The ability of organizations to survive periods of tremendous upheaval lies not in their relative size, strength of their balance sheet, or competitiveness as determined by their current market definitions. Rather, it is the ability and willingness of a business to adapt its current governance protocols and processes while at the same time building on its core governance structures and responsibilities that truly differentiates those firms that emerge successfully from a crisis from those that struggle or fail. Using the COVID-19 pandemic as a lens through which to explore this perspective, firms may consider adapting their governance models using the following series of opportunities and their implications.
If you thought the onslaught of COVID-19 happened quickly, think about this: The world will never be slower than it is today. Implication: The speed and resiliency of a company’s governance structure and business model to adapt is more important than ever.
Environmental, social, and governance (ESG) issues are now table stakes for a firm’s long-term sustainability. The rise of stakeholder capitalism over shareholder capitalism is real and ties back to the critical fact that a firm needs social license to operate—not just a business license. Things that governments used to do, such as act as stewards of the environment, provide health care for the vulnerable, or combat homelessness and racism, now need to be part of enterprises’ ESG mandate. Failure to align the business with ESG goals will result in other consequences. Implication: Successful boards have the resolve to intervene to ensure that progress is made toward meaningful and clear ESG metrics. If this is not a priority, some firms may very well not be able to retain their best employees, attract top directors, or maintain their ability to finance the business.
Similar to adopting the International Organization for Standardization’s safety standards, boards and companies will evolve to adapt to virus-sensitive protocols around how they conduct business and governance operations. If some board meetings are digital, it reduces the board’s physical exposure and travel footprint in a material way. Implication: COVID-19 is not a temporary phenomenon. We now live in a world where learning how to govern and operate safely despite the presence of dangerous, contagious viruses is essential to ongoing business viability and an opportunity to differentiate a company’s value to stakeholders, all while reducing risk.
From a risk and opportunity assessment perspective, customer relationship management systems (CRMs) need to place more emphasis on global issues and their ties to local operations. Implication: Companies that have evolved their ability to become preemptive in their actions due to “over the horizon CRM-ESG radar systems,’ will stay ahead of trends instead of struggling to catch up.
The business strategy and balance sheet must through all phases of the business cycle be disciplined enough to invest in new growth. With the narcotic of low interest rates and an unprecedentedly long bull market, many firms’ business models have been exposed as they were only viable under then-current market assumptions. Implication: Directors need to be healthy skeptics and ask the question: Is our strategy designed to excel under current conditions or can it also propel us to create or enter new markets so that when change occurs, we are less dependent on our current paradigm?
Governance processes (not responsibilities) need to adapt to the times they are in. Implication: Governance is not passive. The board has a responsibility to stay engaged, especially during unprecedented periods like this, and needs to find the right balance between “nose in” and “fingers out.” Some options to consider include the following:
Shift to short monthly meetings instead of quarterly meetings (if you haven’t already).
Meet virtually with directors the evening before board meetings to regain some of the social interaction that is lost absent in-person dinners and on-site gatherings.
Stay out of management’s way of running the firm if the business continuity protocols are working.
Offer shareholders, proxy advisors, and credit-rating agencies digital access to the board instead of traditional face-to-face meetings.
Business life is not going back to the way it was. Take advantage of the opportunities volatility can create to accelerate innovation. Implication: Fight the tendency to have the organization snap back to the way it was. Lock in the innovations, cost reductions, and process improvements that management has achieved through this period of upheaval.
Executive and board compensation must be aligned with stakeholder interests. In volatile times it is prudent to forego any sort of immediate compensation adjustments unless they are absolutely necessary. Implication: Whatever the compensation treatment may be, it better align with how shareholders, employees, customers, and other key stakeholders experienced this event. The board’s ability to apply discretion while conveying trust and thanks to management and front-liners is especially important at this time.
A diverse and seasoned board of directors is valuable. Directors who have governed through major disruptions such as catastrophic weather events, technology upheavals, financial meltdowns, and so forth are the ones you want on your board all the time, not just in adversity. The board should also seek out not only diversity in decision-making experience but in gender, age, race, and ethnicity to minimize myopic decisions. When recruiting directors, ask them to share something from their leadership experience that went truly awry and what, from a governance perspective, they learned. Implication: We all are good captains in fair weather, but the storms truly bring out the best of leadership in both boards and management.
The secret sauce that makes a firm’s strategy resilient is the quality of leadership at the CEO and board level, coupled with clear and timely communications to stakeholders. The CEO is the linchpin that connects the board to management and sometimes the chair with the board. Implication: Absent leadership and effective communications, this can all be for naught.
Don Lowry is chair of Capital Power Corp., a Canadian power-generating enterprise committed to environmental stewardship. He previously held various C-suite and board-level positions at the likes of EPCOR Utilities, Hydrogenics Corp., Stantec, and more.
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NACD: Tools and resources to help guide you in unpredictable times.