The afternoon when “ESG” stopped being a buzzword.
After 2 years of online events and thousands of hours of video calls, it felt great to be back on the road and attending LEAD Network events in Paris and Lausanne. As always, it was a pleasure to catch up with friends, clients, and opinion leaders who hold passionate views about many topics. During these two events, I had off-the-record meetings with 3 CEOs. Every executive needs a trusted headhunter not only when they are looking for a new job, but also to share market insights. What surprised me the most this time was that all of them seem to have a growing focus on and attention to enhancing corporate governance. While governance, as a board priority, is not new to me, it is now a much sharper focus of the top executives that I had spoken to.
It is not new that corporations are evolving and fine-tuning strategies to address customer needs and expectations through new business models, changing product portfolios, entry into new markets, and new supply chain configurations. Decarbonization is a high priority for many companies across the globe. Technologies are disrupting business operations- from innovation to marketing to production to sales to service. Decision-making is based on data-driven insights. Simultaneously, organizations are seeing a distinct shift in their workforce, with more GenZers and Millennials now responsible for implementing and managing the transformation.
All this is happening even as “ESG” concerns become a priority- not just for academics and activists but also for boardroom discussions. This is no coincidence because societies and governments (and hence customers) are becoming more conscious of the need for businesses to operate in ways that consciously minimize damage to the environment while also promoting inclusivity, diversity, social equity, liberties, and justice. Sustaining these priorities needs strong governance to minimize the risk that corporations do not make decisions based on financial considerations and to the detriment of other aspects.
As Douglas Lamond, CEO at Tony’s Chocolonely and former CEO of Innocent Drinks said to me in our Career Success Podcast “Personally, I think that kind of paradigm of whether you either have performance or you have social responsibility is kind of outdated. I think the two work together perfectly well in harmony. Thinking about the business that way is bringing in sustainability or other elements, it’s just another element that comes into the decision-making part.”
What is corporate governance and why is it important?
The term corporate governance broadly refers to the systems/processes that guide the direction in which an organization consciously seeks to evolve, and how people associated with the organization conduct themselves. Governance is primarily the responsibility of the company’s Board of Directors. However, it is the senior management team and others lower down in the organization who collectively ensure that the spirit of good corporate governance is implemented in everyday choices, decisions, and other actions (e.g., not discriminating in hiring or adopting a new technology that reduces waste but may cost more, etc).
While all corporations need strong corporate governance, the need is especially important for those that have diverse lines of business and/or do business in multiple geographies across the world. Governance must transcend regions, regulations, markets, cultures, etc. It must recognize and account for differences in regulatory norms and compliance requirements in different jurisdictions.
Studies across private and public sector organizations have shown that good governance delivers superior performance by ensuring better resource allocation and risk reduction for existing investors. Governance is an increasingly important criterion for attracting new investors. All of this reduces the cost of capital, improves profitability and free cash flows, and thus improves shareholder value. A 2020 study by Stanwick & Stanwick, found that firms with good corporate governance were able to increase their value by 10-12% (Source).
Consumer product companies such as Coca-Cola, Pepsi, AB-InBev, Nestle, Unilever, and Procter & Gamble are all taking various steps to promote recycling, reduce plastic, reduce greenhouse emissions, source responsibly, etc. (Source). Many of these companies have well-defined, time-bound targets. Sustaining the momentum in the face of headwinds will need these- and companies across industries- to place even greater emphasis on their corporate governance mechanisms and approaches.
In the recent past, companies such as Credit Suisse, Luckin Coffee, Wirecard, and Theranos have all been tainted by poor corporate governance of various shades. That ESG, already a big deal that is going to become even more important, may be seen from the fact that a UK-based activist investor has recently asked Mr. Larry Fink, founder of BlackRock (a leading global asset manager), to resign as CEO citing “apparent hypocrisy.” In the firm’s stand on fossil fuels. (Source)
Corporate governance quality can be improved by increasing the Board’s diversity
The quality of corporate governance is closely tied to the composition of the Board of Directors. This point was repeatedly made by many of the leaders with whom I had the privilege of interacting at the LEAD events. The world of business continues to change very rapidly; uncertainty is perhaps higher than at least in the last fifty years. Therefore, leaders who were co-opted as board members based on their stellar track records from decades ago may no longer be equipped to add the value they once did. Also, some individuals may hold views that go against the grain of what the future needs.
Neurodiversity is being valued in workplaces and must be valued in Boards as well, as it will enhance the level of risk analysis/management, guidance, decision-making, and course correction. Just as a stock portfolio with shares from companies across industries provides diversification and better-expected returns, a diverse board is also more likely to deliver better corporate governance because its members have different views, and decisions are made after healthy debates. Companies such as Starbucks are known for their diverse boards- and the performance is there for everyone to see.
I also found it interesting that “diversity” no longer just means “gender diversity”- although that undoubtedly remains an important parameter. Indeed, boards are being deliberately restructured to reflect a better mix and balance of ages, genders, areas of expertise, experiences, perspectives, and cultures/ethnicities. Each individual thinks, learns, and perceives the world differently. This shapes how they process information and consequently, how they interact with people and respond to situations. Therefore, boards with greater diversity are inherently more neurodiverse and capable of higher levels of empathy. Such boards are better positioned to guide CEOs and other leaders through periods of greater turbulence, uncertainty, and volatility.
“Good governance is not a fad. Good corporate governance in the broadest sense was, is and always will be the bedrock on which great, talented leaders built and will build successful businesses for the long term.
It requires truly diverse leadership that understands what good governance means, the value it adds to the business and its stakeholders, and that is not prepared to make shortcuts for short term (financial gains). That is key for senior leaders and has to be supported by the Board.” Says Chris Van Steenbergen, former CHRO at Heinneken.
Infusing diversity into boards requires a conscious and sustained effort
In order to enhance the diversity of their Boards, companies must act proactively. I suggest a four-step process to ensure that your Board has the right people in it so that it is consistently able to take an unbiased view on various issues and provide the best guidance to senior management.
- Step 1: Assess the composition of the current board to identify areas of imbalance using various diversity criteria. Also, identify the retiring directors and in what timeframe they can be replaced.
- Step 2: In the context of your business, envision what a strong and diverse board should look like in say, five years- including the kinds of people it should ideally have.
- Step 3: Start building a talent pipeline of potential executive/independent directors so that you can approach them quickly when suitable opportunities present themselves. Tweak the pipeline periodically to remove individuals who are either unavailable or unsuitable for any reason.
- Step 4: Define criteria to evaluate the performance of the Board (and individual members) and monitor the quality of governance regularly (using external agencies as may be needed) to ensure that members are pulling their weight and the board is acting with propriety, transparency, and fairness. If gaps are consistently found, go back to the talent pipeline to start finding suitable replacements.
If you would like to know more about my team and I can assist your board to enhance diversity over time, please write to me at firstname.lastname@example.org.