How nextgen decision-makers can meet tomorrow’s challenges

A shifting risk landscape and the need to build a sustainable enterprise for the future are forcing boards to rethink their purpose.

Next generation (nextgen) decision-makers on the threshold of leadership positions within private or family enterprises will inherit or adopt operating models, institutions and systems that have served the organization well in the past. The board is one such institution.  Admittance to the board is a destination many nextgen leaders may seek and need to prepare for. Nextgens seeking to serve or currently on boards need to ask themselves, how do I add value to the board dynamic? How do I influence the board, so the organization is ready for the future ahead?

A look at the board today, what lies ahead and how the board could evolve to continue to bring long-term value for the future is a starting point. Organizations have evolved dramatically in the past few decades: supply chains have globalized; technology has enabled 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. In fact, according to the EY Family Business Index, the largest 500 family enterprises worldwide have collectively generated US$7.28 trillion in revenues, employed 24.1 million people, and constitute the third largest economic contribution in the world (after the US and China) by revenue – despite the global economy shrinking by 3.5% (pdf) in 2020.

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.

1. Elevate business risk and transformation planning to the top of the agenda

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.

Yet 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.

Bring risk and transformation to the fore by having a focused risk committee in addition to the board’s focus on audit and the financial reporting. Traditionally risk and audit have been grouped together into one board committee, but this can leave little time to focus on emerging risks because you have to do a deep dive on the financial accounts at least twice a year,” explains Vickki McFadden, Board Director, GPT Group, Allianz Australia and Newcrest Mining. “So, it makes sense for some boards to have a very focused risk committee.”

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 a myriad of other components such as culture, race and age.  The next generation of leaders can bring professional expertise, valuable technology and digital capability, and insights into the current generation of consumers and employees. Generational attitudes differ on sustainability, for example. Gen Z and Millennials are more likely than older generations to favor sustainable lifestyles and share information about sustainable products with peers. 

If the average family business board member is 61 years old, and one in five businesses have a next generation member (aged 40 or younger) on the board or in the management team, the board needs to consider whether it has the skills it needs to lead for the future. It is embracing diversity across gender, age culture and race as well as “non-observable” diversity, such as collaboration, creativity and constructive challenge, to unlock untapped thinking.

Conclusion

Nextgen leaders can assist boards to reconsider how they operate to keep pace with the modern stakeholder expectation that organizations should create value in the long-term. In parallel, the risks in this increasingly complex world are now more interconnected than ever. There are opportunities for the board to reframe how they approach the oversight of risk management: starting with an overarching view of organizational purpose; ensuring diverse mindsets and skillsets are present within the boardroom; and employing the use of technology to improve the efficiency of board decision-making to free up time to focus on the creation of long-term value.