10 minute read 14 Jul 2021
Multicoloured beehives with flying bees

The Board Imperative: How today’s boards can meet tomorrow’s challenges

By Patrick Winter

EY Asia-Pacific Area Managing Partner

Focused on promoting Asia-Pacific innovation and technology. Committed to client service by driving EY cross-border collaboration. Passionate about inclusive long-term growth. Husband and father.

10 minute read 14 Jul 2021

A disruptive risk landscape and shifting stakeholder expectations are forcing boards to rethink their purpose and revisit how they operate.

This article is part of the EY Global Board Risk Survey 2021.

In brief
  • Pressure is mounting on boards to adapt and recalibrate how they operate.
  • Technology, such as artificial intelligence (AI), may deliver better data-driven insights, giving boards more time to focus on oversight of their strategic remit.
  • Boards should revisit and review their organizational purpose to ensure long-term value creation is a key component.

Organizations have evolved dramatically in the past few decades: supply chains have globalized; technology drives and enables much of what we do; and new enterprise models have emerged to facilitate these shifts.

But one component of the traditional business model has remained largely unchanged: the board. New sub-committees may have been added and diversity may be beginning to prevail, but essentially board operating models still look as they always have.

So, what’s the impetus for change? After all, many organizations have continued to perform well financially over the short term despite recent turmoil. And while regulators in sectors such as financial services have in some jurisdictions asked for minor changes to how boards operate, there has been no wholesale pressure to adjust.

But this is changing. First, the risk landscape has become more disruptive: according to the EY Global Board Risk Survey 2021 of more than 500 board directors around the world, 87% of boards say market disruptions are becoming more frequent and 83% say they are increasingly impactful. Second, there’s a need for a nimbler approach to seize transformation opportunities: more than eight in 10 boards believe their business strategies need to be more agile and evolve more quickly. Third, there is mounting pressure from a wide range of stakeholders to deliver long-term value.

These three drivers mean that current board operating models should be re-evaluated to ensure they evolve to serve a broader, stakeholder-driven purpose.

The Board Imperative Series provides suggestions to board directors with the objective of helping them to reframe the future of their organizations. It urges boards to think beyond existing constraints and reimagine a vision of the future by guiding them through how they and their organizations might change. However, there is no one-size-fits-all approach. Instead, we suggest three areas of opportunity for your board to explore:    

  1. Review and re-think what you do, and how you do it
  2. Promote diversity at board level
  3. Make purpose your path to prosperity

These initiatives are interlinked. For example, making progress on board diversity can accelerate changes in how the board operates. “The interplay between board diversity and risk, how the board operates, and board governance is very topical today,” confirms Kay Matthews, Board Director, Main Street Capital, Coherent Inc. and Silicon Valley Bank. “My hypothesis is that the more diverse your board is, whether that’s with respect to gender, ethnicity or other characteristics and experiences, the better you can identify and manage risk and potentially change how the board operates.”

The more diverse your board is the better you can identify and manage risk and potentially change how the board operates.
Kay Matthews
Board Director, Main Street Capital, Coherent Inc. and Silicon Valley Bank
1. Review and re-think what you do, and how you do it

One of the most significant obstacles holding boards back is how meeting agenda time is allocated: 59% of board directors say allotting more time for open discussion of emerging trends and potential disruptions would improve risk-management oversight.

Our survey shows that boards are struggling to focus on longer term strategically important topics such as transformation planning because they are too bogged down in necessary but nearer term aspects such as financial reporting and traditional risk and compliance: 43% spend the most time on financial reporting, but only 18% think they ought to.

Traditionally risk and audit have been grouped together into one board committee, but this can leave little time to focus on emerging risks.
Vickki McFadden
Board Director, GPT Group, Allianz Australia and Newcrest Mining

“Traditionally risk and audit have been grouped together into one board committee, but this can leave little time to focus on emerging risks because you have to do a deep dive on the financial accounts at least twice a year,” explains Vickki McFadden, Board Director, GPT Group, Allianz Australia and Newcrest Mining. “So, it makes sense for some boards to have a very focused risk committee.”

Beyond committee structure, how can boards liberate themselves for more focused and strategic discussions that will lead to better decision-making and outcomes? Technology – and AI in particular – can reduce the amount of time that boards spend on routine tasks. For example, AI can read, review and validate financial reporting, which in turn will free up capacity for more in-depth discussion and decision making. Equally, by analyzing large volumes of data over time, AI can quickly establish trends and patterns that would have taken years to uncover due to the scope, speed and scale improvements that AI brings.

Naturally however, boards must ensure that their AI strategy is embedded in their enterprise strategy. And that means ensuring that there is robust governance around its ethical use; intention is key here, and areas such as unintentional bias and discrimination must be avoided at all costs in order to build trust in AI and mitigate reputational risk.  

Get AI right, and it will be a force-multiplier for board directors and an accepted brain in the boardroom – not only fact checking, but also generating new detailed insights with real-time analysis of financial and operational data, trends and patterns. 

2. Promote diversity at board level

Surprisingly, given the almost daily diversity debate in the global media, boards are not convinced of the need to evaluate board composition and augment skill sets. Just 30% believe this would improve their risk-management oversight. And just 6% of C-suite executives anticipate significant changes in leadership in the next 12 months, according to the EY Capital Confidence Barometer.

