strategy | INSEAD International Directors Network (IDN)

Governance of Corporate Renewal and Sustainability

Date September 23, 2021

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Governance of Corporate Renewal and Sustainability

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

By Karen Loon IDP-C and IDN Board Member

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

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

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

Increasing pressures require boards to better guide companies to renewal

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

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

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

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

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

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

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

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

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

The importance of sensing, pivoting and aligning by boards

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

Areas which boards can work on:

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

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

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

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

Boards can improve their sensing, pivoting and aligning capabilities

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

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

Board best practices to experiment with

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

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

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

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

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

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

INSEAD Corporate Governance Centre (“ICGC”)

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

Best practices of independent directors in family owned-firms

Date May 25, 2021

Posted by Karen LOON

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Best practices of independent directors in family owned-firms

Leading independent directors understand family board dynamics, build relationships with all board directors, and build a coalition of independent directors.

By Karen Loon IDP-C and IDN Board Member

Whilst family-owned firms are critical drivers of global business and growth, the role of their independent board directors is complex given the overlapping roles between family, ownership and business.

As a follow up to the session, Fit for Generations: How to Create & Lead a Family Business Board held in March 2021, on 26 April 2021, over 50 INSEAD Directors Network (“IDN”) members shared their international experiences of best practices in governance of successful family boards, focusing on their perspectives as independent board members.

The discussions were led by Martin Roll, Distinguished Fellow (Family Business) and Entrepreneur in Residence, INSEAD and Xavier Bedoret IDP-C, IDN Belgium Ambassador, NED and Advisor.

Liselotte Engstam IDP-C facilitated the event with support from Hagen Schweinitz IDP-C, both IDN board members.

The role and challenges of independent board members

Martin Roll set the scene, sharing his views on family-owned companies, highlighting their global power and influence.

“They’re interesting, because first of all, there are a lot of them. They’re very significant in terms of the global economy. They’re very significant in terms of entrepreneurship, and they also have a very big heart when it comes to impact. But at times they do need help, and this is where the family board members coming in” – Martin Roll.

After noting some of the challenges of wealth preservation of family-owned firms, Martin emphasised that that family business strategy depends on clear roles, responsibilities and guardrails between family, ownership and business.

The roles and responsibilities of their external directors are not easy, Martin said.

“We are external – we’re bringing a different point of view. We sit in the business. You are going to work with people in the families that you have around you, and you are also going to work with some of the key owners, and some of them being the business. You are in this triangle of a lot of different types of interests. As board members, we need to navigate that” – Martin Roll.

In addition to family, ownership and business, other areas which independent family board members may support with include family office and impact (which relates to sustainability and aligns to the higher purpose for the firm). Martin presented his Family Business Strategy model to help guide this process (Figure 1).

Resistance to changes in the investment strategy and impact investing often arise as new generations come into the business.

Figure 1: Family Business Strategy (Copyright Martin Roll Company 2021)

Independent board members need to work with family firms to assist them in dealing with the dilemma of balancing the growth of their businesses with a long-term perspective and yet ensure family harmony and welfare. A key question is, how do they do that? Martin provided an overview – see Figure 2.

Figure 2: Traits of effective board members (Copyright Martin Roll Company 2021)

Martin reminded members that sustainability is deeply embedded in many firms, which makes family firms interesting.

He highlighted a quote by André Hoffmann – “That’s what separates us from non-family-owned businesses. It’s the concept of sustainability which (I’m glad to say) is much in favour at the moment. And this sustainability is lived by the family.“

In order to be successful in their roles, Martin encouraged family board members to think of the following:

Bring passion to family firms and build personal connections with key stakeholders across the business family system.
Integrity is your key currency and never dilute its value. In the end, competence and experiences are the assets you contribute.
Dare to renew! Renewal is the most important factor for business family success over the long term, so don’t hesitate to disrupt (with love)

Xavier Bedoret highlighted four challenges of independent directors: These are:

1. Combine the best of both worlds

Finding the right balance between the paradoxical tensions of tradition and modernity; family values and financial logics; stability and transformation is not easy. These can both be combined at the board or executive committee level.

