5 minute read 4 Jul 2021
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Five trends that will the shape the board of the future

By EY Oceania

Multidisciplinary professional services organization

5 minute read 4 Jul 2021

By 2030, Australia’s boards will be accountable to a wider group of stakeholders, navigating greater volatility and complexity.

Imagine it’s 2030, and you’re a non-executive director on the board and risk committee of a challenger bank.

It’s the morning of the risk committee meeting, so you check the online portal for real-time updates on your organisation’s risks. You then log into EY AI risk portal to review the anonymised risk registers of similar companies in different geographies. You spot that a couple in South America have identified 'solar storms' as medium risk, while you have them as low risk.

As you wait for your drone-delivered coffee, you log in to your bespoke board portal to review your environmental, social and governance (ESG) metrics in real time. The dashboard shows that the metrics generated overnight for net zero emissions and employee wellbeing are in good shape. Every executive has completed anti-money laundering training and your organisation is on track to meet its targets towards the UN Sustainable Development Goals.

But, social-media scraping reports indicate that customers in India are venting about poor customer service and there are signs that growing third-party risks are leaving some key suppliers exposed. You message a colleague to invite the stakeholder advisory group to give an update at the next board meeting. While you’re at it, you agree that you’ll attend the next retail banking committee session and she’ll attend the institutional one.

Now it’s time to join the virtual reality risk committee meeting via an app on your phablet. You present your case for considering the risk of solar storms, particularly the potential cost to business of a power blackout. The rest of the committee understands your thinking profile and has undergone advanced soft skills training. The committee members are agile when it comes to changing their appetite for risk. After a constructive, reflective discussion, the group upgrades the risk to medium.

  • 10 predictions for the future of boards

    Boards in 2030 will …

    1. Be operating under a more differentiated regulatory approach and regime. Depending on an organisation’s size, sector and situation, compliance requirements will be less rigid – and therefore more nuanced. 
    2. Have executives who are more in control of operational risks, so the board has the space to focus on strategic ones.
    3. Have moved towards a long-term view of performance that includes explicit outcomes for stakeholders – and rewards executive and non-executive directors for achieving them.
    4. Be advancing a sustainability agenda, through clear governance structures and processes; and communicate it to stakeholders regularly.
    5. Look different in both composition and structure; no more one-size-fits-all. 
    6. Have the training and emotional intelligence (EQ) to understand, value and exploit diverse thinking styles for better decisions. 
    7. Gather external data and perspectives to understand risk and opportunity; and use technology to make sense of them.
    8. Embed AI technologies and use data to fuel conversations and liberate themselves from procedural oversight tasks. 
    9. Set the cultural tone from the top by committing regular time, resource and skills to strategic thinking,so the organisation can meet its objectives over the short, medium and long term. 
    10. Be volatile, uncertain, complex and ambiguous (VUAC) - and change-ready – willing to reinvent and adapt themselves while making sure the organisation has the skills and behaviours to do the same, so they can support the organisation’s evolving strategy.

The governance trends of today aren’t going away

This may be the reality for future board members as five trends reshape governance models, according to EY recent study of boards in Australia. These trends are already having a profound impact on boards’ performance, and are expected to fundamentally redefine their roles and structure by 2030:

1. Elevated stakeholder voice from more diverse groups

The shift from shareholder primacy to stakeholder capitalism was underway before the COVID-19 pandemic, but the crisis has accelerated the urgency to turn this ambition into action.

For boards, this means exchanging the known rules, metrics and priorities of shareholder primacy for the unknown landscape of creating long-term value for more – not just for some. Already we see leaders beginning to embed standard non-financial metrics, such the WEF-IBC standards for measuring ESG, into their organisations.

Meanwhile, the 2021 Edelman Trust Barometer1 revealed that 86% of respondents expect CEOs to publicly speak out on societal challenges and there’s evidence executives are responding, by shifting from being internally-focused business leaders to assuming broader societal leadership roles. For example, in EY 2021 CEO Imperative Study, 66% of CEOs in Australia and New Zealand saw fostering stakeholder trust and confidence as an increasing part of their role.

Boards needs to be ready for and embrace this shift. As one of interviewee said, “If we think about when shareholder primacy was dominant… we have moved away from that paradigm, and boards need to adapt. Boards need to recognise stakeholder expectations and that companies operate as part of the community and broader society.”