But in order to reflect the organizations and societies they serve, boards must, by design, seriously consider their current and future composition. It is not just the ethical thing to do – it also translates to greater commercial success.

“At some point between 2035 and 2040, we will reach the time when the majority of people in the US are people of color,” says Herman Bulls, Board member at USAA, Comfort Systems, Host Hotels & Resorts and American Campus Communities. “If you don't have that diverse perspective in your boardroom, you’re not going to be as effective and therefore competitive going forward.”

The data speaks for itself. Research shows that female representation on boards, for example, can be linked to better financial performance and better climate governance and innovation. Beyond gender, diversity also encompasses myriad other components such as culture, race and age.  At EY, we think broadly about differences, such as nationality, language, education, gender and gender identity/expression, sexual orientation, generation, age, socioeconomic background, working and thinking styles, religious background, abilities and disabilities, experiences, career paths, technical skills and identity dimensions defined and constructed by some societies in ethnic, color, cultural, or racial terms.

Boards must also consider “non-observable” diversity, ensuring that a range of perspectives and attributes are represented at board level. As well as enhancing technical skillsets that are relevant to each organization’s operating environment; boards should enhance soft skills such as collaboration, creativity and constructive challenge to unlock untapped thinking.

If you don't have that diverse perspective in your boardroom, you’re not going to be as effective and therefore competitive going forward.
Herman Bulls
Board member at USAA, Comfort Systems, Host Hotels & Resorts and American Campus Communities

While we are not necessarily advocating a radical and immediate re-composition of the board, we do see value in developing a diverse pipeline of senior C-suite leaders for succession planning purposes. Boards should also encourage CEOs to do the same when appointing people to senior management positions. At present, CEOs appear to overlook this issue: when asked about the most important changes that could be made to the C-suite, only 8% cited greater diversity and 7% said talent from outside the company.

Boards should also consider engaging with external subject matter experts where appropriate and regularly seek a broader range of internal perspectives – including through programs such as reverse mentoring – to expand their horizons.

3. Make purpose your path to prosperity

Stakeholder expectations of businesses are growing and changing: 66% of C-suite respondents to the EY Long-Term Value and Corporate Governance Survey believe that COVID-19 has increased expectations from stakeholders that their companies will drive societal impact, environmental sustainability and inclusive growth. And 78% believe that a focus on sustainable and inclusive growth has been critical to building trust with stakeholders in today’s uncertain times.  

Yet a significant “say-do” gap with respect to long-term value remains: execution it would seem is not keeping pace with intention. This suggests a lack of common understanding of how to truly integrate long-term value into the entire organizational value chain. 

Therefore, boards have an opportunity to strengthen their corporate governance around stakeholder commitments, embed purpose into their business strategy and ensure accountability. One way of doing this is to compensate executives based on their progress on delivering long-term value to stakeholders in line with the business’ purpose-led strategy. EY teams estimate that linking 15–25% of pay to long-term value metrics would make a significant difference. Defining or redefining the organization’s purpose is the critical first step. 

But it is not enough to simply improve outcomes for a wider set of stakeholders; organizations must also demonstrate transparency by measuring and reporting on their progress.  As such boards should guide management to consider a shift towards greater integrated reporting by accounting for items such as intangible assets, to more accurately reflect the true long-term value of the organization. To draw inspiration on how to achieve this we recommend referring to the work completed by the Embankment Project for Inclusive Capitalism (EPIC), which outlines a framework for creating and measuring long-term value.

By focusing on the three areas, boards should find themselves in a better position to guide their organizations to navigate the increasingly disruptive risk environment, seize transformational opportunities and ultimately deliver long-term value to a wide range of stakeholders.  

  • Questions for boards to consider

    1. Have you proactively discussed and collaborated with executive management on the technology agenda including how artificial intelligence can or is being used to review and validate data and information to unearth insights into enterprise risks and opportunities?
    2. When considering new board appointments, are you aware of the mechanisms and processes the board and nominating committee has in place to ensure diversity is a key consideration or design principle when looking to appoint new members? 
    3. Are you confident that the purpose of the organization, the board and individual directors is clearly defined, understood and put into practice?
  • Methodology

    The EY Global Board Risk Survey 2021 is a survey of 510 global board directors from organizations with greater than US$1b revenue and across industry to uncover their perception of enterprise risk management (ERM) within their organizations.

Summary

Now is the time for boards to reconsider how they operate to keep pace with the modern stakeholder expectation that organizations should create value in the long-term. In parallel, the risks in this increasingly complex world are now more interconnected than ever. There are opportunities for the board to reframe how they approach the oversight of risk management: starting with an overarching view of organizational purpose; ensuring diverse mindsets and skillsets are present within the boardroom; and employing the use of technology to improve the efficiency of board decision-making to free up time to focus on the creation of long-term value.

About this article

By Patrick Winter

EY Asia-Pacific Area Managing Partner

Focused on promoting Asia-Pacific innovation and technology. Committed to client service by driving EY cross-border collaboration. Passionate about inclusive long-term growth. Husband and father.