be made in the Recruitment-Development processes, moving from a stereotypical view of the Chairman role profile, towards a more creative resourcing, on-boarding and mentoring support process developing more appropriate role models.

There needs to be more active sponsorship and development of women at the Board level to engage with development for the Chairman role.  This needs to go beyond the typical Big Four Information sessions on Audit/Risk/Cyber/Governance, into a more creative development framework of Board level development. This will require women to step beyond the existing Board for their development, recognising that many Boards already have limited time allocated to develop knowledge and the interpersonal dynamics within the Boardroom.

We need to increase our ambition and pace of change; it is time to drive practical and direct action to accelerate the acquisition of more female Chairman right across our companies.

It is time to push through this current psychological log jam and actively discuss the facilitative and revolutionary evolution to remove this limiting mental model and stereotype of a Chairman.  There will need to be a concerted effort from Headhunters, Chairman, the media and the other wide range of interested groups to draw on available mentors and sponsors as well as to challenge thinking and make this happen.

As a practical step in the UK the ‘Diversity at the Top Initiative’ gathered together a group of likeminded people from a range of backgrounds who are committed to increasing the number of Female Chairman, as an exemplar of Board performance and a beacon for the diversity of their Executive pipelines.  This group has focused on ‘The Future of Woman Chairman’, over a series of meetings and discussions, and provided a spotlight on the issues and more importantly the potential solutions to this logjam.

A summary of their deliberations and Action Plan, identifying the most important areas to highlight to ‘move the dial’ can be accessed at here.

 

 

Boards and Sustainability: From Aspiration to Action

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Boards and Sustainability: From Aspiration to Action

Boards of directors can play a critical role in determining how much attention their firms pay to sustainability.

In this article, Craig Smith, INSEAD Chaired Professor of Ethics & Social Responsibility and Ron Soonieus, INSEAD Executive in Residence and Chairman of the Dutch NAA Sustainability Club explain how boards can turn their aspirations for sustainability into meaningful action, particularly in light of the fundamental questions boards should be asking in the wake of the COVID-19 pandemic.

From the authors:

“This article is our most elaborative on the subject to date. It includes a fresh take on our “Five Archetypes of Board Sustainability Behaviour”, new insights, recommendations, and our view on how COVID-19 changed nothing (and everything) for boards.”

First published by Management and Business Review.  To read the full article click here.

Synopsis

Boards of directors are vital to firms taking substan­tive action on sustainability. While prior research has suggested that boards pay little attention to the topic, a recent survey by Board Agenda suggests that many individual board members have ambitious aspi­rations for sustainability. Unfortunately, respondents also feel that their companies lack the people, knowl­edge, and tools to take action. We interviewed twen­ty-five directors from the boards of well-known firms, examining the obstacles to greater board engagement with sustainability, including board members’ charac­teristics. In analyzing interview responses, we found five distinct archetypes of board member behavior. These profiles help explain the divergence between the attitudes of board members toward sustainability and the frequently inadequate action of the board as a whole. Our findings suggest ways to motivate each type of board member and the value of auditing the knowledge and mindset of board members toward sus­tainability, offering six approaches to strengthening board engagement with sustainability. While the eco­nomic effects of the COVID-19 pandemic might appear to reduce businesses’ ability to become more sustain­able, we believe the wise course is to focus on the longer-term trend toward meaningful action. We are con­fident that many board members will agree.

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Confronting Governance Conundrums in an Era of Change

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Confronting Governance Conundrums in an Era of Change

How have the role and focus areas of boards been evolving as the corporate landscape has changed? 

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

On 16 October 2020, a diverse panel led by Helen Pitcher OBE, IDN President discussed “Confronting Governance Conundrums in an Era of Change” in a session held as part of the INSEAD Directors Forum.  Panellists included:

  • François Bouvard, Vice Chair of Institut Français des Administrateurs & NED
  • Karina Litvack, Non-Executive Board Director, ENI S.p.A., Executive Board Director, Chapter Zero, Member of Board of Governors, CFA Institute, Non-Executive Director, BSR
  • Elena Pisonero, Chairperson of Taldig and former President of Hispasat, former Spain’s Ambassador to the OECD; former Secretary of State of Trade, Tourism and SMEs in Spain

The panellists discussed a wide range of topics including:

  • What COVID has meant for boards
  • Digitisation and data
  • Changes in corporate governance in the future
  • How will the role of directors change in the future?

