Human-centric boards: A new paradigm

The OECD Principles of Corporate Governance emphasize the board’s critical responsibilities in guiding corporate strategy and overseeing management, ensuring the board's accountability to both the company and its shareholders. These guidelines advocate for a rigorous oversight mechanism, focusing on key areas such as risk management, ethical corporate behavior, and the strategic alignment of the company with long-term goals. The principles have evolved considerably since they were first adopted 25 years ago.

In their implementation, the distinction between the roles of the CEO and the board members is crucial to prevent conflicts of interest and promote transparency. This framework has been adopted globally and is reflected in the governance structures of companies across various jurisdictions. The OECD emphasizes the need for boards to possess a balanced mix of skills and experiences, enabling them to address complex business challenges effectively and enhance the company's long-term value creation.

Empirical evidence suggests that some of the recommended changes, including the growing number of independent board members, have been positive for corporate governance. Nevertheless, the overall impact of those changes on the quality of governance and corporate performance is not clear. Over the past 15 years, many companies with the right board structural attributes—including firms such as Boeing, Crédit Suisse, Deutsche Bank, Facebook, General Electric, Uber, Wells Fargo, WeWork, and Wirecard among many others—went through major corporate governance crises. Board structural conditions that those companies did have were not enough to guarantee the quality of their governance. In particular, those structural conditions did not prevent the board from bad resource allocation and business diversification, value-destroying acquisitions, negative board dynamics, or bad interaction between the chairperson and the CEO.

The complexity of boards’ agendas has recently increased with major disruptions in the corporate world that include AI, sustainability and climate change, and geopolitical tensions. The European Corporate Governance Institute (ECGI) and the IESE Center for Corporate Governance organized the annual corporate governance conference on this theme: “Towards a New Model of Boards of Directors” in Madrid on April 15th, 2024.

The Conference was organized around five major themes for boards of directors: corporate purpose and sustainability; corporate strategy; CEO and leadership succession; board dynamics and board as a team; and boards and shareholders’ engagement. We will summarize some key ideas around two major areas: “What should boards focus their attention on?” and “How should the board work?”

What should the board focus attention on? 

The board mandate to monitor the CEO and financial performance remains important. Nevertheless, in this era of disruption and growing complexity, research and anecdotal experience suggest that an effective board should focus its attention on some critical areas. The first is the firm’s long-term strategy and its future growth and value creation. The board should leave the CEO and management team to prepare and work on the firm’s strategy as R. Aguilera, B. Cassiman, and C. Torres highlighted. This work should include how the firm gets ready to improve its data management and adopt AI; how it defines a clear sustainability strategy; and how it takes into account and makes choices upon the firm’s geopolitical challenges.

Strategy itself is not the goal; rather, it comprises the central decisions that the board and the management team should make to meet the goals that the board has set up for the next few years, tackle the challenges it faces, and contribute to achieving the firm’s purpose. The board, after discussions with shareholders and other stakeholders, sets and approves the goals at which the firm aims. This involves a special collaborative work between the board and the management team to define ambitious and reasonable goals and set the best course of action for the firm for the next few years.

The second key area of attention for the board is leadership development and CEO and management transition plans, including succession plans as H. Ibarra and M. Giné highlighted. Many firms say that people are their first priority, but talk is cheap. According to data on CEO succession processes and CEO tenure, not many companies are really effective in leadership development. Only companies with competent managerial teams are able to tackle the complex challenges that firms face today. The way by which many boards monitor leadership development may not be up to this challenge.

How should the board work? 

The board of directors is a human group. Group decision-making is subject to biases and dysfunctions that boards should be aware of. Moreover, boards should develop some group capabilities to perform as an effective team to fulfil its duties of care and loyalty. Individual board member performance is not enough. A. Raes, A. Licht, and R. Durand stressed the importance of creating a positive board dynamic that facilitates deep discussions, manages conflicts, and eventually makes better decisions. The role of the chairperson in this respect is critical, the complementarity of board members’ expertise and skills, and the adequate level of diversity of board members were considered critical factors. A well-defined and integrated corporate purpose would also serve as glue and reference for the board, management team, and employees. Without this set of factors, board dynamics would not work well, even if board structure matches some board structural requirements requiring board composition.

The board is appointed by shareholders in most jurisdictions. It has the duty to protect and promote the company and protect shareholders and other key stakeholders. Shareholders’ engagement is a dual process: from shareholders engaging the board and the board reaching out to shareholders. An effective board should listen to shareholders and understand their concerns. It has the final responsibility for decision making but it would be unwise if it does not spend time understanding investors’ views. L. Enriques and D. Katelouzou presented at the conference some interesting frameworks regarding investor engagement and stewardship.

Defining the right structure and composition is not enough. An effective board should work with the senior management team on strategy and leadership development. It needs to assess its capabilities and competence regarding the definition and advancement in central strategic priorities, purpose, board dynamics, ‘teamness’, and board culture. The boards of the future will reconsider their priorities to focus on developing long-term corporate development and value creation. They will also assess how effective they are as a group of people understanding complex problems and making timely and effective decisions. The new paradigm of boards of directors is more complex than what is described in even the most recent corporate governance codes and principles, but it may help boards perform their functions more effectively.

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By Marco Becht, Université libre de Bruxelles and ECGI & Jordi Canals, IESE Business School

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