February 14th, 2024

This article originally appeared in Directors & Boards. It is reprinted with permission from MLR Media.

Venture capitalist Scott Lenet once described the changing nature of competitive risk as “less the shark that might come and eat your lunch and more death by a thousand tiny piranhas.” In other words, any one competitor may not be cause for concern, but the cumulative effect of many competitors, if not monitored and taken seriously, can overwhelm an established brand.

The role of the board is going through its own “thousand tiny piranhas” moment. Ask any director to identify the transformative events that mark out changes in board governance and they will likely point to the series of high-profile governance failures that led to Sarbanes Oxley and a recalibration of risk oversight, or the passage of Dodd-Frank 10 years later as a response to governance failures that helped fuel the great financial crisis.

We are in the midst of a third wave of how we understand the role of the board and this time the change is not driven by a legislative event, but by a number of converging forces that are reshaping the definition of good governance including technology, talent, climate change, social demographic shifts and the increased transparency driven by social media.

“In the last 15 years or so the level of strategic complexity that boards and directors have to face has increased exponentially,” says Anna Catalano, who serves on boards across the energy, technology and manufacturing industries. “Companies that had kind of merrily gone along and just done everything they’ve done before just a little bit better or a little bit faster are finding the things that got them across the finish line for many, many years are no longer sufficient.”

As company leadership grapples with how to keep up with changes in the business environment, boards grapple with how this changes the nature of their work, too. The fundamental role of the board — to provide effective oversight of risk and value creation through good governance — has not changed. What has changed is how we understand what constitutes risk and what creates value and how that impacts governance, and it’s reshaping what it means to be a good director.

“It comes down to process and paranoia,” says Cindie Jamison, who serves as lead director of Tractor Supply and sits on the boards of Darden Restaurants, Big Lots and Office Depot. “The paranoia comes from the feeling that there are many external things that you can’t control but you have to protect against. Twenty years ago, they weren’t talking about cybersecurity. They weren’t talking about social media. They weren’t talking about digital disruption. That’s the paranoia element — how many more things do I have to worry about and how can I feel like I have my arms around them?”

Rethinking strategy and risk

Getting arms around this increased level of disruption increasingly means understanding that issues that had once deemed “softer” — things like talent, culture and environmental and social concerns — are now critical drivers of strategy and risk.

“When I first came to this work, board members would say their main role was to pick the right CEO and, in a sense, get out of the way,” says Bill McNabb, the former CEO of Vanguard who now serves on boards including UnitedHealth and IBM. “Fast forward to today, and the best boards are really trying to understand the breadth and depth of talent and the culture that talent creates because we’ve seen more companies fail on that dimension than almost any other.”

“The social movements we’re seeing have really shined a light on, what the board is doing about its corporate culture,” says Chelsea Grayson, a former general counsel and CEO who now serves on the boards of Spark Networks, Goodness Growth Holdings and iHerb. “That focus wasn’t there as much as it has been over the past five or six years. MeToo, Black Lives Matter and other social movements have changed the expectations. You can’t know that those things could take down your entire company and then not change your culture very deliberately. Most people recognize that this has to come from the boardroom, first and foremost. That’s where the examples have to be set, that’s where the policies have to be written.”

Environmental risks are not new to certain sectors like manufacturing, but as understanding increases of how climate change threatens supply chains and entire business models, these risks create new imperatives for response. In an unprecedented move in May, a small hedge fund successfully elected an activist slate of climate-focused directors to the board of ExxonMobil. The move was, in large part, a response to growing investor concerns that the company — and the board — had ignored the ways global warming was impacting the company’s future.

It’s not just investors who are paying attention. According to a 2020 Pew Research poll, a majority of Americans across the political spectrum support increased efforts to reduce the impact of climate change. This all changes the calculus for boards across industries.

“When groups are going after the Bank of America and saying that by 2030 or 2035 you have to come up with a net zero strategy, a lot of service companies are now going back to the drawing board to figure out what the ‘E’ in ESG means for a service entity, for a tech entity. And if management is wrestling with what the ‘E’ looks like, then boards are wrestling with what oversight of ‘E’ looks like,” says Paula Chomondeley, an advisor and longtime board member.

ESG is not just impacting the risk agenda. As board’s rethink their role in strategy oversight, ESG can be a key factor. Irene Chang Britt, who serves on multiple boards including Victoria’s Secret and Brighthouse Financial, points out how the “S” in ESG also means ensuring that the company’s strategy is relevant to the tastes, values and norms of a changing consumer base.

“When I served on the board of Dunkin’ Brands, we had some really interesting conversations around whether we were pursuing the right strategy for the next generation, and then the generation after that,” says Chang Britt. “Sometimes you have to think about whether you are still relevant. And are you ready for the next waves of consumers and what they want?”

