Achieving Excellence in a New Era of Corporate Governance

by Savoy Staff

Byron Loflin, Nasdaq Governance Solutions

Throughout 2020, companies around the world faced uncertainty and complexity that was previously inconceivable. As a result, these organizations were tasked with responding to such uncertainty by quickly pivoting their strategies to meet the unique needs of their stakeholders.

Corporate governance is the foundation upon which organizations build successful structures that serve and deliver value to their stakeholders. In this era of change, organizations that have excelled can point to healthy and robust corporate governance. Organizations with a sharpened focus on environmental, social, and governance (ESG) matters demonstrate an understanding of the importance of such matters to organizational, stakeholder, and shareholder success.

Boards that exhibit strong engagement and play an active role in driving focus on long-term strategy—while adapting appropriately to new short-term, pandemic-, economic-, and socially-driven challenges—are effectively stewarding their organizations into this new era.

As organizations review their efforts to achieve governance excellence, we encourage focusing on the following areas:

Stakeholder-Oriented Governance
A stakeholder-oriented governance structure provides clarity of purpose and focuses strategy on common values and goals that go beyond those of the shareholder. An organization should focus on delivering value to its essential stakeholders, including its employees and contract workers; its clients and the communities it serves; its suppliers, partners, and vendors; the environment it impacts; its shareholders; and the organization itself. Boards that embrace ideals for excellence should consider driving strategies and risk mitigation in a consistent and innovative manner that serves all stakeholders.

Board and Management Alignment
High-performing CEOs and managers deserve qualified, highperforming board members. Over a company’s lifecycle, invariably the individuals who comprise a board change. As board members look for new members, they evaluate candidates on their potential to contribute to maintaining or elevating the performance of the board. While relevant experience, expertise and skill sets are indeed essential qualifications for consideration, a more holistic, value-oriented assessment of board composition has emerged that recognizes the benefits of diversity of thought.

The importance of maintaining healthy dynamics between the board and management team, agreed-upon risk thresholds, and a shared understanding of how an effective decision-making process functions was showcased throughout 2020 as organizations tackled the various challenges born out of the pandemic. From assessing whether to furlough or lay off workers to managing debt( Powell Associates Ltd. can also help you out to get the best debt advice), from raising capital to approving mergers, ineffective boards and management teams risked for b2b debts and it has also experiencing the next corporate governance failure and a case study for generations. Conversely, the most effective boards and management teams keenly understood the benefit of having people in the room who could candidly raise diverse perspectives and thoroughly vet issues and, as a result, found solutions to and opportunities in challenging circumstances.

Board Composition
While organizations work to comply with regulatory diversity mandates and respond to investor demands for advancing board diversity, sophisticated boards understand that diversity can be a strategic differentiator for board effectiveness, especially when facing complex circumstances. Varied perspectives and experiences allow for more robust discussions and thorough analyses of possible downside risk and upside potential. Yes, diversity should include considerations of gender and race, but it should also expand towards a more comprehensive and impactful definition to include cognitive diversity, i.e., diversity of thought.

A formal board succession plan is essential to maintaining a future-ready board. Among its clients, the Nasdaq Governance Solutions board engagement team has observed a recurring theme around the need to evolve from an essentially ad hoc succession planning approach. Formalizing a succession plan begins, as most boards do, with considering factors such as candidates’ experience (including prior board and leadership experience) and expertise, gender, race, age, national and geographic origin. Beyond those basics, boards should also consider personality and alignment to board culture and corporate values to understand how each candidate would impact the boardroom environment, cultivate relationships with other directors and management, and represent the organization. Comprehensive board succession plans, along with thorough director recruitment, onboarding, and evaluation processes, can help boards evolve to meet the challenges of an ever-changing marketplace and provide effective oversight.

Board Performance
The current climate has challenged the traditional “good” board performance paradigm. Whereas previously directors had a clear eye on creating shareholder value, they may not have had the requisite expertise and perspectives to represent stakeholders’ interests or even to provide truly effective corporate oversight. Directors must be willing to ask challenging questions while at the same time supporting management in addressing challenges, mitigating risks, and realizing opportunities.

To better understand corporate strategy and strengthen the alignment between the board and management team, directors should undertake building intimate knowledge of the organization. Whether that takes the form of factory site visits, test driving the company’s cars, or shopping at the local stores, that ground-level knowledge helps directors put themselves in the position of the stakeholder and understand the gaps to successfully executing on strategy. With pandemic-related safety restrictions still largely in place, gaining this kind of first-hand perspective has been difficult, but innovative boards and management teams have found ways to adapt to maintain some level of engagement.

ESG & Human Capital Management
Another emerging area of the board’s fiduciary duty is to understand their stakeholders’ ESG priorities. The pandemic and social justice movements in 2020 have heightened the focus on human capital management (HCM), which continues to be a focus for investors. Corporations are often asked to disclose workforce safety, welfare, and equality initiatives and progress in their annual proxy statements. In addition, investors are signaling that boards will be held accountable for demonstrating progress toward ESG and explaining how those factors correlate to business performance and risk reduction. Boards should consider disclosing this information, proactively, to showcase transparency and progress toward the organization’s ESG goals. An effective, forward-looking board will evaluate ESG matters through an approach that brings together strategy, risk, and governance with co-equal, cross-disciplinary responsibilities for the board and management team. The board should consider working closely with the management team in assessing what environmental and social matters are material to the organization and its stakeholders—which will be specific to each organization based on several factors. It is then the board’s responsibility to ensure the stakeholders’ environmental and social priorities are built into the strategy and culture. ESG matters, including HCM, will likely be key drivers in changing the way organizations—and their boards function in the future.

Crisis Preparedness and Lessons Learned
The pandemic highlighted how ready (or not ready) boards were in handling a crisis. Organizations have been prompted to reevaluate board performance with respect to risk oversight responsibilities. Many boards were asked to convene on short notice, working closely alongside their management teams, having daily meetings in some instances to address the disrupted and rapidly evolving environment. Boards moved to help management teams respond swiftly to changing and unfamiliar circumstances—ensuring that employees could work remotely, protecting workforce health and safety, and developing actionable plans in response to social unrest.

The events of 2020 provided boards a reason to reflect upon the lessons learned—assessing the adequacy of management’s crisis preparedness plans and responses; evaluating the effectiveness of the board’s oversight of crisis response; understanding enterprise risk management framework maturity; and regularly reviewing corporate risks and delegating oversight responsibilities. In its work with clients, Nasdaq Governance Solutions’ board engagement team helps boards see the value of “table-top” and “black swan event” exercises. Those that use such exercises leverage each director’s relevant experience to provide real-world examples of actual crisis response practices from other organizations to their management teams. Table-top exercises contribute to an organization’s ability to respond effectively to a crisis and message continuity plans to stakeholders.

While the 2020 pandemic and social justice events presented organizations—and their boards—with challenges, the “new normal” also presented opportunities for improvement and innovation. Boards should be evaluating the current competitive landscape and refining their strategies to expand reach, drive efficiency, and disrupt their industries. Boards should also consider helping management teams make the transition from short-term stopgaps to long-term strategies for sustainability, efficiencies, cost reductions, and improved stakeholder value. Post-pandemic recovery will result not from a “return to normal,” but from imagining a new future built on reinvigorated long-term growth strategies driven by dynamic practices, agile workforces, and sophisticated leaders.

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