In a dramatically shifting business environment, the traditional roles of the chair and board are having to evolve.
Non-financial issues, and non-traditional board measures such as sustainability, D&I, digital transformation and social purpose, are adding new dimensions to board leadership and governance, causing the role of the board to evolve. The pressure is on all board directors, but most of all the chair, to not only take on a more active role but also to reflect on what they personally need to bring to the table as companies look to reinvent themselves for a post- Covid, post-Brexit age.
The pandemic was a ‘black swan’ event which created a series of challenges ranging from working capital, liquidity and supply chain disruption to the wholesale collapse of certain markets and sectors. Such distressed situations required a rapid diagnosis of issues and the swift implementation of a dramatic change programme and many chairs played a crucial role in steering this, providing counsel and stewardship when most needed.
Looking at the bigger picture, however, the events of the pandemic are simply indicative, albeit at the most extreme end, of an increasingly ‘VUCA’ environment which organisations have had to try and adapt to and operate in for a number of years now. Repurposed by McKinsey in a business context, VUCA was originally coined as a military acronym to reflect the volatile, uncertain, complex, and ambiguous geo-political situation following the collapse of the USSR in the early 1990s.
Covid-19 was not only a VUCA event in itself, but it also amplified other dynamic trends which organisations have had to contend with in recent years, including technological disruption and the potential for disintermediation by new market entrants with radically different business models.
When the first business crisis meetings were called in the wake of the pandemic last March, all boardrooms suffered from a fundamental lack of direct experience. Nobody had lived through anything similar before, so there was no playbook for what to do. But considering the pandemic was just the latest VUCA event, the implication is many boards lacked the necessary breadth of indirect, transferable knowledge, experience and skills to tackle the challenges they were facing before Covid-19 even arrived on the scene.
In mid-2021, Savannah Group surveyed over 100 chairs and other board directors from FTSE and PE- backed companies, including in-depth qualitative interviews conducted by Savannah partners, in order to understand how the requirements for board composition and the traits and skills required of a chair are changing. Several clear themes have emerged which impact how the interconnected roles of the chair and the board are evolving.
Check and challenge
The role of the chair has historically been to run the board while the CEO runs the company, though the former can certainly influence the latter. The chair presides over and sets the board agenda, and ensures meetings of the board run smoothly towards achieving a consensus in decisions on major company issues and policies for corporate management and oversight.
“Chairs create a board of competencies and capabilities to support the business,” said one survey respondent. “They provide counsel and advice to the Executive as they go about driving strategy and managing the business. They provide check and challenge, as well as leadership around policy, and ensure relationships are strong with both internal and external stakeholders.”
While this formal definition of the role remains constant, the scope of the board agenda can shift significantly according to the business context, on both a macro and micro level, and the issues that affect good governance. When the general business and governance landscape changes little, the role of the chair and board is unlikely to materially evolve. When they face significant change, however, as has been the case in recent years, the requirements of the board can take on a host of new dimensions.
Arguably the biggest impact on the role of the board, and therefore the chair, has been the rising importance of the environmental, social and governance (ESG) agenda. The traditional governance model of shareholder primacy, which prioritises the interests of shareholders (and therefore commercial profit) above all else, has been challenged by the rise of stakeholder capitalism, whereby boards and executive leaders are urged to also consider others in their decisions, and not just clients and employees, but also communities and the environment.
“The relationship between business and wider stakeholders has shifted during the crisis and there is a question as to how much further it can go,” said a former FTSE 100 chair. A FTSE small cap chair said the board now plays a greater role in “driving values, behaviour and culture”, while a FTSE 100 CEO added: “Boards need to be advocates for change.”
In the midst of the Black Lives Matter movement last year, three in four consumers told a GfK survey that how businesses behaved during the protests affected their desire to deal with them. The #MeToo campaign has amplified gender discrepancies and the pandemic has not only exposed societal inequalities but elevated the environmental agenda. Increasingly, investors, employees and customers want to engage with companies and brands that align with their own personal values.
By widening the definition of ‘value creation’ in a corporate sense, the influence of ESG is having a profound impact on the role of the board, with the concepts of profit and purpose becoming more closely intertwined. By failing to consider these issues, and giving them suitable standing in the board agenda, chairs risk losing their mandate. More importantly, companies risk being left behind by those that take a more sustainable approach to profitability.
It can be argued that a good chair has always got the most out of everybody around the boardroom table, ensuring all voices are participating in strong debate. But if chairs are tasked with internal and external stakeholder management, and the breadth of stakeholders has increased, it means they must now find a way to ensure those other voices are heard too. An adversarial relationship between the board and the execs is bad, but an adversarial relationship with other communities is arguably worse. Just as chairs have always sought to establish trust, mutual respect and open dialogue between the non- executive directors and executive leadership, they must now seek the same for other stakeholders.
The combination of societal shifts and technological disruption has created a need for more outward-facing leadership and governance. Chairs are increasingly having to deal with complex responsibilities driven by divergent regulation and compliance and the mounting demands for much greater corporate citizenship.
Institutional investors have always been there, but recent years have seen a higher degree of engagement from activist shareholders, which boards must learn how to manage. For better or worse, proxy agencies like ISS and Glass Lewis have grown in influence, bolstered by a level of government pressure on issues like executive remuneration that has scarcely existed before.
‘The chair has an increasingly ambassadorial role, carrying the diplomatic and reputational flag for the company.’’ said a former FTSE 100 chair. A current board director concurred: “The role is now more akin to a Chief Reputation Officer. Increasing regulatory pressure means the chair needs to be the company ambassador, strategy provocateur, culture and talent cultivator, guardian and board conductor. They need to bring their own relevant and topical perspectives and expertise, with more interaction with the CEO.”
For more information, download Savannah Group’s ‘Sequencing the DNA of the Future Chair & Board’ report here.