Head of corporate governance at Eurizon Capital SGR, the asset management company of Intesa Sanpaolo Bank group, on improving boards of directors and their goals
Boards of directors have been dramatically transformed, evolving from the traditional, rather reactive oversight and stewardship role, to the increasingly active, independent, more cohesive teams of today. Due to more demanding shareholders and overall greater demands on boards, serving as a director has become far more time-consuming and complex with defined responsibilities, both ethically and legally.
Boards are encouraged more and more to deliver on their core mission: providing strong oversight and strategic support for management’s efforts to create long-term value, engaging more deeply and more publicly, spending more time exploring and communicating long-term strategy, and addressing any attendant reputational risk.
Depending on the circumstances of the companies that they serve, boards are at varying points on the road to development and engagement.
Companies need to strengthen boards’ knowledge and help directors build, maintain, and refine a long-term mindset. A first step is firmly grasping what a director’s “fiduciary duty” is. Most legal codes stress two core aspects of it: loyalty (placing the company’s interests ahead of one’s own) and prudence (applying proper care, skill, and diligence to business decisions). The logical implication is that the director should help the company thrive for years into the future. If directors can keep their fiduciary duty firmly in mind, big changes in the boardroom should follow. The discipline of keeping long-term value creation foremost in mind would help clarify choices and reform board behaviors.
The discussion that, until recently, centered largely on board diversity, has moved on with a new key word: board refreshment. This refers to the processes that are in place (or not) to ensure that so-called independent directors do not become entrenched and that new faces are brought on board in a timely and effective manner. The importance of board composition, director succession planning, board evaluation processes, and director skillsets are important common themes for Board refreshment.
The “new” boards rely on a combination of best practices that includes diversity, an independent non-executive chair, superior compensation practices and high-quality skillsets.
Board composition needs to be tailored to the specific circumstances of the company, its challenges, strategic ambitions and time demands.
It needs to consider the overall composition of the Board, including the independence of its directors, the combined skills and knowledge of the Board.
Boards ought to have a sufficient diversity of thought among its members, and the collective experience and expertise to be able to understand and address all of the key risks and opportunities facing the organization, including those created by digital challenges and increased global competition.
A highly effective board should steer a company financially, operationally and strategically toward strong performance and shareholder value. Technology is driving change at high speed, and in many organizations the traditional skillsets of management do not leave them well prepared to respond. In this scenario, the role of the board is one of risk oversight and setting strategies to ensure that technologies are used appropriately. Therefore long experience may be counteracted by the need for new, innovative people (i.e., younger, less experienced but with certain skills e.g. IT, cybersecurity, social media, etc.).
Companies hence have the challenge to achieve the optimal balance between refreshing the Board and retaining valuable experience components such as director tenure and backgrounds and the relevance of continuity.
“Independent thinking” is one of the main criteria for company boards to consider when appointing new directors. Boards that combine deep relevant experience and knowledge with independence can help companies break through inertia and create lasting value.
Boards taking a strategic approach to director succession planning is of critical importance to investors. These responsibilities are particularly central to nominating committees, but certain investors will hold the entire board responsible for good stewardship of its own succession plan, hence also its process.
The trend also underscores the increasing value and complexity behind the role of a board director, which has evolved from attending a few meetings per year to being a hands-on ambassador and holding active dialogue with major shareholders, through robust, ongoing communication about strategy, governance and sustainability.
While board education programs have always been important, they are particularly so at a time when directors need to quickly get up to speed with complex new issues, and keep their knowledge up to date as those issues evolve. As they discuss complex matters, boards may also seek the advice of subject matter experts, both from within and outside the organization.
Regular, formal evaluations are of great importance in creating effective boards and these processes are becoming part of the landscape for most large, listed companies. To be effective, these evaluations must include looking at tenure and skills, but also how the board functions as a team and its dynamics.
All of these board initiatives must fit the company and industry context. But in total they could bring about a deep shift in the culture, behavior, and structure of public company boards. Over time nothing else will do more to ensure that corporations deliver the kind of sustained value creation that long-term shareholders expect and that our society deserves.
Cristina Ungureanu was a participant at the Salzburg Global program Corporate Governance in the Global Economy: The Changing Role of Directors. The session was hosted in partnership with BNY Mellon, Goldman Sachs, and Shearman & Sterling LLP and was sponsored by Barclays, LIXIL, Mars, Potter Anderson & Corroon LLP, the state of Delaware, and Warburg Pincus. More information on the session can be found here: http://www.salzburgglobal.org/go/550
