I’ve heard steadily over the past few decades about the need for boards of directors to urgently transform themselves to meet the economic, social and technological stresses of the times. Today, it may finally be true.
Directors operate on the organizational edge. Yes, they oversee important internal issues and often immerse themselves in strategic and operational details, briefed by or working alongside management. But they are usually outsiders, bringing perspectives from the external environment, guardians of risk and reputation.
In particular, issues around social responsibility of corporations, the dangers of climate change, inequality and racism have the potential to endanger organizations – “gradually, then suddenly,” as Ernest Hemingway put it to describe a bankruptcy in The Sun Also Rises. Boards must be vigilant. Actually, more than that, board members must think like activists, Helle Bank Jorgensen, a Toronto-based consultant to many Fortune 500 boards, warns in her book Stewards of the Future.
She notes that if the pandemic has taught us anything, it is the importance of taking broad social trends into account when considering potential risks to a business.
“Board members assumed for many years that shareholder activists and special interest advocacy groups inhabited another world, and that they would simply have to tolerate discussion of a climate change or social justice proposal at the annual meeting. However, attitudes and expectations have changed, especially among employees and consumers younger than the baby boomers who still call most of the shots around boardroom tables. Activism has now reached the boardroom, and it will not be going away soon,” she writes.
Directors need to do more than listen; they must align their thinking with the activists and respond.
That starts with insisting board materials accurately portray the environmental, social and governance, or ESG, issues the organization faces, and spell out how management will deal with them. Directors need to acknowledge that their fiduciary responsibility extends beyond just the shareholders – to employees, customers, suppliers and the public at large.
“First, competent boards will pay less attention to next quarter’s earnings and share price. Second, they will look for ways to devise an early warning system for events and issues with the potential to harm the firm’s finances and reputation,” she says.
Making that more specific, she asks: How often does your board discuss different scenarios that may affect your business in the future? How often do you discuss whether management has the necessary expertise and resources to respond to a disruptive environment? How do you know if your corporate culture encourages sustainability and the overall purposes you have set for the company? Is your board committed to diversity, equity and inclusion in its own ranks? Should your board re-evaluate the amount of time it spends on financial performance versus ESG and strategy? Does your company curb excessive executive compensation and ensure compensation is equitable at all levels?
Those questions link the internal and external, which fits with the approach to risk advocated by retired U.S. general Stanley McChrystal in Risk: A User’s Guide, written with Anna Butrico, an associate at his consulting firm.
Fixated on external factors, he argues we fail to see the greatest risk to our organizations is actually us. “Threats – people or things that could potentially do us harm – are omnipresent. But it is our ability to prevent, avoid or mitigate a threat that determines to what extent it constitutes a risk,” he argues.
The risk is not climate change, but how you respond to it. You need to build a strong risk immune system, as he dubs it.
And be alert to what policy commentator Michele Wucker calls “grey rhinos.” Nassim Taleb popularized the notion of unexpected and unpredictable “black swans,” but Ms. Wucker has offered an alternative. Grey rhinos are not random surprises, but occur after a series of warnings and visible evidence. They are often highly probable but neglected threats that have a high impact. Some grey rhino scenarios should be considered in your strategic planning.
One grey rhino not to miss is artificial intelligence. It’s a danger area because most board members are not technology experts and this is an area that is particularly murky – and, because of that, can spin out of control. It’s easy to gleefully go along, excited at being on the cusp of a magnificent, revolutionary approach. But that is exactly when the unexpected arises and you find yourself, say, unintentionally discriminating, harming people, violating regulations or breaking a law.
Governance adviser Mark Pfister advises boards not to erroneously delegate the full artificial intelligence decision-making to the technology unit in your organization. It belongs with senior management and the board. Board members have to ask questions and not approve anything that defies a layperson’s smell test. “If a suggested direction or output seems off or illogical, it likely is,” he writes on LinkedIn, adding, “Don’t assume anything.”
Above all, boards must own sustainability in their organization, as Matthew Lynch, associate director of the Ivey Centre for Building Sustainable Value, and Thomas Watson, editor of the Ivey Business Journal, write in that publication.
Major institutional investors and asset managers have realized sustainability is fundamental to the long-term value of the assets they own. “Believe it or not, even some players in the hedge fund crowd are pushing companies to take sustainability seriously,” they note.
A sustainability standards board has been proposed to facilitate global standards. The potential impact of truly comparable data for markets should not be underestimated, especially when the largest market players might make strategic choices based on this information. “In essence, firms will be competing on their sustainability performance,” they warn. That will require a major change in thinking – and attention – for most boards.
- “Do you have any questions?” is a standard catchphrase of leaders. Replace it with, “What questions do you have?” to bring out more viewpoints, recommends consultant Diana Peterson-More.
- Promote excellence, not perfection, insists leadership consultant Charlene Li. One key way is to recognize when your team is done and give them permission to stop working toward an unattainable standard.
- To support working parents, acknowledge any biases or preconceived notions you have about working from home, remote work or hybrid work and eliminate them, says HR consultant Sharlyn Lauby.
Harvey Schachter is a Kingston-based writer specializing in management issues. He, along with Sheelagh Whittaker, former CEO of both EDS Canada and Cancom, are the authors of When Harvey Didn’t Meet Sheelagh: Emails on Leadership.
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