Chapter 1
COVID-19: rising to the oversight challenges posed by the pandemic
In a period of crisis, what’s your board strategy for helping the organization to navigate now, next and beyond?
Oversight challenges don’t get much bigger than COVID-19. The pandemic poses significant risks to almost every aspect of a company’s operations. Inevitably, COVID-19 requires boards to do a lot of short-term firefighting. At the same time, however, the pandemic has far-reaching implications for organizations in terms of their business models, relationships with stakeholders, working practices and workforce structures. For this reason, it is crucial that boards keep the medium and long-term perspective firmly in mind when dealing with any urgent issues that arise. To navigate ongoing uncertainty and the lack of visibility around the future, they will benefit from continuously evaluating their organization’s business continuity and contingency plans.
Depending on the organization’s sector, the topics boards might want to explore with management include the reengagement of the workforce following a period of furlough or remote working, the restarting of any operations that have been halted by the crisis, and the adaptation of customer offerings to meet new demands. Organizational solvency will be a major concern for a number of boards.
In light of the severe economic downturn we’re in, boards will want to know what management teams are doing to reset stakeholder expectations in areas such as salaries, budgets, payment terms and supply chain management. They themselves will need to make sensitive decisions about dividend payments. In every decision they take, boards should be mindful that the way in which their organization responded to the COVID-19 crisis will be remembered by all its stakeholders over the years to come.
Chapter 2
Purpose and integrity: new ways of strengthening and focusing board decision-making
How can your board support the organization to activate and articulate its sense of purpose?
Companies that fulfill their purpose, while acting with integrity, are more likely to enhance their brands and reputations and build strong relationships with customers. They are also more likely to innovate successfully, mitigate risk and attract and retain talent, among other benefits. As a result, they are well-placed to achieve long-term value for a broad range of key stakeholders, which will translate into a strong financial performance over a sustained period of time.
The board has a responsibility, in its oversight role, to consider how it can support the organization to activate and articulate its sense of purpose. A good starting point is to ask important questions of the management team, such as, what does the management team understand the company’s core purpose to be? How is it using the company’s purpose to inform decision-making and influence working practices across every area of the business? How might the company’s purpose need to change in response to COVID-19?
The board has a responsibility, in its oversight role, to consider how it can support the organization to activate and articulate its sense of purpose.
When questioning management, it is worth making particular enquiries about the company’s environmental policies, human rights practices, communications with employees and relationships with suppliers. Also worthy of consideration are the incentives used in remuneration schemes.
If boards are to provide effective oversight of their organization’s purpose, they need to be composed of the right people and have the right committee structures in place. It may be necessary to recruit new board members with specialist competencies and skills. Alternatively, it might be appropriate to establish a committee that is dedicated to overseeing how the management team adopts a responsible business ethos that is aligned to the company’s core purpose.
Chapter 3
Climate change and sustainability: from environmental, social and governance (ESG) to a robust business strategy
Does your board consider climate change and other sustainability-related issues in its decision-making?
Boards have a public interest responsibility to make their companies more sustainable. Their stakeholders – including global policy makers, regulators, investors and the general public – expect them to address global challenges. Also, COVID-19 has highlighted how major threats to human wellbeing have the potential to severely disrupt business operations.
The priority for boards is to understand how the risks and opportunities associated with climate change and social issues could affect their company. They should also encourage management teams to consider how the company’s operations and business model can be adjusted to capitalize on developments such as renewable energy, advanced recycling techniques and the rise of the circular economy. Sustainability may be an opportunity for the company to become more competitive, efficient and resilient than its peers.
Of course, the way in which a company embeds climate change and social issues into its strategy will vary according to its business model, objectives and sector, as well as the specific risks it faces. Bearing this in mind, boards will need to ensure that they have sufficient information and expertise, as well as the right structures and processes, to provide effective guidance to management teams.
