5 minute read 4 Jul 2021
Man using digital tablet in a meeting

How Australian boards may look in 2030

By EY Oceania

Multidisciplinary professional services organization

5 minute read 4 Jul 2021

EY research suggests that current governance approaches on Australian boards may not be fit for purpose in 2030. There are some alternatives.

Australian boards are under pressure. A recent study by EY Global Centre for Board Matters found that directors face key challenges – a growing regulatory and legal burden; outdated modus operandi; skills gaps; and increasing emphasis on environmental, social and governance (ESG) issues. These factors, as well as the recent crisis of the COVID-19 pandemic, have put boards on the back foot, unable to respond at speed to more volatile conditions and, most worryingly, putting their organisations at unacceptable levels of risk.

Where and how board operating models may change

  • Management systems and performance

    • Boards will set and communicate long-term value targets and KPIs that clearly reflect the organisation’s strategy and intent. 
    • Good quarterly financial results will be interesting but not a preoccupation. 
    • It’ll be both crucial and easier to demonstrate board performance objectively (including but not limited to ESG). 
    • Non-executive directors (NEDs) will be rewarded in line with that performance, including how they contributed to long-term value.
  • Processes and procedures

    • As boards move towards stakeholder capitalism, their processes will adjust to make them more agile and able to engage multiple stakeholders.
    • New processes will emerge to support more rapid decision-making cycles, with fast-moving and relevant data. Other processes will make sure boards make decisions with integrity.
    • Automation will support management teams and company secretaries with standard board processes, including reporting, managing risk and overseeing audit and finance. Board packs will be a fraction of their current size.
  • Technology and data

    • Technology will be central to reducing the time boards spend on reading and checking – freeing up capacity for thinking and dialogue. 
    • AI systems will be ethical, well governed and vetted, increasing trust. 
    • AI will be a force-multiplier for NEDs and an accepted brain in the boardroom. It’ll provide real-time analysis of results, trends and patterns, as well as fact-checking.
  • Structures, roles and responsibilities

    • Structures will vary and provide new mechanisms for tapping into wider views and expertise. 
    • Some boards may rebrand themselves 'stewardship councils' or 'value custodians' to reflect their purpose and longer-term focus (while still meeting their regulatory responsibilities).
    • The structures of these boards will be more 'outside in'. This will allow directors to make sense of ambiguity, interpret external noise (including stakeholder sentiments) and uncover competitive opportunities earlier.
  • Participants and their skills

    • Board members will be different, and not only in terms of their demographics. 
    • They will properly assess for and use cognitive diversity and contrarian thinking, along with other 'soft skills'.
    • Making active use of 'soft systems' skills to navigate uncertainty and support regular transformation will be the norm. This might include harnessing a wide range of thinking styles to resolve differences, build influence and unpack complex topics.
  • Ways of working

    • Boards will work in more agile and unstructured ways to get to grips with a fast-moving, VUCA world. 
    • Board management and governance will evolve to reflect changes in project management philosophy. Planned and sequential “waterfall” approaches will lose ground to agile ones. 
    • Cultural and procedural shifts will mean directors have more frequent and real-time interactions with management and key stakeholders.
    • They’ll also be constantly plugged into real-time performance dashboards and systems for early warning, assessment and control.

Key questions to help define your future operating model

Even as boards and their C-suites begin to recognise the need for change and adapt governance models, questions remain around exactly what the future board should look like. This article, puts forward some considerations but with a caveat; there is no one way forward for Australia’s boards. In a complex working world, different organisations will find different models suit their current reality and their future ambitions. But there are four steps that can help redefine the future operating model.

1. Establish what 'fit-for-future-purpose' means for your operating model

To do this, boards will need to look at three levels of purpose:

  • the long-term, societal purpose of the organisation, and how they support it
  • their mid-term priorities, based on the organisation’s three- to five-year strategy
  • their view of their own responsibilities as a board – together and as individuals (the board’s raison d’être).

Questions for approaching purpose with purpose

  • Level 1. As a board, are we aligned with the management team on a common grand purpose (our 'why?')?

    • Which key stakeholders are we here to serve? Do we consider them to be equal? If not, how do we decide on priority, and against which metrics? 
    • Are we clear about where and how the organisation will generate, report and reward long-term value? 
    • Have we clearly articulated to the external market what this grand purpose means for our brand promise and our social licence to operate? 
    • How will it affect our lived values, role-modelling and messaging in the long term, as well as our board behaviours? What legacy are we working towards, both individually and as a collective?
  • Level 2. Based on our organisation’s mid-term strategy, are we clear as a board:

    • How this will shape our priorities and the levers we pull to create value?
    • Which strategic risks and key assumptions we pay close attention to, and which metrics we need to be particularly mindful of? 
    • What this means for our respective roles, board structural arrangements, competencies and agendas?
    • How regularly these are reviewed and assessed, and by whom?
  • Level 3. Are we clear as a board:

    • What we do that’s different to management? In other words, where do we add to their work and where are the boundaries for decision-making?
    • What our unique value-add is and how we’ll assess that effectively? 
    • As a result of this, what will and won’t we focus on (in terms of both depth and breadth) and what will we communicate back to our management teams?
    • What beliefs and assumptions are we carrying, individually and collectively, about our role and what’s important to the performance of the organisation?

2. Have an honest conversation about what kind of governance approach will best fit your 3Ps

Should you be shareholder- or stakeholder-centric? Looking outwards (to gather and make sense of relevant data) or inwards (to keep tight control)?