 What COVID has meant for boards

Over the past nine months, COVID has significantly changed our world.  Whilst some companies anticipated some of the changes, others were less prepared for them.  For many companies, it has created an acid test for workforces, management and boards who face big challenges ahead.  As management may not have enough time to focus on strategy and “reset”, there may need to be a big shift in the roles of management and boards.

The acceleration of change has also brought to the forefront companies which were less or more prepared due to their digital structures.  Those companies which identified the transition of change in society prior to COVID have been transitioning this fairly well compared to sectors which are struggling because they are still doing business in more traditional ways.  COVID has emphasised the need for boards and management to work more closely together to identify the future needs of stakeholders at large, not just shareholders.

The pandemic is an example of a systemic risk – something that none of us can solve because it needs to be solved at a systemic level, but all of us suffer the consequences of if it’s poorly managed, therefore, what are we going to do?  In considering the systemic impact of the pandemic, a broader question some companies have been considering is do boards understand systemic risk, do they talk about it, do they discuss it?  What can they do as companies to influence systemic preparedness, and is there a role for business in influencing the policy environment and the big social infrastructure investments that are made to protect both the society and business environment?

Some panellists feel that it is time for companies, led by their boards to introduce more ‘out of the box’ thinking and change the role of governance.  Boards and companies should not only be considering what they can control but think more broadly about all the things that are going on.

Digitisation and Data

Many companies have a misconception or misunderstanding of what digital is – it is what we can do with connectivity but doing things in a different way. Digital technology is the tool which allows companies to better reach their purpose.

Increasing the extent of use of digital should be viewed as a cultural change; it is not a matter of introducing new processes or new titles for the C-Suite.  It is how companies combine digital and physical means.  Companies need to have a mindset change and consider their whole value chain and how they can better manage and identify best opportunities to change their business models in order to thrive.  Companies cannot succeed at affecting this transformation unless they put people at the centre of it.

One suggestion was that in order to be better prepared for more digitalisation, companies should introduce ‘D’ in ESG because we should introduce as much data as we can to improve our decision-making processes.  Data is a crucial part of a digital mindset to improve decision making and identify and anticipate future risks.

Changes in corporate governance in the future

Boards are now looking at how they govern their companies more holistically, shifting discussion towards stakeholder governance rather than just shareholder capitalism.  Many companies are starting to address human issues (i.e. talent development) more effectively and are connecting the dots in terms of digital to human elements, recognising that at the end of the day that key stakeholders are customers and employees.  Digital has been providing companies ways to be more efficient.

Whilst sustainability is more on the mind of everyone, many companies are struggling with shorter term issues, so have pushed some longer-term questions aside for the moment.  This will continue if the pandemic drags on.  However, boards and management do need to revisit the way they work together on strategy in the longer term.  Whilst in the short term, companies may have lost focus on sustainability, in the longer term the view is there needs to be much more focus on this area as companies have a societal responsibility and everything they do should link back to the organisational purpose.

It is likely that the amount of time which boards spend focusing on more “out of the box” discussions in the longer term will expand, given that CEOs and management teams are required to spend much more time on shorter term issues.

How will the role of directors change in the future?

As the whole landscape changes, directors will also need to change.  This should start with the board of directors.  To be on top of all the issues, not only do they need to be open, read a lot and network well, they need to continue to improve their soft skills to be able to support their CEOs and teams in a supportive and yet challenging way.  Boards need to increasingly take a holistic view of their stakeholders, as well as how they support the development of talent, and how they use digital and data.  There is also likely to be much more interaction between boards and management, often digitally.

Holding the moral compass – Boards social responsibility

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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?

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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?

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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?

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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.

AI Leadership for Boards – now a reality!

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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 book: AI Leadership for Boards – The Future of Corporate Governance, which 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.