Boards should also heed the growing trend toward responsible investment. This trend is due to investors believing that sustainable companies are more likely to create long-term value. Boards should ensure that investors are provided with robust information on how their companies are affected by, and are responding to, climate change and other major social and environmental issues.
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Chapter 4
Fighting fraud and anti-money laundering: key considerations for boards
Do you understand how exposed your business is to the risk of money laundering?
Financial crime is a spiraling problem – and policy makers expect companies to help fight it. European anti-money laundering legislation has become increasingly more stringent over the past few years. Meanwhile, regulators globally are paying close attention to virtual currencies such as bitcoin, because they are a favored settlement method for money launderers and terrorists.
Exposure to financial crime is a particularly acute risk for companies operating in the financial services sector. Nevertheless, boards of companies in every sector should monitor developments in the regulatory environment as part of their governance oversight. They should ask their management teams to provide an assessment of the extent to which the company is exposed to anti-money laundering compliance risks, such as cryptocurrencies or politically exposed persons, and how they plan to mitigate those risks. Also, what is being done to improve the detection and prevention of economic crime within the company? Is the company making effective use of technological tools or collaborating with partners and peers to share best practice?
Boards should ask their banks to explain what they are doing to comply with anti-money laundering laws and what practices they are putting in place to instill ethical and responsible behaviors within their organizations.
A further way in which boards can strengthen their company’s defenses against financial crime is to ensure that the right processes are in place to encourage the reporting of illegal activities. For example, an anonymous whistle-blowing helpline might highlight some poor practices and provide valuable insights into areas of the organization where financial crime poses a particular risk.
Chapter 5
Digital business transformation: managing risk and seizing the upside of disruption
Is your board aware of how the organization can use new technologies to create more value for stakeholders over the long term?
Digital business transformation presents boards with some key issues to consider in their oversight capacity. The starting point is understanding the strategic opportunity – how can digitalization enable the company to enhance its operations and create a better experience for its customers and suppliers?
Once they have this understanding, boards can look at how the company could use new technologies as a platform for increasing efficiency, accelerating growth, developing new partnerships and overhauling its business models to achieve competitive advantage. They can also explore what the company is doing to attract and retain staff with digital skills and how it is using change management programs to embed new approaches and processes.
Another important consideration for boards is the emergence of some major technology-related risks. These include cyber risks – e.g., the theft of customer data – and ethical risks – e.g., an artificial intelligence system making biased decisions because it has been trained using an inaccurate or incomplete dataset. A further risk, particularly in light of COVID-19, is the emergence of a disruptive competitor that undermines the company’s business model or seizes market share because it has developed a digitalized service offering that customers prefer.
To be successful in future, companies will need their boards to exploit the exponentially larger data intelligence that can be harnessed through the power of technology.
By using tools such as data analytics, boards will be able to identify emerging megatrends and guide management to address the challenges that these megatrends present. The knowledge that they gain from data will also allow them to support management to develop more innovative business models, collaborate with new partners and incubate new ideas to realize competitive advantage.
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Chapter 6
Risk management: enhanced oversight of strategic opportunities and threats
Does your board have enough visibility of different emerging risks that could impact the organization?
The rapidly evolving business landscape requires boards to consider a multitude of emerging risks. As well as technology-related risks, they need to consider regulatory risks and sustainability-related risks, such as those posed by climate change, outbreaks of disease, skills shortages and failings in organizational culture. COVID-19 has also highlighted the potential for unexpected risks to threaten staff wellbeing and productivity, disrupt supply chains and decrease revenues and profits.
To provide effective oversight of such a broad range of risks, boards should work with their C-suites to map out the whole risk landscape that their organizations face, including both traditional and atypical risks. To get new insights, they could review their reporting frameworks and adopt reports that reflect the changing risk landscape. Going forward, for example, they are likely to require reporting that relates to intangible assets such as culture, reputation and talent. They will also need information on new and emerging competitors and other market developments that could challenge organizational strategy and result in culture- and conduct-related risks.
