The Board Imperative: How today’s boards can meet tomorrow’s challenges

A disruptive risk landscape and shifting stakeholder expectations are forcing boards to rethink their purpose and revisit how they operate.

Organizations have evolved dramatically in the past few decades: supply chains have globalized; technology drives and enables much of what we do; and new enterprise models have emerged to facilitate these shifts.

But one component of the traditional business model has remained largely unchanged: the board. New sub-committees may have been added and diversity may be beginning to prevail, but essentially board operating models still look as they always have.

So, what’s the impetus for change? After all, many organizations have continued to perform well financially over the short term despite recent turmoil. And while regulators in sectors such as financial services have in some jurisdictions asked for minor changes to how boards operate, there has been no wholesale pressure to adjust.

But this is changing. First, the risk landscape has become more disruptive: according to the EY Global Board Risk Survey 2021 of more than 500 board directors around the world, 87% of boards say market disruptions are becoming more frequent and 83% say they are increasingly impactful. Second, there’s a need for a nimbler approach to seize transformation opportunities: more than eight in 10 boards believe their business strategies need to be more agile and evolve more quickly. Third, there is mounting pressure from a wide range of stakeholders to deliver long-term value.

These three drivers mean that current board operating models should be re-evaluated to ensure they evolve to serve a broader, stakeholder-driven purpose.

The Board Imperative Series provides suggestions to board directors with the objective of helping them to reframe the future of their organizations. It urges boards to think beyond existing constraints and reimagine a vision of the future by guiding them through how they and their organizations might change. However, there is no one-size-fits-all approach. Instead, we suggest three areas of opportunity for your board to explore:    

1. Review and re-think what you do, and how you do it
2. Promote diversity at board level
3. Make purpose your path to prosperity

These initiatives are interlinked. For example, making progress on board diversity can accelerate changes in how the board operates. “The interplay between board diversity and risk, how the board operates, and board governance is very topical today,” confirms Kay Matthews, Board Director, Main Street Capital, Coherent Inc. and Silicon Valley Bank. “My hypothesis is that the more diverse your board is, whether that’s with respect to gender, ethnicity or other characteristics and experiences, the better you can identify and manage risk and potentially change how the board operates.”

1. Review and re-think what you do, and how you do it

One of the most significant obstacles holding boards back is how meeting agenda time is allocated: 59% of board directors say allotting more time for open discussion of emerging trends and potential disruptions would improve risk-management oversight.

Our survey shows that boards are struggling to focus on longer term strategically important topics such as transformation planning because they are too bogged down in necessary but nearer term aspects such as financial reporting and traditional risk and compliance: 43% spend the most time on financial reporting, but only 18% think they ought to.

The data speaks for itself. Research shows that female representation on boards, for example, can be linked to better financial performance and better climate governance and innovation. Beyond gender, diversity also encompasses myriad other components such as culture, race and age.  At EY, we think broadly about differences, such as nationality, language, education, gender and gender identity/expression, sexual orientation, generation, age, socioeconomic background, working and thinking styles, religious background, abilities and disabilities, experiences, career paths, technical skills and identity dimensions defined and constructed by some societies in ethnic, color, cultural, or racial terms.

Boards must also consider “non-observable” diversity, ensuring that a range of perspectives and attributes are represented at board level. As well as enhancing technical skillsets that are relevant to each organization’s operating environment; boards should enhance soft skills such as collaboration, creativity and constructive challenge to unlock untapped thinking.

While we are not necessarily advocating a radical and immediate re-composition of the board, we do see value in developing a diverse pipeline of senior C-suite leaders for succession planning purposes. Boards should also encourage CEOs to do the same when appointing people to senior management positions. At present, CEOs appear to overlook this issue: when asked about the most important changes that could be made to the C-suite, only 8% cited greater diversity and 7% said talent from outside the company.

Boards should also consider engaging with external subject matter experts where appropriate and regularly seek a broader range of internal perspectives – including through programs such as reverse mentoring – to expand their horizons.

3. Make purpose your path to prosperity

Stakeholder expectations of businesses are growing and changing: 66% of C-suite respondents to the EY Long-Term Value and Corporate Governance Survey believe that COVID-19 has increased expectations from stakeholders that their companies will drive societal impact, environmental sustainability and inclusive growth. And 78% believe that a focus on sustainable and inclusive growth has been critical to building trust with stakeholders in today’s uncertain times.  

Yet a significant “say-do” gap with respect to long-term value remains: execution it would seem is not keeping pace with intention. This suggests a lack of common understanding of how to truly integrate long-term value into the entire organizational value chain. 

Therefore, boards have an opportunity to strengthen their corporate governance around stakeholder commitments, embed purpose into their business strategy and ensure accountability. One way of doing this is to compensate executives based on their progress on delivering long-term value to stakeholders in line with the business’ purpose-led strategy. EY teams estimate that linking 15–25% of pay to long-term value metrics would make a significant difference. Defining or redefining the organization’s purpose is the critical first step. 

But it is not enough to simply improve outcomes for a wider set of stakeholders; organizations must also demonstrate transparency by measuring and reporting on their progress.  As such boards should guide management to consider a shift towards greater integrated reporting by accounting for items such as intangible assets, to more accurately reflect the true long-term value of the organization. To draw inspiration on how to achieve this we recommend referring to the work completed by the Embankment Project for Inclusive Capitalism (EPIC) (pdf), which outlines a framework for creating and measuring long-term value.

By focusing on the three areas, boards should find themselves in a better position to guide their organizations to navigate the increasingly disruptive risk environment, seize transformational opportunities and ultimately deliver long-term value to a wide range of stakeholders.