Author: Dr Phil Considine; Director of Executive Education and the Centre for Board & Director Development, Strathclyde Business School
Since the onset of the pandemic, boards have seen what would normally be straightforward decisions take on massive complexity. Lynn Paine reinforced this in her 2020 article in Harvard Business Review which notes that Covid-19 is having a significant impact on board decision-making. She uses the question of dividend – historically the straightforward application of stated dividend policy or selection of a figure based on shareholder expectation relative to company earnings. This decision in now influenced by significant moral dilemmas - questions of equity and the reputational impact of returning money to shareholders when staff are being furloughed or public money is being paid to support the business. The post Covid decimation of economies combined with huge uncertainty over the depth and duration of the crisis makes this decision more difficult.
Equally, we see other examples of corporate malfeasance that make news headlines with monotonous regularity. The recent Wirecard collapse shows us that traditional governance failures still impact shareholders, employees and other stakeholders with financial and reputational consequences, as well as undermining the global financial system.
The pandemic has been a crisis like none that we have ever experienced - it represents a pivot point that is likely to lead to generational changes in our personal, societal and organisational worlds in ways that we are yet to fully understand. Paine also suggests that the entire context and environment is undergoing an existential shift and those new pressures and expectations from a very broad range of stakeholders require incorporation into the strategy and direction of our organisations. The overall uncertainty and changing societal expectations have created a level of complexity hitherto unknown creating not only wicked problems but also an entire context that could be described as wicked. Wicked problems have no simple solutions because they are complex, new and are characterised by uncertainty and ambiguity.
The importance of our organisations across all sectors in rebuilding post Corona must be noted – they are the engine that drive the global economy, give meaning & purpose to those who work in them, provide health & social care and support our communities. They provide goods, services and drive the innovation that are helping to defeat the virus and create opportunity post Covid. They require leaders who have the knowledge, skills and capabilities to ensure that our post pandemic world is inclusive, values led and strives to minimise inequality while also encouraging investment in new businesses, technologies and science.
Against this backdrop the Centre for Board and Director Development at Strathclyde Business School asked a group of core stakeholders to come together and to consider the question ‘What are the key issues facing your boards in the post Covid world ?’ The group comprised of a wide range of experienced Directors, NXDs and Trustees representing private, public and third sectors. Their experiences included listed multi-national corporations to SMEs, LLPs to charities, partnerships to family businesses and we had inputs from a range of mainstream investor owned and social purpose businesses. The sectors represented included Financial Services, Manufacturing, Engineering, Technology, Health and Social Care, Construction, Professional Services, Hospitality Education, Sports and Leisure.
That there has been a move away from the narrow focus on returns to shareholders was not a surprise as we have seen this happening broadly across Investor Owned Firms (IOFs) in the last decade and particular since the global financial crisis. This is not to say that shareholder returns should not be a key metric for assessing board effectiveness, nor that directors should not retain a laser focus on total shareholder returns when making decision, but rather that this should be a result of good practice and that other factors are equally important when balancing board responsibilities. In 2018 Larry Fink the Chief Executive of BlackRock – the world’s largest asset managers – said in an open letter to CEOs that they needed to focus less on short-term profits and more on long-term growth and making a positive contribution to society (BlackRock 2018). Good governance provides the foundation for this. Fink reiterated BlackRock’s commitment to sustainability in his 2019 and 2020 letters and it was a central theme of the Davos 2020 Manifesto. This mind-set was clearly reflected in the output of the groups’ conversations.
Whilst there were significant points about the need to incorporate Social and Environmental factors into governance the pandemic seems to have helped organisations to focus much more clearly on what this might mean to them and to their core stakeholders.
The key issues facing the groups were identified as:
- Financial sustainability
- Sustainable business models and organisational purpose
- Re-evaluation of the role of the board and effectiveness measures
- New norms
- Equality and Diversity
- Staff Wellbeing
This is not to say that all of these were seen as problematic – many are viewed as opportunities and much of the conversation identified the need for boards and executive teams to regroup and to ensure that they are working strategically to realise the value that their stakeholders expect. For example, the need to better understand social movements and their impact on both boards and organisations more widely underpinned the need to have more diverse boards. To understand changing social norms and expectation requires not only a diversity of gender, ethnicity and socio-cultural factors but also in thinking and values. The pandemic has had a transformational impact on the use and understanding of digital channels and data both for commercial and social activities. This has shown that new ways of working in some sectors is not only possible but inevitable.
New ways of thinking are needed to deal with both ambiguity and risk. Until the pandemic risk and strategy were usually framed around historical data and a process of ‘retrospective sensemaking’ The pandemic has shown boards that this no longer meets the requirements of UK Corporate Governance Code 2018 that “The board should carry out a robust assessment of the company’s emerging and principal risks.” This requires a new skillset and one that boards must quickly develop.
Measures of board effectiveness vary across sectors and industries. In the IoF sector shareholder return is still a key metric however the use of a balanced scorecard in now the norm and the pace of change in this will only increase. Boards across all sectors and industries need to understand what measures reflect their organisational purpose and which frameworks can help underpin their measures. The Sustainable Development Goals provide a powerful framework for some organisations however to identify how best to use this or any framework requires significant consultation with employees, customers and other stakeholders. Related to this Sustainability and Environmental factors have grown in importance during the pandemic and net zero targets; and while boards understand the meaning of this there is a need to understand the topic better and to incorporate specific measures into a balanced scorecard.
Financial factors are fundamental but in general, boards have expertise in this area so whilst balance sheet repair and recovery is important and many organisations are questioning their ability to meet the test of ‘three months of reserves’ this was seen as important but one area that appears to be within the expertise of most boards.
The health and wellbeing of staff has been the focus of much discussion in the media and a deeper understanding on the importance and impact of mental health has developed during the pandemic. This is reflected in the factors that the groups identified – with boards actively seeking tools and techniques to support an often physically and mentally exhausted workforce.
In conclusion, we see that whilst there are significant challenges ahead there is an overarching sense of optimism that our organisations will come out of the pandemic with renewed values and purpose. Porter and Kramer (2011) discussed the need for organisations to create ‘shared value’ for communities and stakeholders. Whilst the impact of the pandemic has been universally negative and at times catastrophic, there is a general feeling that with the right support and direction the creation of shared value is achievable in the post pandemic world.