Governance opportunities for the coming era

“Wars and pandemics change the world.” So said Martin Wolf, Financial Times chief economic commentator, in a reflection on life after the coronavirus pandemic. Part of the change we are experiencing is technological and further global integration. “The world we are moving into over the next couple of years will really be quite different from the one before the pandemic hit us.”

Martin Wolf also sees a world in which demands for social change and inclusion are rising, and the younger generations have very different attitudes and values from their elders.

“Businesses that understand the new values and meet those new demands are going to have immense opportunities, while businesses that fail to do so will perish. Periods of difficulty and turmoil in the economy and society have often generated extraordinary social changes and business opportunities. This will be no exception.”

Once we combine the social, economic, technological, and political changes that are under way and amplify them with the ecological tsunami(s) we are confronted with, we can anticipate there will be truly no shortage of difficulty and turmoil, nor will there be any a shortage of, in Martin Wolf's terms, “stupendous” business opportunities.

But the opportunities will not be evenly distributed – they will favour the prepared! Since it is the boards of companies that are responsible and accountable for creating and maintaining organisations with a clear purpose that deliver long-term value consistent with the expectations of relevant stakeholders, it begs the question: what can they do to prepare?

There are three big shifts in governance that boards need to master.

Content of governance

The work of boards has changed a lot over the course of the past century – but the change currently under way is truly transformational. For the past 30 years, since the time of Sir Adrian Cadbury’s seminal report in 1992, many thought of the boards’ work as the direction and control of companies. It is also no coincidence that the full title of the report the committee he chaired was: “Report of the committee on the financial aspects of corporate governance.” For a long time, the financial health and the assured returns to shareholders were at the centre of governance, and therefore central to boards and companies.

Today, and even more so tomorrow, companies will not only have to be financially viable by efficiently producing goods and services that customers purchase, but they must be able to define and account for the ultimate value they generate for specified stakeholders. It is this ultimate value, the companies’ contribution to significantly increasing wellbeing, that is at the heart of any organisation’s meaningful reason to exist – that is its purpose. The expectations that stakeholders and rapidly more and more regulators have of companies is that they solve meaningful problems for people and planet and can demonstrate that they do not profit from creating harm.

For many boards this constitutes virgin territory for work. For the able companies this represents exciting new opportunities. The clearer an organisation is on how and for whom it contributes what aspects of wellbeing, and the more it is in control of its environmental and social impacts, and can provide data-based assurance that the solutions it is creating are sustainable in the sense that it and others can continue to satisfy the needs of future generations – the more it will flourish. In this new era, governance is now all about the “human-based system through which organisations are directed, overseen, and held accountable for achieving its defined purpose.” (ISO 37000:2021).

Structure of governance

In order for boards to be able to lead their organisations to grasp the opportunities that are facing them, one of the important shifts currently under way is the need to let go fast of the notion that only the board governs.

Boards need to master the ability to establish and maintain an integrated governance framework for their organisation that co-ordinates the governance activities of all groups that contribute to the governance of organisations.

The board is accountable for ensuring that there are clear roles, relationships, appropriate authority, competence, and resources; as well as controls and improvement processes established for all governing groups within the organisation.

For anyone in doubt who these groups might be and how constructive or destructive the relationships might be, think of the shareholder assembly, family council, line ministries, strategic business groups, internal governance functions of organisations. Only in this way will organisations have the possibility to find their way through an increasingly turbulent operating context.

Process of governance

The third important shift involves both old and new governance processes. Whenever we lead board evaluations, conduct training programmes or help organisations revamp their governance systems, there are two points of discussion that invariably generate a lot of energy and cause directors to take out their phones and take pictures of the slides we are discussing: first, what are practical processes through which boards can be more outward and forward-looking; and the second is, how can they increase their strategic contributions without micro- managing those to whom they have delegated?

The guidance on both questions involves four dimensions: clear intentions – why, to what end, how does governance contribute to value-generation; skills or ability to find, take, and make the role of effective board members; the right information and decision architecture,which increasingly involves real-time, forward-looking information, digitally integrated from multiple points across the organisation and its wider context; and finally, the ethos and culture of the board and the organisation which enable governing groups to separate signals from noise, and ensure effective and ethical decision-making under conditions of high uncertainty.

In view of these shifts, are you able to say how your organisation is doing? What are your governance opportunities? How prepared are you for a world in which the major asset will be the cohesiveness of your people that good governance generates?

Dr Axel Kravatzky is managing partner of Syntegra-ESG Inc, vice-chair of ISO/TC309 Governance of organisations, and the co-convenor and editor of ISO 37000 Governance of organizations – Guidance.

Disclaimer: the views presented are those of the author and do not necessarily represent those of any of the organisations he is associated with.

Comments and feedback that further the regional dialogue are welcome at axel.kravatzky@syntegra-esg.com