2. Help develop the family spirit

A director needs to decide at what level they should be active – whether it is the family association, shareholder, director or manager level.

“Family spirit is the glue that prevents frustration and dissent” – Xavier Bedoret

3. Take the heat out of the decision process

The duality of “family” and “enterprise” can increase anxieties. Independent directors have a role to play to support family firms in this area.

“Emotions are a bias in relationships, and in family decision making” – Xavier Bedoret.

4. Engage young family members

Independent directors can play a role to support younger family members in their transition into more senior roles, given the family challenges of maintaining family values and managing power.

Three best practices of independent board directors of family-owned firms

For independent directors, working with family businesses is exceptionally complex but extremely rewarding. They often play a critical role in:

Helping with communication (as often family members may not be on the same page);
Supporting the transition of roles between senior generations and the next generation; and
Assisting in managing conflicts such as finding a middle ground in situations of risk aversion.

Three best practices shared by IDN members included:

1. Understand dynamics of the family

The role of an independent director on a family-owned company can be much more complex than on a public listed board, given the chemistry.

Board members should understand why they were brought onto the board.

They also may need to prove themselves first as an expert to the board and the family to show what they can do before being trusted to assist them more broadly.

Board members may be expected to commit more time and be available much more than on other types of boards.

One suggestion was to “rush slowly” – understand time horizons, priorities, and the pace of change of the family shareholders. Family boards need to take their time to make the right discussions and decisions.

2. Build a coalition of independent directors

All independent directors should bring their own unique experience to the board. It is essential to ensure that independent directors are aligned and a force within the board.

3. Build relationships with all board members

This includes on a one-on-one basis. As not all board members may have the same knowledge of governance, help new board members succeed by arranging onboarding and an ongoing training programme to ensure they all have the necessary expertise to participate actively in board discussions.

To view Martin Roll’s slides, visit here.

IDN’s next webinar on Governance of Social Impact Ventures will be held on 11 June 2021.

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

INSEAD Corporate Governance Centre (“ICGC”)

Why Some Boards Add Value and Some Don’t

Date January 22, 2021

Posted by Karen LOON

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Webinar Summary of Lifelong Learning IDN Webinar

By Karen Loon IDP-C with inputs from Roy Ling GEMBA

How do boards and board directors best equip themselves to deal with the challenges of innovation and disruption, and how do they add value?

INSEAD Directors’ Network (“IDN”) members Denise Koopmans IDP-C, Roy Ling GEMBA, and Hagen Schweinitz IDP-C shared their diverse views and experiences on these questions in an INSEAD Lifelong Learning session by IDN, sponsored by the INSEAD Alumni Association on 19 January 2021. The session was chaired by IDN Board Member, Liselotte Engstam IDP-C.

Prior to the session, participants were surveyed and asked to share their views on the effects their boards have on company value. The key findings suggest that the top area which boards have been focusing on in more recent times is value adding strategies.

The panellists shared their candid views and insights, as well as practical feedback on key developments in corporate governance in more recent times. These included:

How boards can be successful at creating value – Successful boards invest sufficient time on board work; maintain a well-rounded team; and have an effective chairperson who runs meetings well, as good leadership sets the tone for the board as a whole and sets the stage for a more value enhancing board. As Roy Ling shared:

“Boards should maintain a well rounded team with a culture of trust and respect, where directors and management challenge each other with constructive feedback”.

