Chris Lawley, Vice-President APAC, Diligent, suggests four steps for boards to modernise their governance.
Diligent recently launched a new category called ‘modern governance’ to bring boards of directors and leadership teams up to speed in today’s digital world. Simply put, modern governance is the practice of empowering leaders with the technology, insights and processes required to fuel good governance.
The importance of good governance is best understood in its absence. According to a recent Diligent Institute report – Modern Governance Report, published in May 2019, ‘governance shortfalls’ globally are at US$490 billion in value and the top 20% of companies outperformed the bottom 20% by 17 points, or 15% over a two-year period. In other words, good governance is a competitive advantage.
Through our interactions with board members and governance professionals around the world we’ve learned a few things. Good governance is dynamic and it can look a little different from one organisation to the next. Yet there are a few modern governance principles that hold constant. We’ve translated these into action items for today’s boards.
Four steps boards can take towards modern governance
1. Re-examine the governance structure you’ve inherited
When you join a board, you are in a governance structure (that is, an existing set of rules, roles and processes that govern the board and the broader organisation). Rakhi Kumar, Senior Managing Director and Head of ESG Investments and Asset Stewardship at State Street Global Advisors, challenges board members to re-examine the model and principles by which they govern. ‘Too often, boards fail to ask why things are the way they are. The inherited governance structure may not be wrong, but it should be purposeful. Boards should be able to explain why it works,’ he said at a Diligent event last year.
It’s this kind of introspection that led Netflix to design and adopt a transparent board-management communication model, which caps board material at 30-page outlines and focuses discussions on strategy. A similar self-examination led the Prudential board to reform their proxy disclosure with six internalised governance principles, which they adopted from the Investor Stewardship Group.
Diligent’s recently published book – Governance in the Digital Age – based on interviews with corporate directors, suggests that the modern age necessitates a new era of governance and what progressive boards and directors should be doing to make that happen.
2. Focus on board composition
Today’s organisations may have the right mix of people sitting around the boardroom table, they may have aligned board skills with long-term strategy as much as possible, but executing on succession-planning principles is where many boards fall short. This is one area where data is vastly underutilised.
Modern boards should have today’s universe of board candidates at their fingertips. This type of function is available for boards and must be utilised to identify gaps, monitor peer composition, gauge candidate supply and recognise conflicts of interest.
3. Improve visibility around key risks and opportunities
Expanding board members’ knowledge around industry trends and emerging technologies is important – how is your board empowering and challenging itself on a regular basis? With business risks growing in number and complexity, today’s organisations cannot afford any blind spots. They cannot chance complacency. Companies that fail to innovate are destined for irrelevance – we’ve seen this time and again with legacy companies.
It’s not enough to simply have dashboards, reporting frameworks and information gathering networks that allow you to identify red flags. A modern governance solution alerts boards to predict shareholder voting actions, enables reputational risk monitoring and enhances visibility across peer groups.
4. Avoid easy cyber mistakes
Board and company leaders are notoriously guilty of using text messaging or personal email to share sensitive information and materials. Even if they are not sensitive in nature, they may be used as entry points for bad actors. Organisations that practice modern governance do not make mistakes – they communicate through secure messaging tools and document sharing through protected data rooms. The best part, however, is that secure communication is no longer at the expense of convenience – it has all the functionality and ease of everyday messaging and collaboration tools.
Modern governance matters
Modern governance is about more than meeting the structural requirements for the measures described above. Governance failures can sometimes be traced to the absence of these structural requirements, but they can also have to do with harder-to-measure governance issues. The way a board deals with crises, or how effectively a board can oversee culture, or how a board responds to risk, or who a board chooses to lead the company – all of these factors play crucial roles in companies’ successes
Strong corporate governance is critical for companies that seek to maintain high performance and avoid devastating crises. The cost of poor governance practices is high. Consistently, companies with governance deficits perform worse than their peers who adhere to modern governance – and they underperform against their industry’s average.
The good news is that, even as corporate governance has become increasingly demanding, many boards are stepping up to the challenge. As the rate of change increases and the speed of information continues to change the business landscape, it is only becoming more important for boards of directors to have both the structural and cultural safeguards in place to detect and respond to issues. Modern governance practices are helping companies to outperform the market and helping boards to deal with crises before they become catastrophes.
Chris Lawley, Vice-President APAC