Don Lowry is a corporate executive, director and current chair of Capital Power Corp.
High-performance boards are adapting to the reality that we are working in a virus-charged world, adjusting their governance protocols accordingly. Thinking unthinkable scenarios is no longer a fantasy exercise, it is pragmatic risk management. The challenge is to emerge from these paradigm shifts stronger than before, with the ability to sustain and increase value for all stakeholders.
There are three forces reshaping board governance that offer opportunities for boards to consider as they adjust to the new reality.
Directors are unable to discharge their duties for health reasons or because of pandemic restrictions on travel or gatherings.
The restrictions on travel, both international and domestic, were unimaginable only months ago. Due to requirements such as quarantines, some directors and third-party advisers (auditors, for example) are prevented from performing their leadership and advisory duties in person. A more extreme possibility is that all of a company’s directors could simultaneously be impaired for health reasons.
Although digital technology has made tremendous strides in resolving the travel issue and will likely remain part of regular board meeting logistics, it is not the whole or permanent answer. Boards need a mix of in-person and digital meeting formats to deliver maximum performance while simultaneously mitigating the potential for spreading the virus.
These conditions seem likely to remain for the foreseeable future, so progressive boards are considering a number of alternatives to adjust their governance protocols without diminishing their responsibilities.
The establishment of a vice-chair role in a different geographic region than that of the current chair can allow governance continuity in person. Skill certainly is the priority in terms of chair selection, but location will likely be given more weight now.
This issue is of particular importance for boards with a mix of directors across both domestic and international borders. This concept can also be extended to committee chairs and, where appropriate, the broader board succession planning process. The role can be more than a contingency, and thought should be given to performing other functions such as undertaking the annual internal board evaluation or leading special projects for the board.
A lead director in some circumstances may be another option, but given that a lead director’s role by definition often overlaps with the duties of the incumbent chair, this option’s suitability will vary between organizations and their circumstances.
Digitization is revolutionizing the way boards work, but not their responsibilities.
The world has changed, and we are not going back. The skills directors possessed that got companies to where they are today are not necessarily the ones boards need in our new world.
Being digitally savvy has become table stakes for directors. Either through director education or at the time of recruiting, this is now an essential skill. Organizations that teach governance as a profession will likely expand their curriculum to include not only how to navigate the technology but how to more professionally interact online. When we look back several years from now, today’s digital tools and online performances will appear amateurish.
Another element in a director’s background that is coming to the fore is experience in crisis governance or rapid industry transformation due to social, financial, technological or government policy. The world will never be slower than it is today, and the speed at which disruption can occur is only increasing. Having experienced talent around the table that can deal with these events is a significant governance differentiator for boards that navigate disruption well versus those that do not.
Director meetings with investors, proxy advisers and other critical stakeholders are now being initiated with online tools rather waiting for them to call. Based on personal experience, the take-up by these groups is far better than traditional one-on-one meetings.
Similar to the International Organization for Standardization of safety standards, progressive boards are adopting meeting practices that maximize safety for all while minimizing their environmental footprint. For instance, having a protocol that says only so many directors may meet in person at one time and dedicating a certain proportion of meetings to a digital format reduces travel requirements, exposure to viruses, costs and environmental impacts.
Similar to management policies prohibiting a CEO and select officers from travelling together, the board can further reduce health risks if it judiciously manages the number of directors physically present at any one time. Although not the same as a traditional meeting with everyone present, this is part of the hybrid work environment many firms are embracing, as opposed to having all workers back at one time. As good as digital technology is, the best governance is finding the right balance of technology and human presence, and there is no set formula.
Environmental, social and governance (ESG) is part of the DNA of industry governance leaders.
The rise of stakeholder capitalism versus shareholder capitalism is real and ties back to the reality that a firm needs more than just a business licence or regulatory approval to operate, it needs to have earned its social licence. If the pandemic has taught us anything, it is that if workers, customers, investors, suppliers and the communities we live in do not feel that management cares about their health and safety and the environmental and social impacts of the company’s operations and their right to be treated fairly regardless of race, colour or gender, then nothing else really matters.
The importance of getting these foundational principles right is likely the biggest risk to companies and the greatest responsibility boards now have. Investors and proxy advisers are increasingly signalling that failure to get this right will risk their access to capital markets. The appointment of Mark Carney to lead this role at Brookfield Asset Management underscores the growing significance of this element of governance.
If boards do not set the right ESG tone at the top, the negative impact can be profound. Shareholder activism, social unrest and interventionist public policy can be devastating. Done right, ESG can be a major competitive advantage. Leading director candidates increasingly will not serve on boards or work at companies that lack this level of commitment.
Our task as directors is to ensure that the improvements made in the time of crisis by management and boards are baked into ongoing operations. This strengthens a firm’s speed and ability to adapt to future change. Good governance is not passive; it adapts and enables organizations to be resilient and thrive on disruption as a competitive edge.