Changing dynamics in the way boards work – Boards are becoming increasingly agile and forward looking, working together through many challenges. They are discussing strategy and scenario development more frequently. More backward-looking topics are being discussed in committees. Decisions are being made faster, there is more focus on task forces to deal with certain topics, and more open flow of information.
Having board diversity – Not just in the areas of gender, age or experience, but diversity of opinion, personalities and capabilities. Directors need to be comfortable with differences of opinion. A question which was discussed was how good companies are at finding independent directors. The panellists also shared that whilst specialist skills such as digital, innovation and sustainability are important, directors also need to have other skills such as leadership and being able to operate in a team to be effective in the boardroom.
A growing focus on board reviews – With the increasing need to further professionalise boards, leading boards undertake regular self-assessments on board performance on Board composition and dynamics, how boards perform specific board tasks and how boards operate. More advanced organisations focus more interviews and less on questionnaires. Annual review processes including the use of peer reviews with 360-degree feedback are also becoming more common. Many also obtain external third party periodic “health checks” to evaluate the feedback process.

Participants highlighted that they believe that the top area of focus of their boards in 2021 will be digital innovation. The panelists also shared that areas such as talent management, human resources and effective board processes should not be ignored by boards in 2021. As Denise Koopmans shared:

”Boards have become more leading, agile and forward looking. They have speedy and resilient decision making processes with ad hoc committees, deep dives and task forces as support. The board agenda is more geared towards strategic challenges and the role of the Chair as facilitator is critical.”

On board processes, many boards remain focused on upholding corporate governance and compliance with regulations. However, a challenge is that directors who have extensive views on how to reinvent the company and its business model may often not receive adequate attention from the board due to limited board time. One suggestion was that perhaps an ‘Innovation Committee’ should be formed to get more board attention. The innovation committee role is to actively motivate and facilitate management’s ideas and initiatives on innovation and productivity.

Another idea was that a review of the board’s agenda is a good way to measure board effectiveness. If the same items are appearing on the agenda with no resolution, it may be an indication that the board lacks the necessary expertise to deal with the issue.

How can directors keep up to date?

A challenge for most directors is how can they keep up to date as a board member. In addition to leverages such as the IDN network, recommendations included:

Engaging between board meetings. Not just about spending more time on board strategy, it’s also about being able to connect with management in between meetings and staying current. But how often should they meet? Boards need to experiment to figure this out, but the key is to remember that boards are only as good as the information they have access to.
Engaging with strategy as it is forming. Directors can participate early in the formation of strategy and stress-test it along the way, as opposed to reviewing a strategy that’s been fully thought through by management.
Engaging on the tough questions. It is important to ask uncomfortable questions that extend beyond strategy sessions to a wide range of issues. Every board member does not necessarily need to have industry experience, but you must have the courage in the boardroom to ask the difficult questions.

As Hagen Schweinitz shared:

“Being a board director is now a profession with a lot of obligations. And future board reviews will look at how board members behave, interact and how independent they are.”

COVID-19 has reshaped board strategy

COVID-19 has certainly disrupted and reshaped how boards undertook strategy work in 2020. While many boards are tempted to refocus from long-term growth to short-term survival due to COVID-19, this could be a grave mistake. Instead, boards should capitalize on the COVID-19 opportunity to reposition and pivot their companies to strengthen their positioning and come out ahead. The participants suggested that boards need to be aware of three areas.

Resilience comes through speed. COVID-19 gave rise to many uncertainties and changes. But boards need to guide management processes for fast responses. The point isn’t to have the right answer. The point is to build organisational capability to learn quickly why your answer is wrong and pivot faster than your peers do.
Beware of a gulf between board and management and workers. While it is relatively easy for boards and management to switch to remote working, and they see it as effective and efficient, those in the trenches may not see it as so.
More than ever, a bias to action is essential, which will frequently mean getting comfortable with boardroom disagreement.

