Setting the pace or keeping up — is your board future-fit?

By

Sharon Sutherland

EY Global Center for Board Matters Leader and EY Global Markets Strategy and Operations Leader

Global mindset. Power through diversity. Art lover. Intellectually curious. Traveler. Legacy matters. Passionate about learning initiatives.

20 minute read 31 Jul 2019

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Discover six new or improved practices your board can adopt to become future-fit.

In a technology-enabled transformative age, businesses have moved outside of traditional capabilities and continue to explore new business models and ways of working, including in the boardroom. To keep pace, boards need to reshape and reimagine their roles in order to ensure they are future-fit.

In recent years, the average lifespan of the largest US public companies has been declining as a result of economic or technological disruption and in some cases, this is because they have missed opportunities to adapt and innovate.Similarly, a significant percentage of companies that made up the UK’s list of largest public companies in the 1980s have either been bought, declined or disappeared. The ones still around are those who have been able to adapt and shape the future.2

But is any of this new? Businesses have always operated in constantly evolving environments. So, what’s significant now?

The accelerating pace of change means that boards must continually evolve to embrace transformation and address effective performance now more than ever. Technological, geopolitical, demographic and environmental changes require boards to do the hard work needed to guide their companies to seize the upside of disruption, manage risk and optimize performance.

EY has identified six key areas of action for boards to test their future fitness and, within each, highlighted questions your board should consider:

  1. Gather new perspectives
  2. Revitalize board dynamics
  3. Increase focus on the long-term
  4. Adapt communication, protect reputation
  5. Align and monitor culture
  6. Enhance risk and compliance oversight

Future-fit boards are forward-thinking and proactive in collecting perspectives which could impact the business. They are diverse by nature, inclusive and navigate the provocative and the unexpected. They are outward-looking and show leadership in balancing interests for the long-term. They are transparent and responsive. They are innovative in their oversight of human capital and culture as a value driver. And they have an expanded view of risk with technology-enabled compliance, monitoring and mitigation.

Underpinning all of this, future-fit boards have a clear conception of purpose. As new value sources are discovered, a clear sense of purpose can provide a path through uncertainty by strengthening focus and vision, building trust and enabling agility to innovate in times of transition.

This is particularly the case for businesses with a broad view of purpose which goes above and beyond shareholder value to considers other key stakeholders and other growth drivers.3 As Harvard Business Review found in their 2018 study of the UK’s longest-lasting organizations, the ones which have stood the test of time are those that focus not just on ‘serving customers, owning resources, being efficient and growing’ but those that ‘try to shape society, share experts, … and focus on getting better not bigger’.4

Enabling future-fit boards

Working with clients around the world on new and evolving practices essential for future-fit boards, EY leaders on corporate governance and board matters now share their insights. Consider the following six areas of action for testing your board’s future fitness.

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Chapter 1

Action 1: Gather new perspectives

To receive the quality and breadth of insight needed in today’s environment, future-fit boards ask the right questions.

Gathering perspectives is not just about gaining a view, for example, on the quality of customer experience or an understanding of employee treatment, for the purposes of assessing past performance. For future-fit boards, gathering a broad set of perspectives is important at a strategic level.

Proactively gathering perspectives and seeking input from stakeholders, including investors, helps to inform decisions about strategic direction, emerging risks, purpose, values and long-term health of the business. What are you hearing about how your stakeholders view your strategic priorities? What are you hearing about their preferences in balancing short- and long-term objectives? What are you hearing about their values and core beliefs? How are their values and interests changing and what do these changes tell you about the opportunities and risks facing the business?

Future-fit boards help their stakeholders by asking the right questions and this, in turn, helps to create two-way dialogue that builds trust and maximizes access to talent, markets and customers.

Start by conducting an exercise, with periodic review, to map and prioritize stakeholders. There are methods for mapping stakeholders by influence and interest, or power and impact, and to identify groups with the most significant ‘stake’ in the business. It can be useful to ask: who would be impacted if our business disappeared tomorrow and who would start the business again because they see value in the purpose or contribution of the business to society?This can prompt discussion about the effect of the business’ activities and its position in a wider network of interests and values.