It may be necessary for the board to devote more time to discussing emerging risks and strategic opportunities. In this case, they could find the time by reorganizing committee structures and schedules. They should also look at how they make use of both internal and external data pertaining to the organization in their decision-making.
A valid priority for the board might be to assess whether the company’s C-suite and senior executives have the skills and competencies to address today’s biggest strategic risks. Where these skills and competencies are lacking, they could then suggest that the organization either recruits for them or engages with external experts who have specialist knowledge. The company’s risk management function should prove to be a valuable resource for the board, especially if it is able to deploy powerful technological tools to identify, assess, monitor and predict risk.
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Chapter 7
Audit committee perspective: understanding the CFO’s expanding responsibilities
How can your audit committee strengthen the organization’s governance by capitalizing on the CFO’s expertise as a strategic partner?
In this environment of extreme uncertainty, CFOs are providing forward-looking insights to boards and management teams. To do this, they are relying on emerging technologies, such as predictive analytics. At the same time, they are continuing to perform the activities that would have been the mainstay of the CFO’s role in the past – activities such as managing the company’s cash and liquidity, overseeing the financial reporting processes, and establishing and monitoring internal controls. It’s important that there is a strong relationship between the CFO and the audit committee, with trust as its bedrock.
Given this context, the strength of the relationship between the CFO and the board – and more especially the audit committee – is a matter of great strategic importance. COVID-19 presents some significant financial reporting issues in areas such as asset impairment, contract accounting and going concern. So, it is important that audit committees are kept well informed, and there is a strong relationship between the CFO and the audit committee, with trust as its bedrock.
Regular meetings between the CFO and the audit committee are essential. They foster open, regular communication and enable pertinent issues, such as risk management, to be discussed in a timely manner. As well as covering important corporate reporting and accounting issues, the meetings should explore wider strategic issues that might have a short- or long-term impact on the performance and value of the business.
They can also be an opportunity for the audit committee to gain a better understanding of the quality of the relationships that the CFO has, not only with the board and the CEO, but also with other members of the management team and senior-level executives. The audit committee can further recognize the CFO’s expanding responsibilities and strategic remit by ensuring that the finance function has the right talent to support the company’s objectives going forward.
Chapter 8
Board effectiveness: the changing dynamics of governance
How can your board operate more effectively to better meet stakeholder expectations?
An effective board, in the eyes of its stakeholders, will ensure that its company acts with purpose and serves a broad range of stakeholders, from investors through to customers, employees, suppliers and the community. It will also have board members with the right skills, competencies and experience to perform the board’s governance functions in line with the company’s strategy.
Undoubtedly, the chair plays a crucial role in improving board effectiveness. They can do this by overseeing a regular program of board self-evaluations and by establishing an atmosphere of inclusivity and trust within the boardroom. At a more practical level, they can ensure the right topics are covered in board meetings and allocate enough time to discuss priority items.
Yet effectiveness is not – and never should be – the responsibility of the chair alone. Good boards are defined by their ability to work well as a team. Board members should be able collaborate while offering constructive challenge and expressing dissenting views. It is important to note that just one non-performing board member can significantly disrupt the overall effectiveness of the board. Diversity is a key criterion of overall board effectiveness.
Research suggests that boards that bring a broad range of perspectives are generally better placed than their less diverse peers to help companies seize market opportunities and manage risks. Effectiveness is also enhanced by term limits for directors. These enable the composition of the board to evolve in line with company strategy.
To be effective, board members must be able to seek out knowledge from management to further improve their own understanding, without encroaching on the role of the management team. They also need to receive a smooth flow of high-quality and timely information from management.
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Summary
Today’s companies are operating in an extremely testing business environment – the most testing for generations. Inevitably, this environment brings with it a plethora of risks – but also a host of opportunities. We do not know what the future will look like, but we can be sure that the world will not go back to how it used to be prior to the COVID-19 crisis.