Looking ahead

While 2020 has been a year of disruption, 2021 is a year of renewal. Some areas for board directors to watch out for are:

Always work on your own game as a director – Continuing education remains important.
For people who want to join boards, carefully check if there is a match between your skills and the needs of the company, as well as a good fit and trust. Remain resilient and have sufficient time for your board roles.
Spend even more time on board strategy – Manage through the COVID-19 crisis and into the new normal. Renew board processes to make them more effective and efficient. Balance trust with challenging discourse. Consider appointing an ambitious Board Chairman and rethink the annual agenda in 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.

INSEAD Corporate Governance Centre (“ICGC”)

Resource list

INSEAD Corporate Governance Centre (“ICGC”) research and articles

A checklist for boards in the new normal (INSEAD Knowledge Post)

Leadership in Risk Management (report)

The market for corporate directors (report)

Innovation & Corporate Renewal also disrupt Boards (report)

IDN Blogposts with related insights

The evolving role of the board in the Covid-19 environment

Board Dynamic Capabilities in Disruptive Times

Can Digital Committees solve board challenges

Getting your first board position

Related webinar recordings

The End of Shareholder primacy?

Driving Tech for Good, the role of Company Boards

Related Podcast Interviews

Create and believe in the Future with INSEAD Strategy Professor Nathan Furr

Experienced Board Chair INSEAD President Helen Pitcher OBE

Webinar: Sustainability and Climate in Strategy and Board Agenda

Date November 30, 2020

Posted by Karen LOON

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Webinar: Sustainability and Climate in Strategy and Board Agenda

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

With climate challenges increasing, the board has a responsibility to assess the impact and define strategies to handle the risk. Are we as board members doing enough? Do we understand how to address the topic? What are the challenges and opportunities here?

INSEAD Directors Network (“IDN”) members had the opportunity to listen to Lise Kingo, IDP-C, NED and former executive director at UN Compact and Novo Nordisk, Stig P Christensen, IDP-C and NED, and Silvio Dulinsky, Head of Business Engagement Latin America, World Economic Forum held on 18 November 2020 in an exclusive webinar for members 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.

Top left – Lise Kingo, Top right – Silvio Dulinsky. Bottom – Stig P Christensen

In their introductory remarks, the panellists covered three areas:

Responsible business is now a board and senior management agenda however climate and social inequality remains far behind

The Sustainable Development Goals were issued out five years ago. Whilst there is much broader recognition that responsible business is now a key board and senior management agenda topic, after five years, we are still very far behind in the whole climate area and also social inequality.

Due to the huge gap and climate emergency across the globe, the whole area of climate change has developed and is now one of the most mature areas in relation to how companies can control, manage and set good risk and targets. In particular, the financial community has put climate risk as a key priority through how they are setting targets. Another recent initiative is that investors want to know how companies put climate risk costs into their accounts.

Climate will continue to stay on the board and management agenda. However, companies need to develop more holistic approaches to running their businesses when it comes to ensuring a successful transition to a net-zero economy. There are a number of tools and initiatives in place to support board members in this process, which means there’s no reason for boards not to stat working on a transition strategy.

We are beyond a tipping point in relation to climate.

We are beyond a tipping point – We have no time to waste. Policy-makers and business leaders have to their best to rapidly implement new ways forward, as younger generations are demanding. Investors are increasingly more supportive of these changes.
Green and digital is core business – There is currently a risk for boards to get stuck on the compliance and risk agenda and not address opportunity agenda. It is often hard for boards to have strong and precise discussions and evaluation of the opportunity side. Boards should push this agenda beyond climate. The way forward requires innovation of the regulatory framework which is currently work-in-progress.
Open the windows and doors – Look outside beyond the borders of your company and M&A objectives you are facing with a systems lens on. Create symbiosis between different companies and sectors.
Listen to the crowds – They can’t be on the boards, but they have to be heard by the company.

Tools are available to support boards. A value chain approach should be adopted.