3. Decide with management who’s responsible for what and how to deal with the grey space in the middle

For your management team, that means establishing:

  • which decision-making framework they’ll use (RAPID or RASCI)
  • which decisions they’re responsible for and when to involve you
  • which items they’ll merely inform the board about and which they’ll consult you on, co-develop with you or delegate up to you
  • how deep into the detail of topics management should go – especially relating to risk and compliance

For you the board, it means deciding:

  • what topics and decisions you should own
  • which powers you’ll reserve
  • when you’ll be involved, and 
  • what you’ll delegate

4. Develop a plan for transforming your governance model gradually

The findings of the EY study revealed that the 'as is' is creating a frustrating vicious circle for boards. As one interviewee put it: “I feel the obligations are upon me to lead these businesses through transformation and that creates a circle you can never quite complete. You permanently feel that you're never quite delivering to the extent that you need to.”

Moving from this vicious circle to a virtuous loop will involve making a series of incremental changes – not transforming overnight. But it’s critical for boards to start questioning their own ingrained thinking. After all, it’s the “that’s just how we do things” mentality among boards and management that prevents organisations from becoming future-fit. For example, by keeping them focused on short-term results instead of long-term performance.)

Getting in shape for the future

Let’s say you’ve worked through the above steps, including establishing purpose. Now, you could try applying your outcomes to find the right structure for your “board of the future”.

As you know, boards in Australia largely use the classical one-tier, British 'unitary' model, and by and large, it’s served them well.

But, this one-size-fits-all structure belies the huge variety of organisations it serves. It also makes it easier for shareholders to view board members as both omniscient and solely accountable. And likewise, executives can feel they aren’t really 'on the hook'.

As the focus on purpose grows, the expectation is that structures will begin to vary. Unitary models may well still dominate. But we’ll also see more two-tier boards and networked structures designed to reflect the business and its operating environment.

These alternative models are already gaining attention, as one interviewee explained when comparing a unitary board with the Nordic system. “[With a unitary board], in the public’s mind, all focus is on the board. Whereas when you've got the two boards… there's at least that question mark in people’s minds. And if you say, 'Well, I do this, and they do that', there's kind of a shrug of the shoulders and, 'Fair enough, then I don’t expect everything [from you]'. Whereas in our model [they expect us do everything]. So, to me, having two boards helps to set people’s expectations.”

What’s more, as boards build the courage to be more bespoke in their structures, they’ll be more ready to explain and stand behind them. And investors will both understand and accept the need for less homogeneity.

Here are three options for what these revised board structures could look like.

1. Hybrid

As the name suggests, this model mixes classic and new board structures, as determined by the organisation’s purpose. Some variants also reflect its wider structure: for example, aligning committees to the business units that create value, and where the biggest risks sit. The model allows for inputs from other key stakeholder groups while keeping some traditional committees.

2. Hub and spoke

In this model, the board (or 'value council') is still the epicentre, but shares its workload more than in the hybrid structure. This means ideas emerge, and issues are solved, around the board as well as within it. Non-traditional committees also support the big value-creating parts of the businesses, while advisory groups support specific topics like ESG.

One interviewee gave this great example: “We just created a new committee, which is around technological transformation of the business and the platforms and has genuine subject matter experts on that. And suddenly the IT guy who's been in the cellar with no windows is actually being dragged up to explain how we renovate the wiring of our ancient old house, and how we do it fast.”

3. Networked

Here, the board sees itself not as an omniscient epicentre but as a steward responsible for monitoring and facilitating long-term value. Satellite structures act like listening posts, picking up stakeholder issues as they emerge and feeding them up to sense-making 'nodes'. In this model, the board shares responsibility with these nodes for deciding how to respond.

Ultimately, it’s a question of mindset, not models

As with everything we’ve discussed throughout this series, the above are just suggestions, not cut-and-dried solutions.

This is not a suggestion that only structures should change either. To be ready for what’s ahead, all six aspects of operating models will need revising.

But the big question isn’t about which model, process or skillset is right. It’s how boards choose to respond and that has less to do with how workable a given solution is and more to do with mindset and appetite for change.

So, if you see validity in any of these ideas, you can (and should) consider how to respond. But how can you start, and where?

  1. We have a clear long-term purpose that informs our conversations on the board.
  2. Our committees, advisory and other structures reflect our strategic priorities and purpose.
  3. We have clear guidelines about the types of risk and compliance conversations we need to have with management, who covers what and at what level.
  4. We’ve had a robust discussion about the balance between shareholder primacy and stakeholder interests.
  5. We’re clear on whether we sit on shareholder primacy versus stakeholder capitalism and creating long-term value.
  6. We’ve defined what long-term value means in both financial and non-financial terms.
  7. Executive incentives are directly linked to performance metrics around creating long-term value.
  8. We understand what capabilities we’ll need to prepare for volatility, complexity and uncertainty in the operating environment.
  9. The board have started to discuss (or already have a point of view on) how AI can help with faster and better decision-making.

One more thought to leave you with

The research findings indicate that change isn’t only inevitable – it’s desirable. But that can be difficult to accept when you’re a product of a pre-existing, long-held governance system that for the most part has done the job well.

It can also be easy to reject alternative views on the basis of “Oh, that could never happen” or “It could only happen if X were changed”.

But through these articles, the intention is to challenge you to debate the governance systems you’re using. And if you only ask yourself one question, we’d suggest it’s this: “If we had a clean sheet of paper, given our purpose and strategy and the way things are going in our market/industry/regulatory environment, what would we design?”

The answer may surprise you – and reset your course towards 2030 and beyond.

Summary

What should the board of the future look like? Each organisation will find different models to suit their current reality and future ambitions. In this article we outline four key steps that can help redefine your future operating model.

About this article

By EY Oceania

Multidisciplinary professional services organization