Purpose, innovation and diversity are driving a realigned set of priorities for board directors.
When the chairs and other executive and non-executive directors were asked by Savannah Group in mid-2021 to rank the top issues of importance to the board today, the results revealed a stark realignment of priorities from what was traditionally associated with boardroom decisions.
While business strategy did not change as the number one priority for the chair and the board, in second place came corporate purpose, viewed as more important than leadership and succession.
The remainder of the leaderboard is just as telling. Company culture was listed as the fourth highest priority, seen as more important than risk and crisis management, while employee wellbeing, diversity and inclusion, ESG and transformation were all ranked above investor and stakeholder management. With six of the ten key issues covering areas that have not historically ranked as highly on the board agenda, it’s clear that priorities have significantly changed.
It’s easy to see the damaging effect on businesses whose boards fail to keep up with technological changes in their industry. Disruptors such as Amazon, Uber and Tesla are commonly cited companies that have usurped legacy organisations which, through plain complacency, wrongly assumed their market dominance couldn’t be challenged by new upstarts. Digital disruption, however, is something that will eventually transform the make-up of every sector. Boards that don’t now see digital transformation as a priority are not meeting their obligations.
This is especially vital because the pace of digital change is only increasing, accelerated further by a pandemic environment which, according to Microsoft CEO Satya Nadella, saw “two years’ worth of digital transformation in two months”. It is leading every business, to a greater or lesser extent, to embrace new innovation, which relies on a board which, at the very least, understands the power and importance of digitalisation. As an area where boards have traditionally lacked knowledge and experience, this poses questions about board composition.
“It’s a digital revolution,” one board director said. “Every business needs to be ready for it, as well as getting on top of cyber and other security related issues as a key priority.” Another mentioned disruption first when asked about board priorities. “It is timely for the chair to consider whether the board composition is fit for the future,” he said. “Boards need to be more agile.”
The latter point is key. As all businesses have sought to embed more resilience in their operations during the pandemic, one vital theme has emerged more than others: agility. In a VUCA landscape, a five-year business strategy is no longer sufficient. Instead, a three-year horizon and a rolling one-year strategy framework with a clear view on the destination but, crucially, an adaptable approach as to how to get there, is increasingly viewed as more appropriate and effective.
The board, of course, plays a critical role in testing the executive teams strategy, and one CEO surveyed spoke about the value of strategic challenge from a board with an external perspective and “built-in antenna”. A high degree of agility, therefore, must be central to all board priorities.
Profit with purpose
Defining a corporate purpose, and embedding it right at the heart of the company’s mission and objectives, is arguably now just as important as profitability, not least because, increasingly, it influences that bottom line. With investors very much driving the ESG agenda, one experienced chair believes there is now a much bigger role for the chair to “lighten the load” of the CEO with shareholders, as well as other stakeholders the company engages with.
The chief executive of a FTSE manufacturing firm said: “In terms of priorities, boards need to move away from a simple business strategy and shareholder focus, towards a more external view of future potential and threats to the business, while balancing shareholder management with more dynamic challenge to the status quo. The chair needs to ensure the board is setting the right goals, and that the alignment of actions, culture and business strategy is maintained.”
Purpose and social responsibility are no longer box-ticking exercises tucked away in a corner of the annual report, or matters purely for the public affairs and communications department. They are firmly on the board agenda, and not just because of growing regulatory demands but because boards are recognising the increasing expectations of investors, influenced by a more socially conscious generation of consumers.
The value of diversity
They are also increasingly recognising the business value of diversity. High-profile reports including the Hampton-Alexander and Parker Reviews have intensified the regulatory spotlight on issues of gender and ethnic representation on boards, but the savviest companies are also recognising that diversity of talent and thought, and a happier, more inclusive workforce, fuels better decision-making at all levels of a business. Again, the pandemic has amplified this.
“In the short-term, once we had steadied the ship financially, staff wellbeing jumped to the top of the agenda, ensuring the mental wellbeing of the team was safeguarded,” said one respondent, adding that “D&I came at us like a train”. A senior partner at one PE fund added D&I as an agenda point at the annual investment review for the first time during the pandemic, attributing this particularly to the view that it is a more important driver in attracting and retaining top talent than ever before.
A company with a narrow cast board, populated by retired executives who served in the same sector as the business operates in, is likely to result in a narrow consensus and little difference of thought, opinion and debate on issues of importance to the success of the business. “Breadth of experience from multiple business environments and challenges matters more than specific sector experience,” said a FTSE 250 CEO. Boards, therefore, must be bold enough to hold up a mirror to their own diversity around the board table.
In many ways, the pandemic has acted as a leveller, enabling organisations that previously were falling behind on issues such as purpose, culture and diversity to ‘reset’ their priorities. The chair of a listed business services company said that, aside from repairing the balance sheet and ensuring the cost profile of the business was appropriate for recovery, his priority had been ensuring customers, employees and suppliers felt they had been well treated in the pandemic – and if they didn’t, “repairing those relationships”. “Where resources have been exhausted or gaps exposed,” the chair added, “we need to construct a plan to refresh and reformulate.”
For more information, download Savannah Group’s ‘Sequencing the DNA of the Future Chair & Board’ report here.