Tools are available to support boards in relation to setting up effective Climate Governance. Specifically, there are eight climate principles outlined in the World Economic Forum White Paper “How to Set Up Effective Climate Governance on Corporate Boards – Guiding principles and questions”. These are:

Principle 1 – Climate accountability on boards
Principle 2 – Command of the subject; boards need the knowledge to debate and stay informed re climate related decisions.
Principle 3 – Board structure; the board structure needs to be effective to embed climate in the decision-making processes of the board and senior management.
Principle 4 – Material risk and opportunity assessment; management should assess and manage short, medium and long term climate related risks and opportunities.
Principle 5 – Strategic integration; management should integrate climate considerations into their strategic and financial planning of the company
Principle 6 – Incentivisation
Principle 7 – Reporting and disclosure; reporting and disclosure should be undertaken with the same rigour as a financial report.
Principle 8 – Exchange; engage peers, regulators, investors and the whole value chain in the process.

All companies, including SMEs are crucial in relation to transforming value chains. The role of the board is to support the broader value chain changes required.

A challenge is how can we bring on board others who are not yet convinced on the importance of the issue. The Chair and CEO as well as a critical mass of directors play a critical role to put climate on the agenda of the board to support driving the change.

Top – Liselotte Engstam. Bottom – Hagen Schweinitz

Following the opening remarks, the panellists and IDN members engaged in lively discussion in relation to topics including:

The importance of getting climate on the board agenda.
Being proactive on climate before rules becoming mandatory. Global requirements on climate are increasing rapidly.
Leadership agenda – Set goals which are not only financial, but also deal with other areas including climate, diversity etc. to drive the change agenda. The importance of the role of the board to drive this.
The increasing focus on climate being placed by investors in more recent times.
How do boards look at the risks and opportunities in relation to climate?
Sustainability reporting including accountability, accounting and valuation considerations.
Directors’ fiduciary duties in relation to climate.

As Liselotte Engstam concluded:

“There’s no question that we need to have increased focus from board directors, and it also needs to be more inclusive and holistic, and we are getting much more attention from investors… Don’t just look at this as negative it’s a fantastic time especially now to look at (it as) a source such as an opportunity to rethink and re-set”.

The next exclusive IDN webinar will be on Getting your First Board Mandate which will be held on 1 December 2020 at 1200 – 1300 CET.

IDN Webinar: Can Digital Committees solve board challenges?

Date October 1, 2020

Posted by Karen LOON

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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.

Why boards have a duty to reinforce resilience

Date July 1, 2020

Posted by Karen LOON

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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

Board Governance during a Crisis

Date May 27, 2020

Posted by Karen LOON

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Board Governance during a Crisis

By Joergen Jakobsen IDP-C

When a company is facing a crisis the board leadership is put to the test. The actions of the board can be critical for how successful a company will emerge from a crisis – or if they will be able to emerge at all. Writing this blog during the time of the COVID-19 pandemic this is more evident than ever. In this blog I will examine the top 3 priorities a board need to focus on during times of crisis.

Framing of the crisis and its phases appropriately

As a company finds themselves in a crisis having a material impact on the company the risk of losing sight of appropriate governance is real for many companies. When facing a crisis, it is helpful for the board to break down the crisis into 3 key phases in order to frame the crisis with different time horizons allowing for appropriate options to be considered in the various phases. These 3 phases are:

1. The crisis phase

During this phase the frame is typically short term and relative narrow in scope. The key consideration is about how to protect the company, the people and its key assets. It is about damage control, prevention of major harm to the company and its stakeholders – and maybe even about the survival of the company. This is often talked about as the Business Contingency Plan for the company.

2. The recovery phase

In this phase the frame becomes wider and more mid-term in. The focus turns to how the company will emerge from the crisis. In this phase a range of tactical options will typically be evaluated in the context of how the underlying market environment starts to improve. This is often talked about as the Recovery Plan for the company.

3. The New Normal

It is important to think about the post-crisis environment as a different market environment compared to the pre-crisis environment. The market conditions and the customer requirements might have changed. The competitive landscape might have changed. The stakeholder expectations might have changed. Thus, the frame required to plan for the New Normal must be wider and a new Strategic Plan is required for the company.

