#priorities | INSEAD International Directors Network (IDN)

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

The need for appropriate governance in startups is becoming increasingly acknowledged, however the experience in doing so in the best possible way is however limited.

Luc Sterckx, President and member of the boards of a number of international boards, and an INSEAD alumnus and IDP-C (INSEAD Certified International Director) has recently published his book, “Corporate Governance in Startups” which clarifies the distinctions which need to be made, in particular in the context of the limited means of a startup.

The book combines the structural and legal basis of governance in startups with his extensive experience in the field over several years and shows the way of very practical implementation including setting the right priorities.

We asked Luc his advice on the following important questions:

How do you implement good governance in a start up? What should be the right priorities?

Given the limited resources (in time, experience, competence) of a startup, implementing of good corporate governance is not an easy task – that does not make it less important however quite the contrary.

When asked what the priorities should be, I think compliance with legal provisions is a first must have, second investing into an appropriate board of directors and thirdly realizing you start on a never ending journey of continuous improvement in this field. It is a team effort much like in bigger companies but in a quite significant environment.

The implementation of good Corporate Governance in a startup is mostly a matter of learning and improving along the way. In the often-hectic environment of getting a company launched, Governance seldomly gets the priority it deserves (although this appears to be changing).

Anyway, at the start the situation will be what it is, which probably is a long distance away from “best” Governance practices. That should not be necessarily too negative, provided there is consensus on continuous improvement of the Governance process.

What are the best practices you recommend in governing startups which allow them to remain workable and efficient compared to bigger companies?

A startup by definition is facing a serious number of challenges and choices – possibly even larger and more complicated than an “established” company. The need for focus has been stressed before but considering the many options and questions, it is clear that not all matters might get focus. It is all a matter of setting priorities and setting such priorities, balance is essential and Governance structures play an important role in this process.

“It is all a matter of setting priorities and setting such priorities, balance is essential and Governance structures play an important role in this process.”

The first balance which needs to be respected is the one between the short and the long term. In a startup fires abound, and it is tempting (and sometimes necessary) to turn the entire team into firefighters.

The second balance is the one between the different stakeholders, where especially the interaction between founders- entrepreneurs-shareholders-managers on one side and the external shareholders on the other is a tricky one. A particular point of interest is the relationship with the founder(s) – he/she or they did not start the company to become experts or champions in Corporate Governance. Their key values and interests revolve around creativity, freedom, growth … and these should be taken into account and above all respected by the Governance structures.

The third balance in the company relates to the structure of the balance sheet. In particular, the company should be attentive at financing the long-term capital needs by long term liabilities such as equity and long-term loans.

The fourth balance concerns the necessity to maintain a creative, entrepreneurial free spirit and atmosphere in the company while on the other side a similar necessity to manage and control the company through instruments such as budgets, reports, procedures. Once a company has been set up, the latter principle becomes unavoidable whereas the former necessity can be and often is essential for the growth of the company.

The fact that financial resources are always with a limit makes it however necessary to stay in control of what is happening. That can be done in a remote way, at arm’s length by allowing “creativity with a purpose” to evolve within a given framework. A lot will depend on the personalities of the people involved in this debate, but with some goodwill things can be straightened out.

What would be your key recommendation to directors who are asked to be on the board of a start-up?

I don’t think these are so different from the ones for “ordinary” companies.

Before anything else understand the fundamentals of the business and the strengths / weaknesses of the company are prime objectives. And maybe some particular qualities required: be flexible and above all prepare to ride the storm!

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Holding the moral compass – Boards social responsibility