An updated user manual for corporate boards addresses new business realities




  • In Business
  • 2022-09-30 01:49:00Z
  • By Quartz
 

With stock market gyrations, inflation, rising interest rates, war in Ukraine, divisive politics, and climate change making business survival ever-more challenging, the National Association of Corporate Directors (NACD) has picked an opportune time to update its user manual for board members.

The last time the membership group had issued a set of principles about the role and responsibilities of boards was in 2011, when corporate leaders were still reckoning with the global financial crisis. A new business ethic was growing, from b-corps to conscious capitalism, but it was far from mainstream. The end game was still focused on the shareholder-a.k.a. the stock price-full stop. Boards loaded up CEOs with stock options and equivalents with the idea of "pay for performance" ringing in their ears.

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The rules are beginning to change, though.

A dynamic environment of social media, systemic risks, and deep uncertainty about the future has underscored the need for a different kind of leadership, new ways of governing, and standards for conducting business that speak to a wider set of stakeholders.

As director of the Aspen Institute's Business and Society Program for the past 25 years, I was honored to participate in the process that led to the NACD's take on "The Future of the American Board: A Framework for Governing into the Future." The 58-page report presents 10 guiding principles, on topics ranging from compensation to diversity, to help corporate directors seeking to create long term value while benefitting society.

Here are some key takeaways:

It's not just the answers but the questions boards ask that need to change

Corporate boards, especially those in the harsh light of public markets, are increasingly understanding that not all of the answers they need should be delivered from the c-suite. At some companies, committee charters are being revamped to assure a better flow of insight, whether from employees or even NGOs, which have become especially sophisticated on questions about how companies source their labor and natural resources.

The needed changes in corporate governance have only begun to emerge. But the NACD report poses the important questions that contemporary board members should ask to guide their decisions.

The emphasis here, by the way, is on "contemporary." Boomer directors stayed at their (Zoom) posts during the pandemic, but are now prepared to retire, making more room for women, people of different races, and representatives from a wide range of communities of interest. As the updated principles make clear, who serves, for how long, and for what purpose, all will be reexamined.

In short, the boards of tomorrow have a massive task, and it will not be addressed by the old way of doing things.

Corporate purpose as more than a slogan

It is time for boards to clarify who matters the most, and to match their operations with their goals and intentions.

As the updated NACD principles make clear, the board's work starts with clarity of purpose, and that means interrogating which inputs are critical for the company's survival.

Notably, ESG is not a prescription for this. The terminology of "environmental, social, and governance" emerged from filing shareholder proposals some 20 years ago-it doesn't capture the full complexity of the overhaul that's needed at the board level.

As the new NACD principles make clear, what growth of ESG investment and awareness does capture is that elevating short-term shareholder interests now look increasingly risky-even to shareholders themselves.

Where else should boards look for answers? "Stakeholder theory" is hardly new, and may work in classrooms, but it fails as an organizing principle for management without greater specificity about what matters most. Each business is unique and requires its own road map.

Incentives matter

One of the board's awesome responsibilities is structuring CEO pay, but so is figuring out the correct relationship between the CEO and direct reports, as well as the CEO's reliable sources of insights into company culture, customers, and the supply chain. Restructuring the CEO's pay to assure teamwork, and to prioritize what matters most, is paramount.

Some boards have already taken the step of changing compensation committees into human resource committees. Watch this space. We are only at the starting block. Meanwhile, the disconnect between paying the CEO in stock while grandstanding about "stakeholders" is increasingly apparent.

Judy Samuelson is executive director of the Aspen Institute's Business and Society Program and the author of "The Six New Rules of Business: Creating Real Value in a Changing World."

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