Future-fit boards are also strategic in their analysis of feedback and all types of external information and data. While it’s possible to get overwhelmed by data, not all of which is necessarily important or relevant, future-fit boards take charge of getting the right information and developing their knowledge on the right issues.

They make use of a variety of sources, including new ones, such as social media, and ask for data on new types of metrics which might not have been gathered in the past, for example, on issues around culture, customer behaviors or technological disruptors impacting their industry.

“There are so many different types of investors and it’s important to be proactive in understanding what interests them and how they and other stakeholders are assessing your performance. Boards must guide their conversations with investors to focus on strategic issues and the metrics most reflective of long-term value.” Ken Williamson, Partner and EY UK Corporate Governance leader

Material stakeholders are different for every company. Future-fit boards are proactive, have a handle on their external landscape and bring that information to the board table for robust discussion around risks, opportunities and potential impacts on long-term purpose. They reimagine their ecosystem and reshape performance.

Boards must guide their conversations with investors to focus on strategic issues and the metrics most reflective of long-term value.
Ken Williamson
Partner and EY UK Corporate Governance leader

Questions for your board:

  1. Are we talking to the right stakeholders (both internal and external) and asking the right questions to get insight and input on strategic matters?
  2. Have we reviewed the types of information we receive and whether there are new data points we need to see?
  3. Are we making use of stakeholder perspectives, external data, and relevant expertise to educate ourselves on new areas of risk and opportunity and have the right conversations?
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Chapter 2

Action 2: Revitalize board dynamics

Future-fit boards consider their composition in the context of long-term strategy and the need for challenge, reinvention and adaptation.

What will the boardroom of the future look like? Who do you need in the boardroom to optimize performance now and for years to come? Maintaining a diversity of background, experience and cognitive style is essential and requires planning to ensure a balance is maintained as new directors come and go.

For future-fit boards, it’s also about how new technologies and ways of working add a new dimension to the diversity discussion. Future-fit boards dig deeper to ask: What does under-representation of women in technology mean for your board and your business? What biases could lurk within algorithms providing information to the board?6

Even with a well-balanced and diverse board, it’s possible to squash input and underutilize your assets. Future-fit boards actively value varied input, differences of opinion and disruptive ideas.

In one recent study, ‘Gold Medal Boards’ that rated themselves as highly effective and oversaw a high-performing company (based on outperformance on total shareholder return), more frequently reported having a Chair who drew out relevant experiences of directors, actively sought different points of view and fostered and facilitated high-quality debates.7

In a rapidly changing world, future-fit boards recognize the value of diversity in age – valuing newer directors while also leaning on experience. And working as a whole, they act as learning boards.

Rather than rely on the expertise of one director with a relevant skillset, they train and re-train for the board as a whole to have the right level of knowledge to make informed decisions and provide transformative leadership. Is there an area of the business, an industry trend, a new technology or an emerging geopolitical risk that your board would like to better understand? Draw on internal knowledge, bring in external experts, identify resources and share experiences. 

Ongoing self-reflection is another hallmark of future-fit boards, with and without the help of external facilitation. What are the elephants in the room? How effective is your communication, agenda management, decision-making, leadership and oversight? Consider how market shifts and industry dynamics impact time commitment, information access requirements and relationships with management.Review, reinvent, take bold action and unlock new value.

Questions for your board:

  1. Do we seek and encourage the provocative and the unexpected?
  2. Are we reaching outside of our traditional capabilities to analyze business challenges and issues from every angle?
  3. How open are we to reinvention, adaptation and transformation within the boardroom?
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Chapter 3

Action 3: Increase focus on the long-term

Future fitness is about unlocking new value and future-proofing your business.

Pressure on the short-term remains high amongst some investors, and with increased disruption and uncertainty, it’s easy to understand why some boards would be focused on quarter to quarter survival.