2. More transparent decision-making

We know investors are expecting more from boards. According to Insightia Ltd2, between 2013 and 2021, 85% of demands from activist investors in Australia related to factors within the remit of the board. But others are raising their voice too, using their influence to have an impact on corporate behaviour, and changing their own based on a company’s actions. More than 83% of respondents in a 2019 US study of Gen Z3 said they consider a company’s purpose when deciding where to work. And a 2020 Australian survey4 found that 72% of Gen Z and 69% of Millennials are more likely to buy from a company that contributes to social causes. As one of our interviewees explained, “Our law still includes the shareholder primacy rule, but the reality of where we stand today is that stakeholders feel we are accountable to them.”

3. Greater accountability – and consequences – for boards

The first two trends bring us neatly to the third: the onus on boards to be open, accountable and publicly admit when they’ve made a mistake. Again, Gen Z is particularly vocal on this issue: in the same 2019 US survey of Gen Z we quoted above, 75% said they would research a company to see if it’s being honest when it takes a stand on issues.

The big challenge, though, is that news and public sentiment moves faster than boards can react and having to work out what happened after the story has broken puts them very much in the back seat. Directors that follow an agreed decision-making approach, which includes consulting and sense-checking externally, will be better able to defend their actions.

For example, AI can guide better decisions where fast thinking is required, offering simulations of stakeholder responses. When more considered responses are in order, consultation, critical challenge and review points can support decision-making. Boards need to govern for both speeds, with suitable checks and balances in place for both.

4. Faster, more unpredictable pace of change

Of the issues people raised in our interviewees, VUCA was one of the most common.

A VUCA world presents big challenges to procedurally driven boards, because correlations – the relationship between cause and effect – aren’t well understood and when changes and new rules emerge, the usual procedures favoured by traditional board members just don’t apply. Instead, boards need to test quickly, assess and adjust.

But, while many organisations talk about becoming agile and resilient, we see few boards putting it into practice. Most hold meetings in quarterly cycles, with pre-set information and they generally don’t look beyond the knowledge, experience, skills and network reach of incumbent directors for input.

Changing this reactive approach is critical, but challenging. One interviewee summed up the dilemma like this: “We’re dealing with changes in regulatory environments, markets, technology generally, cyber risk … How does a board stay on top of the changes? … Many boards so are incredibly time poor; they don't have enough unstructured time together; meetings are jammed with agenda items and overly structured; and boards generally don't get adequate time with management. How do you thread the needle as a director through all these issues?”

5. Complex business ecosystems that make governance more challenging

The forces of digitalisation, globalisation and dispersion (of people, organisations, supply chains) have created a mind-boggling level of complexity for boards.

This takes two forms:

  1. Capital arrangements and structures. Businesses may own small stakes in many different businesses – a joint venture here, a minority stake there. This complexity makes it harder for the board to understand the level of control and exposure it has in its subsidiaries.
  2. Networked business ecosystems. Today’s organisations create (or potentially lose) value through a network of employees, contractors and third parties dispersed around the globe. How can boards oversee performance, or make sure everyone in that network is upholding the standards of business, without this direct line of sight?

Together these factors create a board member’s worst nightmare: considerable exposure to risk, with poor optics and little control.

A clear and present danger, or someone else’s problem?

Each of these trends could be a powerful force for change and deserves time and consideration. Collectively, though, they will have significant implications for boards.

Directors may feel that making the systemic changes required to adapt to these trends can wait, while they address the four issues our study identified as the key challenges for boards right now - regulatory and legal demands; outdated and manual modus operandi; technology and skills gaps; and competing stakeholder and ESG pressures. But we can spot clear links between today’s challenges and the trends creating tomorrow’s conditions for boards - those that act now to rethink their operating model can ease pressures now and get ahead of change. Key questions for directors can help kickstart the process:

  1. In the future, how will we assess and transparently demonstrate how we contribute to delivering long-term value for our respective organisations?
  2. Are we expecting that the enterprise will undergo more frequent transformations? If so, how will the board transform itself to align with the new organisational operating model? And how will the board anticipate and oversee major new requirements for transformational governance? 
  3. Do we have a view of what the growing pace of change and ambiguity will mean for our modus operandi? If not, what are we doing to address this?
  4. Do we have a plan for implementing the changes we’ll need to our governance operating model and skills over the next 10 years and beyond?

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What’s next?

The big question is – do the current governance structures of boards enable them to make these changes? This research suggests that redefining operating models may be necessary if boards are to become fit for the future. In the next article, we’ll explore potential models and how organisations can decide the best way forward. Read it here.

Summary

Five key trends are set to reshape governance models and have a profound impact on the boards performance in the future. In fact, by 2030 we expect board roles and structures to be fundamentally redefined.

About this article

By EY Oceania

Multidisciplinary professional services organization