Although it is helpful to think about the 3 phases as different in frame and scope it is important for boards to have an overall view of the planning and decision framework required to bring the company from the crisis situation into the New Normal given the decisions made in prior phases can impact optionality of future phases.

Focus on what matters most during the 3 phases of the crisis

The objective of the board is to govern the company by setting the frame for the future of the company within which the CEO and the executive team will define and execute the strategy under the review and approval of the board. The role of the board is to preserve and enhance the value of the company as seen by both shareholders and other stakeholders while minimizing the risk. In this light let us evaluate the key governance priorities of the board pertaining to the 3 phases:

1. The board’s key focus during the crisis phase

The key priority in this phase relates to value preservation and risk mitigation to minimize the impact of the crisis on the company. Thus, the key areas of focus relate to organizational and financial resilience:

Establish scenario planning to determine the worst-case scenario of the crisis. Establish a Business Contingency Plan to ensure the company can withstand the worst-case.
Review organizational resilience and experience in handling a business crisis at the anticipated level. This includes review of the experience of the executive team and the board and if required involve external resources to address deficiencies. It also includes review of the company’s work processes to effectively handle the nature of the crisis.
Review the financial resilience required to handle the crisis. Assess capital requirements related to the worst-case scenario and if required increase the company’s liquidity.
Review the potential crisis impact to strategic customers and partners and determine how to mitigate this risk.
Increase communication frequency to the employees and key stakeholders to ensure their understanding and buy-in for decisions made.

During the depth of the crisis the board often brings a key value in being less consumed in the day-to-day operational challenges than the executive team. They often bring perspectives and experience from how other companies and other industries handle the crisis which can prove valuable. Also, during this phase the board should increase their meeting frequency to ensure decisions are made in a timely manner.

2. The board’s key focus during the recovery phase

Pending the context of the crisis this phase might have a high degree of uncertainty as timing and nature of the recovery might be difficult to predict. Thus, it is important to stay agile and adjust the recovery plan as required. The key priorities by the board would be:

Evaluate the probable scenarios and strategic business recovery options provided by the executive team against the company’s ability to execute. Challenge the board to ensure various scenarios and recovery options are presented before deciding on the best plan forward.
Review the compensation plans to ensure it is aligned to the new business realities striking the optimal balance between motivation of the organization and the reduced business level.
Ensure the executive team defines and reviews changes required to align the organization and the operational business processes required for the business recovery plan.
Review and update the financial plan and ensure adequate capital is available and allocated to make the plan successful.
Communicate the business recovery plan to the organization as well as key stakeholders to ensure their support and understanding of their role to execute the plan.

3. The board’s priorities preparing for the New Normal

As the company emerges from the crisis it will be facing a New Normal. Customer behaviors and expectation might have changed from the impact of the crisis. Competition might have changed and potentially consolidated. Business processes and associated technologies might have evolved during the crisis. In addition, stakeholder expectations or legal requirements might have changed. In short, the New Normal phase might look very different from the business environment experienced prior to the crisis.

With the above in mind the board should undertake the following activities to ensure the company is well positioned for the New Normal:

The board should review and if required update the overall frame and vision of the company.
Request the CEO and the executive team to develop strategy options aligned to the updated frame and vision for the company and aligned to the New Normal as well as the internal capabilities of the company. The board should review and approve the new strategic plan and its KPIs and empower the executive team to execute the strategic plan.
Evaluate the profile of the CEO and the execution team in order to ensure the leadership has the adequate experience to carry out the new strategy of the company.
Update the risk assessment framework of the company and define risk mitigation actions as required to ensure the risk of the company is managed at the adequate level. Ensure learning and experiences from the crisis are captured.
Communicate the updated strategy to the organization and key stakeholders to ensure support and alignment to the new plan.
Revert to a normal cadence and format for board meetings to manage the overall governance to the company and support of the CEO and the executive team.