As EY and the Coalition for Inclusive Capitalism remarked in a recent report on measuring the drivers of long-term value, ‘the best businesses are defined by more than their short-term profitability. They drive broad-based prosperity by creating value for shareholders, customers, employees, and society alike.’9

Long-term strategies are important as a stake in the ground but must also be adaptable based on new intelligence, technologies and industry developments. Beyond technological developments, disruption can come from regulation, consumer behaviors, sector convergence, employment patterns, societal expectations, geopolitics, climate events and more.10

Future-fit boards are focused on identifying megatrends and guiding management to face new challenges and innovate to seize the upside of disruption.

Future-fitness is also about creating an environment for management which provides flexibility to develop better, more innovative business models, new collaborations and new ways of working, drawing on talent and incubating new ideas.

A recent EY study of 500 US executives found that 42% of executives cite limited budget as their biggest barrier to activation on innovation initiatives.11

Using intelligence gathered from stakeholders is important for shaping long-term value. For example, boards can sometimes make assumptions about what investors and stakeholders are interested in; what they value and support. Based on another recent EY survey, 42% of global board members felt that investors would support long-term investments that improve long-term business prospects even if they diminished near-term financial performance.

The same survey revealed that in fact 60% of investor respondents agreed that they would support this type of long-term decision-making.12 Customer insights on their needs and problems are also a vital source of information.

Future-fit boards are focused on clearly articulating their long-term strategies. What investments are they making to protect and sustain the value drivers underpinning the business? With no universally applied and disclosed metrics on value drivers from human capital, innovation, culture, customer loyalty and trust, it can be a challenge to communicate with investors on a consistent basis.

However, in today’s market, intangible assets make up over 50% of a company’s market value on average – up to 80% in certain industries - and information about how these assets are protected is of increasing interest to investors and other stakeholders.13 “There can be a disconnect between boards and investors, but future-fit boards communicate long-term value, build trust and inspire a new vision for growth and transformation.” Rohan Connors, EY Australia People Advisory Services

The Embankment Project for Inclusive Capitalism (EPIC) brought together companies, asset managers and asset owners in an effort to help businesses communicate how they are creating long-term value to markets and the resulting report identifies metrics for key drivers of long-term value. It also outlines the Long-Term Value Framework which is a helpful tool for boards to consider.14

We are in an age of superfluid markets and industry convergence. New markets are being created as industry lines are blurred and ‘social media companies are becoming live entertainment broadcasters, traditional car manufacturers are transforming into on-demand service companies and telecom companies are leveraging huge consumer bases, capital and data, to disrupt the banking sector’.15

Future-fit boards are focused on transformation and adaptation for the long-term. They are informed by megatrends and stakeholder intelligence and they clearly articulate their long-term strategies and their vision for growth. Future-fit boards reinvent a future fit for a better tomorrow.

There can be a disconnect between boards and investors, but future-fit boards communicate long-term value, build trust and inspire a new vision for growth and transformation.
Rohan Connors
Partner, EY Australia People Advisory Services

Questions for your board:

  1. How ready are we to articulate our long-term value-creation narrative?
  2. Are we enabling management to experiment, make bets and reimagine growth outside of our traditional capabilities?
  3. Is our long-term strategy sufficiently adaptable and informed by latest information, megatrends and stakeholder insights in a rapidly changing world?
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Chapter 4

Action 4: Adapt communication, protect reputation

Reputation in an increasingly transparent world can be an important as well as a fragile asset.

Business today has a wide and varied audience. They are imbued with values, ethics and personalities, and their size, impacts and influence can increasingly transform into political actors as well as economic. Future-fit boards recognize that companies can fail if they say one thing and do another —­ that to maintain trust with stakeholders, aligning purpose with action is paramount.

