Home > Trends in Corporate Governance > Challenges and Trends for boards in the near future

Challenges and Trends for boards in the near future

There are a number of studies or surveys that try to depict a picture of boards in the near future: the challenges, the ongoing trends, the changes to come. A small description of the main topics is outlined in what follows:

  1. Composition, structure and performance.
    1. Composition. Starting with a skills matrix, knowing where a board stands, what the board ideally should have, allows to build a better skill set for the future. The board must be decided to change if needed, as turnover is normally slow; it needs to act fast if it wants to avoid to fall short in proxy contests; if so, a sharp and damaging renewal of the board forced by shareholders will not take place.
    2. Size. Increasing the size could help add the necessary skills when turnover is too slow, but size`s impact in the effective job of the board is to be considered.
    3. Specific Education. Board directors will ideally soon have specific knowledge to carry out their fiduciary duty in each of the existing board committees, whatever their original background, (finance, human resources, and so on).
    4. Independence. An independent chair, (or and effective lead director), and a number of other independent directors that will serve in the Audit, Compensation, Governance and Risk committees, (at least), will become a norm in every public company, and perhaps also in private growing companies.
    5. Industry expertise. If a board is to hold management accountable, industry expertise needs to be present at the board, which is not always the case.
    6. Shareholder support: its relevancy increases each year, so that directors feel they can`t be reelected without the shareholders`approval, so they need to be proactive to their requirements.
    7. Tenure. The idea of a term limit if independence and effectiveness is to be maintained is slowly being imposed. It may be nine, twelve, or a different number of years.
    8. Diversity. Related to the tenure, as renewal is the only source today for higher diversity, this is a great challenge. Regulators will push for results, and quotas are always at reach, so boards should really enhance their diverse experiences.
  2. Stakeholder communications. Pressure from activist shareholders, (in their very different attitudes and ways) is raising the need for a solid interaction, communication and engagement by directors with institutional and retail investors. A clear challenge will be to determine the extent of these communications, the people responsible for them, the topics they should cover, (governance, compensation, director nominations, strategy…), the convenience to establish a communication protocol, and of course the need for director education on communication.
  3. Board practices. Evaluation of the board and individual directors, succession planning, education, and planning of the board`s next year tasks, are major improvement tools a board should use and take care of.
  4. Compensation. Better reports and disclosure, even exceeding what is legally required could help boards to obtain majority support by shareholders, who will increasingly ask for pay for performance, independent members in the Compensation Committee and independent consultant companies, good design of peer groups, limitations to pay for failure and golden parachutes, etc.
  5. Strategy. Leading boards should have and obtain enough information about the environment, the competitors, etc. Even if the Ceo role in designing the strategy is principal, directors should be able to challenge Ceo and managers about the assumptions and main thoughts in their approach. A challenge for boards will be to dedicate enough time to strategy, and do it efficiently. In particular, business and product cycles are shortening, and changes are sometimes disruptive, so boards need to be prepared to identify and respond to them.
  6. Risk management. Boards are responsible for the existence of a risk management policy; directors can help, coach o simply oversee management in building this policy, and they also need to get feedback on its implementation; boards cannot continue to let this part of the Profitability-Risk couple unattended.
  7. IT oversight. Technology transforms businesses, it is not any more a tool to gain efficiency, but a disruptive mechanism. And time lapses for these transformations are becoming shorter and shorter. That poses a challenge to boards, which need to dedicate time and resources to assess new technologies, their effects in the business, and the opportunities they offer to acquire an edge over competitors.
  8. Regulation and compliance. Boards need to dedicate resources to foresee regulatory change for their business. In particular, in after-crisis time, where politicians are trying to understand what happened and wishing to block the possibility that it occurs again, boards need to be aware of the coming trends, restrictions, opportunities appearing as a result of regulatory measures.
  9. Internationalization. Directors have become more internationally exposed than ever, and the challenge for the future could be to introduce different nationalities and languages in the board, so as to better the market reach and knowledge directors cover, and still keeping boards being efficient in their internal processes.
  10. Digital tools for directors and related risks. Board portals can help improve the information flow to directors; timely, and as deep as necessary information can be provided at a low-cost; nevertheless, they may also increase the volume of information to a level that makes it ineffective. The use of director-owned devices might entail certain security risks to the information sent to directors, a danger which sours if materials are printed and carried in hand. Some security measures should also be considered to safeguard the confidentiality of communications and discussions among directors.

Based on different documents and articles on the subject, the “Future of Boards”:

  1. http://www.pwc.com/us/en/corporate-governance/annual-corporate-directors-survey/assets/pdf/pwc-acds-board-composition-and-behavior.pdf
  2. http://accelus.thomsonreuters.com/sites/default/files/GRC00119.pdf
  3. http://albertaventure.com/2013/07/10-governance-trends-you-need-to-know/
  4. http://www.directorship.com/building-a-21st-century-board/
  5. http://blog.nacdonline.org/2013/09/future-boardroom-processes/
  6. http://www.nacdonline.org/Resources/Article.cfm?ItemNumber=7048
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