Having appropriate board governance processes in place

In summary, it is critical for the board to adapt and contextualize their governance practice during a crisis situation. However, the fundamentals of good board governance continue to be critically important and should be in place before a crisis develops. Good board governance includes aspects like having a diverse and active board, understanding of the roles between the board and the executive leadership team, and having in place a strong board culture and processes to optimize the effectiveness of the board – which will be put to the test during a period of crisis.

First published on LinkedIn on 25 May 2020.

Joergen Jakobsen, IDP-C is a board member, business advisor and consultant leveraging more than 30 years of experience from multiple large global technology vendors. His consulting practice is mainly focused on board advisory, business performance management, leverage of partner eco-systems for profitable growth, and optimizing organizational and individual performance in a culturally diverse environment.

What can boards do to handle the Coronavirus Pandemic?

Date May 21, 2020

Posted by Karen LOON

What can boards do to handle the Coronavirus Pandemic?

Webinar with PwC Singapore – 31 March 2020

On Tuesday 31 March 2020, the INSEAD Director Network held a topical webinar for its members on “What can boards do to handle the Coronavirus Pandemic”.

The webinar was facilitated by Liselotte Hägertz Engstam (IDN Board Member, Non-Executive Director & Chair at Listed & Private Companies), introduced by Karen Loon (IDN Board Member and Non-Executive Director), and featured guest presenters, See Hong-Pek and Marc Philipp of PwC Singapore, and with Q and A support by Gerard Forlin QC.

In her introduction, Karen Loon noted that COVID-19 is a wicked problem which globally is impacting all our lives personally and well as professionally. A challenge for all of us is dealing with the rapid change – how do we move from our fear zone (anxiety and ambivalence) to a learning zone, and ultimately a growth zone where we embrace this opportunity. She also shared her experiences of both some short-term challenges of boards (especially helping people, business continuity and clients), as well as some medium term potential focus areas, and concluded that it is during these fluid times that it is important that we all leverage our networks for diverse ideas and perspectives.

Three waves of response

SEE Hong-Pek of PwC Singapore highlighted three potential scenarios (contained, pandemic with hot spots, and uncontrolled pandemic) concerning the evolution of the crisis which need to be taken into consideration by companies which will have different impacts on organisations.

Companies are likely to go through three different waves (mobile – immediate; stabilise – medium term; and strategise – long term) as they learn to adapt and accept the new “norm”.

Supply chain challenges

Marc Philipp of PwC South East Asian Consulting outlined some of the external and internal challenges which companies which PwC works with have experienced in relation to their supply chains. These have included external (unpredictable demand; supply disruption; economy uncertainty; contractual challenge), and internal issues (production/internal supply, workforce limitations; financial and regulatory issues; operational issues). An example of a challenge for some companies was to be able to manage the increase in demand for products in China after some restrictions were lifted.

He also suggested eight questions which boards could be asking in relation to their business continuity plans, operational risk assessment, scenario planning, alternative sourcing, risk assessment across supply chain tiers, critical supply chain data, temporary inventory and evaluation processes, and product redesign/material certification resources.

IDN members also raised questions, particularly in relation to legal matters including global legislation, work from home legal employer duties, data protection, and potential litigation. The speakers all agreed that good communication with all stakeholders is vital, and that that board members play a key role in supporting the mental wellbeing of the people in our organisations, particularly CEOs.

INSEAD IDN will be arranging more webinars on managing during the crisis for our members in the next few months so do watch out for them!

SEE Hong Pek – Partner, Business Resilience, PwC Singapore specialises in assurance and management consulting services in the areas of information technology, data privacy and business controls.

Marc Philipp, Partner & Management Consulting Leader, PwC South East Asia Consulting has significant experience in corporate strategy, operating model design and digital supply chain transformation across Asia Pacific.