In a recent EY survey, 80% of global CEOs agreed that in the next 5 to 10 years, public opinion will become as important to companies as their investors.16 This comes at the same time as surveys which indicate: 76% the general global population feel that ‘a company can take specific actions that both increase profits and improve the economic and social conditions in the communities where it operates’; 67% of employees expect their employers to join them in taking action on societal issues; and more than three-quarters want their CEOs to take the lead on change instead of waiting for government to impose it. 17

EY’s recent survey also found that 86% of investors said that the corporate response to global challenges will become more important to investment decision-making over the next five years. Mala Shah-Coulon, Associate Partner, EY UK Corporate Governance team, said “Future-fit boards unpick trends, looking at underlying causes beneath particular socio-political events to understand how public expectations of business are evolving and what this changing landscape means for their business.”

It is a wake-up call for boards to note that the most significant factor global CEOs cite as constraining them from being more vocal and involved in helping to solve global challenges is ‘board attitudes, skills, composition and leadership’.18 This was at the top of the list for 57% of CEOs — above regulation, compensation and investors – and suggests that they feel they would be more active and vocal, were it not for the direction from the boardroom.

Future-fit boards recognize the value which can be unlocked from increased trust, loyalty and commitment from employees and other stakeholders which is shown to significantly increase when employees feel their company is engaging in beneficial actions on their behalf.19 They recognize the risks that can come from policy making during periods of low trust in business and the incentives therefore to increase public understanding and trust.

They also understand that "what is legal, or even socially acceptable today, could easily fail the tests of a shifting zeitgeist tomorrow"20 so they lead rather than follow. Future-fit boards empower management to take a stance. They show bold leadership to drive inclusive and sustainable growth for a better working world.

Taking the lead on change

76%

of respondents think CEOS should take the lead on change rather than waiting for the government to impose it. (Source: Edelman Trust Barometer 2019)

It’s also important to have a clear mutual understanding of the division of roles for external communications and plans for response in the event of a crisis, whether it be from a cyber-attack, the MeToo movement, fraud or environmental destruction. The heightened scrutiny from 24-hour news cycles and the viral spread of information means that clarity, integrity and timely responses are fundamental for future-fit boards.

Questions for your board:

  1. How accurate is public understanding about what our business does and how we contribute to society and the economy?
  2. Are we constraining management from helping to solve global challenges and engaging with employees and other stakeholders on issues that matter to them?
  3. How ready are we to respond in the face of a crisis and how assured do we feel that our purpose is being lived and we can always stand by our values?
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Chapter 5

Action 5: Align and monitor culture

Emerging technologies are changing the workplace and having an impact on culture.

Regulators and investors across the globe are interested in how companies are better leveraging talent strategy and culture to accelerate long-term success and enhance viability.21 Culture is a strategic asset and future-fit boards are focused on understanding and monitoring the metrics that best reflect the alignment of the company’s culture with long-term strategy.

These can change over time, especially in this transformative age, when strategies must be adaptable to face new challenges. For example, a company that has previously been focused on efficiency, might need to shift to a focus on innovation, or a focus on quality.

It takes time and resources to drive cultural shifts which future-fit boards acknowledge, and they explore new metrics, engage with influencers, and re-think incentives, as they create a new normal.

In a recent EY survey, 73% of global mid-market CEOs said they were planning to adopt artificial intelligence in the next two years.22 Such developments can enhance the retention of talent by allowing employees to focus on more strategic work, but there are also challenges. Many leaders are working to build greater technical competencies and facing talent shortages. Digital and contingent workers may work remotely and require new strategies for embedding a cohesive culture.

Future-fit boards have a clear vision of the corporate culture, aligned with long-term strategy and empower management to embed the culture throughout the business. They then conduct their monitoring role using new metrics not traditionally considered by the board to look at the issues from every angle. “Future-fit boards send a strong message and clear tone from the top about culture. They are rigorous and creative in finding ways to measure and monitor the alignment of culture with strategy and the impact of culture on corporate behavior and engagement.” Rani Doyle, Executive Director, EY Americas, Center for Board Matters

Some boards are getting insights from social media, employee review sites, turnover rates, exit interview data, hotline trends, training effectiveness and incentive schemes. Future-fit boards also use and encourage management use of big data, for example in analyzing health and safety incidents to find ways to reduce harmful incidents.23

