Corporate governance is defined as “frameworks of rules and practices by which a board of directors ensures accountability, fairness, and transparency in a company’s relationship with all its stakeholders.”
Though responsible for transparency, for many people corporate boards seem far-removed, invoking images of smartly attired executives, mahogany tables, sleek boardrooms and city skylines. Unfortunately, when corporate boards fail, the fallout can hit close to home – as any former employee of Enron or shareholder in VW, Wells Fargo or Facebook can attest to.
But corporate boards are undergoing a transformation in the wake of these high-profile corporate scandals. As IESE Prof. Pedro Nueno explains, “Enron and WorldCom set the bar on governance failings 15 years ago, yet corporate dysfunction is still alive and well. The structure, purpose and role of corporate boards are changing to correct some of the underlying issues and hopefully avoid problems in the future.”
Through his conversations with directors, advisers and owners of companies around the world and his experience as a board member of numerous global firms, Prof. Nueno highlights 10 trends that are shaping corporate boards:
- Smaller boards: it’s time to downsize
In the 1990s, corporate boards had as many as 20 members but “too many cooks in the kitchen” can undermine their efficacy. The trend is toward more compact boards comprised of eight or nine members.
- The importance of preparation
Financial acumen, industry experience, operational know-how, risk management knowledge and international expertise: to truly meet the needs of global companies, today’s board members need to have it all.
- A global mindset
Appointing directors with international profiles is critical in an age of increasing globalization. Members with global mindsets and expertise broaden a board’s outlook and enhance decision-making as firms seek to expand into new markets.
- More women on board
Making all-male boards a thing of the past remains a slow work in process. Some countries have rolled out mandatory quotas for publicly traded companies, while others, like the UK, have opted for a “voluntary business-led approach.”
- Greater regulation means greater responsibilities
The excessive risk-taking during the global financial crisis sparked both legal reforms and increased legal responsibility on board members for breaches that occur on their watch.
- Rigorous board oversight
The board oversees senior management, but the board itself requires oversight. Firms need outside experts to periodically evaluate the board’s performance and ensure that its format, profile, discipline and dynamics meet the company’s needs.
- Greater transparency
There’s nowhere to hide in the age of digital: who sits on the board, how much they earn and how long they have served can be considered as public knowledge. As a result, board members should assume that their actions could become known to the public.
- Converging remuneration
Board remuneration traditionally depends on the size of the company, although every country and company has its own system. As companies extend their global reach and boards become more internationalized, remuneration policies will converge.
- Higher turnover and greater independence
Appointments typically last eight to 10 years – four to five years plus one re-election – but to maximize effectiveness and objectivity, the shift is toward faster renewals and more independent members on corporate boards.
- The rising role of committees
Most publicly listed companies already have committees, the most common of which are the audit committee and the appointments and remuneration committee. But new ones, such as strategy committees and disruption committees, are appearing on the horizon to help firms secure long-term sustainable value.
“Value Creation Through Effective Boards” is a joint IESE-Harvard collaboration that explores the fundamentals of successful corporate governance and essential keys to enhancing board-member performance. IESE’s Barcelona campus will host the next edition.