Align Risk Management with Strategy and Operating Performance, Reward and Remuneration

Date December 31, 2018

Posted by Liselotte ENGSTAM

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Align Risk Management with Strategy and Operating Performance, Reward and Remuneration

This blogpost is shared as part of a series of insights from INSEAD Directors Network, based on roundtable discussions held during INSEAD Directors Forum October 2018. The Directors Forum Round Table Discussions were held with IDN members led by IDN board members or IDN Ambassadors. Other Blogpost in Series shared last.

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(Photo: Pixabay)

The round table discussion “Align Risk Management with Strategy and Operating Performance, but also Reward and Remuneration” was led by Susana Gomez-Smith, NED and IDN Ambassador for Portugal with the introduction

As the ultimate steward of value and overseer of risk, the board must grasp the relationship between strategy and risk and assist management, in gaining that understanding but also in putting it to practical use. The Board must also ensure that remuneration policies/practices are consistent with and promote sound and effective risk management and in line with the business strategy.

Why should the Board consider and discuss strategy and risk appetite in tandem? How to do it in practice?
What can the board do to drive greater awareness of the risks to the strategy throughout the organization?
“Remuneration forms part of the culture and governance priority as set out in our Business Plan. As a key driver of behavior, remuneration of senior and risk taking staff is an important area of focus for the FCA to ensure that risk and reward are aligned in firms that we regulate through our Remuneration Codes (the Codes). Whilst our remuneration rules only apply to specific groups of firms, remuneration is a key driver of behavior for all firms and individuals. Implementing appropriate remuneration policies and practices helps to ensure appropriate outcomes and reduces the likelihood of harm from occurring “
Financial Conduct Authority, Remuneration Codes
How can Boards satisfy themselves that firms remuneration practices lead to appropriate outcomes and risk and reward are aligned?

Pre-readings:
Strategic Risk Management: A Primer for Directors, Harvard Law School Forum on Corporate Governance and Financial Regulation
The UK Corporate Code, Financial Reporting Council (from page 16)

Roundtable discussion

The strategy and risk areas has historically kept as quite separate topic, as the risk focus has tended to be quite operational in focus. As the strategic risk has been in steep increase for many companies the boards needs to find more appropriate ways to work with the topics in tandem. Some key insights from the board members were noted as;

The strategy of the firm is and has to be the starting point of all the considerations
The Strategy should comprise the areas of the core business and potential new business areas
The risk appetite for both areas has to be set and will be overseen by the Board (in a regular exercise)
The risk culture is set at the top of the company!
The second line of defence (Risk Management, Compliance) as well as the third line of defence are supporting the first line (operations) – clear definitions needed
Especially the Risk Management and Compliance functions must be filled with experienced and independent staff
With regard to risk measurement and risk identification, the right KPIs (which are rather backward looking) and KRIs have to be defined (better start with few but the most telling ones). Monitor not only your risks but also how the probability, impact of such risk is evolving.
The Risk Management process is not static, it is a constant effort. Risk managers should be incentivized to identify emerging risks. Some companies on the side of the regular Risk Committees perform regular exercises to reflect on emerging risks. It is advisable to include in such exercises different areas of the company and not only a closed inward exercise of the risk department.
At Board level, a trade-off between investments in new business areas and investments to mitigate/eliminate existing risks has to be found
The remuneration should be linked to

Implementation of the strategy (s-t, m-t, l-t) and hence parts of the variable compensation be deferred
Accomplishments in the core business areas as well as in developing new business areas
Risk taking and risk management
Implementation and living the risk culture in the firm

The Remuneration Committee should be given the power to override formulaic outcomes of bonus schemes
Remember: The Management is responsible for Risk Management, the Board is responsible for Risk Oversight.

Conclusion: Strategy and risk needs a framework to be jointly considered as the strategic risk is increasing for many companies, and it needs to be fully aligned also with new and balanced remuneration schemes.