Even when performance is high, future-fit boards look beneath the surface to understand what behaviors are driving performance and what challenges are being faced.24 In a war for talent, culture is a key intangible asset that must be protected. 58% of millennials leave their job within the first three years and ‘employers need to move beyond traditional approaches if they want to retain their workforce’.25

Future-fit boards send a strong message and clear tone from the top about culture. They are rigorous and creative in finding ways to measure and monitor the alignment of culture with strategy and the impact of culture on corporate behavior and engagement.
Rani Doyle
Executive Director, EY Americas, Center for Board Matters

Questions for your board:

  1. How effectively are we overseeing shifts in culture as our strategy shifts to face new challenges and build a future-focused workforce?
  2. Are we being creative in our use of data to build a picture of culture from every angle?
  3. How clearly are we communicating the culture we need to drive strategy and monitoring alignment?
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Chapter 6

Action 6: Enhance risk and compliance oversight

Future-fit boards embrace risk and seize the upside.

They have a pragmatic approach for horizon scanning, gathering external insights and deploying monitoring mechanisms.26 They also think broadly about indirect and emerging risks and make use of automated techniques for more ongoing monitoring of emerging risks, deploying tolerance thresholds for Key Risk Indicators (KRIs).

In an EY survey of more than 2,000 global executives27, more than one-third ranked fraud and corruption as the greatest risk to their business, with the other highest-rated risks being cyber-attack, macroeconomic environment and changing regulatory environment. In the same survey, 66% of heads of compliance stated that compliance spend needs to increase.

Digital compliance tools, which use predictive analytics and real-time risk alerts, can optimize monitoring and reporting, and even the use of resources. For example, artificial intelligence can be used to provide risk-based communications tailored to individuals in real time, rather than classroom or web-based trainings.28

There are also new sources of data which can support a risk and compliance function; for example, emails, social media, video, and voice and text messages can help with analysis around key risks or events.29

A suite of data analytics tools EY calls ‘Finance 4.0’ can be deployed to provide increased assurance and trust to internal and external stakeholders on both financial and non-financial information.30 Future-fit boards are focused on the evolving world of reporting, monitoring and compliance technologies as well as the investment and cultural shifts needed to enable them. “If board members are able to access information in a smarter and more effective way, this is a very valuable commodity and allows them to make better business decisions in real time.” Christopher Gallagher, Partner and EY UK&I Risk Advisory practice leader

One of the shifts required is to develop new competencies of finance, risk and compliance professionals as well as of boards and audit committees. For example, making use of these technologies requires strong knowledge of legal frameworks for external data hosting, audit procedures across different platforms, and internal and external data protections risks.

If board members are able to access information in a smarter and more effective way, this is a very valuable commodity and allows them to make better business decisions in real time.
Christopher Gallagher
Partner and EY UK&I Risk Advisory practice leader

Questions for your board:

  1. Are we combining rich data and smart technology to power our risk and compliance oversight?
  2. What new skills and competencies are needed at board and management level to make the most of ‘Finance 4.0’ information?
  3. Is the board treating data as a strategic asset and are data governance risks encompassed in the boards risk assessments?

Summary

The future belongs to those who can set the pace, reimagine their ecosystem, reshape performance and reinvent themselves. Future-fit boards reimagine their ecosystem by achieving clarity on their stakeholder environment and gathering external perspectives to shed light on risks and opportunities.

They reshape performance by enhancing their decision-making through diversity and looking out for the long-term. And they reinvent themselves with clear communication, aligning values and culture when needed and re-energizing risk and compliance mechanisms.

A clear sense of purpose acts as a compass; setting due north and acting as a navigation tool for future-fit boards to create a better tomorrow.

About this article

By

Sharon Sutherland

EY Global Center for Board Matters Leader and EY Global Markets Strategy and Operations Leader

Global mindset. Power through diversity. Art lover. Intellectually curious. Traveler. Legacy matters. Passionate about learning initiatives.