Trisa Thompson, former senior vice president and chief responsibility officer for Dell Technologies who now serves on several boards, says that Dell’s forward-looking approach to sustainability, including a first-of-its kind closed-recycling program, translated to big financial gains. “We were up for a contract worth $500 million with a company out of France where ESG was 12% of the contract criteria and they told us this program was a big part of why we won the contract. There is a big potential upside when sustainability concerns drive business model change, but you have to be ready. The board can help drive that.”

The power of storytelling

As the nature of the risks that boards must navigate are increasingly driven by external forces, there is growing focus on what the board can control — committee structure, quality of meeting time and who runs the company. One of the most powerful governance tools that a board has at its disposal is historically also one of the more under-leveraged: telling a compelling story about the ways the company is responding to these new risks and stakeholder concerns. This becomes more important in an era where stakeholders expect more transparency.

This past proxy season, shareholders from companies like General Electric, ConocoPhillips and United Airlines approved proposals asking for greater disclosure of and transparency into how each company plans to reduce emissions.

“I haven’t really asked a lot in the last 20 years about ‘How are we reporting this?’ But that’s changing,” says Jamison. “My boards tend to be very good about what they’re doing, but not as good about communicating it. Several of my boards are getting dinged by ISS for not doing ESG things that they actually are doing. I find I’m not just asking management about ESG programs, but about the communications around that. I think the likelihood that more reporting will eventually be required is high and they need to be prepared.”

The data back this up. According to PwC’s 2020 annual Corporate Director’s Survey, 41% of directors say that disclosing a company’s efforts on ESG-related efforts should be a priority for management, up from 30% the year before.

Given this new level of scrutiny, boards are proactively considering how to shift ESG disclosure to meet the moment. “Every board I sit on has published or is looking to publish a sustainability report,” says Catalano, “We also will undoubtedly have more disclosures in proxies regarding various aspects of DEI (diversity, equity and inclusion).”

How boards navigate these issues can vary based on company size and industry, but directors should stay rooted in one part of the role remains constant: long-term value creation, says Liane Pelletier, who serves on four public company boards. “I worry sometimes that the discussion seems to be focused more on inputs as opposed to outcomes and I always try to focus on what I want this company to feel like in two years, in five years, in 10 years?”

Putting the “G” in ESG

While there are some issues, like separating the chair and CEO role or proxy access, that may receive less attention than in the past, most directors report that the net effect of a more complex environment is an overall increase in scope of the board agenda.

“Once an issue gets on the board’s radar, it’s hard to remove it without the fear that if you don’t keep up with developments, something will go wrong,” says Luis Aguilar, a former SEC commissioner who now sits on multiple public company boards.

“I doubt that 10 years ago directors were reading 900-plus pages before a board meeting,” says Jamison. “It’s exploded in terms of the amount of information and detail that you’re being provided, which is good, but it’s become a much more rigorous job.”

With so much more vying for the board’s attention, there is more pressure to use meeting time effectively. “There’s less focus on rear-view performance reports and a heightened practice of assuming materials sent in pre-read are ‘read,’” says Catalano, which allows the board to dive more quickly into strategy discussion.

A packed meeting agenda also means committee work becomes more important than ever before.

“The topics the board covers are only growing in scope and it changes how the board processes its work,” says Pelletier. “More is pressed into committees, which puts the committee chairs into the spotlight more than ever.”

Some boards look to the compensation committee to oversee various aspects of culture, talent and DEI. Others report that nominating and governance committees are in the hot seat to steer those issues. Thompson believes that increased disclosure requirements will mean more work for the risk and audit committees. No matter where an individual issue “lives” at the committee-level, Aguilar says. “It should be addressed in collaboration and cooperation with other committees that are also involved with aspects of ESG. And of course, they all report into the full board.”

The overall impact of a more packed agenda also means that communications are no longer just confined to board or committee meetings.

“We talk to each other a heck of a lot more now than we did before,” says Grayson. “Whether it’s grabbing a virtual coffee, picking up a phone for a post-mortem after an executive session, having conversations about the board materials ahead of the board meetings or figuring out how to build consensus for a particularly thorny issue for the next board meeting, a lot more of that individual backchanneling amongst the board members is happening.”

The education imperative

This pace of change means continuing education is now a core part of the job, Pelletier says. “The kinds of things I think about every day are broader, wider. That means that I have to keep opening up my aperture, and study up, reflect and bring different kinds of conversations into the boardroom.”

“Cybersecurity is a perfect example,” says Jamison. “It was really easy to intellectually get the idea that cybersecurity is a big threat and we need to protect against it, but we didn’t grow up with that level of functioning IT, so I think there’s a widespread paranoia about how to get your arms around the right questions to ask.”

The past year in particular has increased the importance of the board staying current and being able to shift gears to address a rapidly changing environment. “COVID was a huge pressure test for everybody,” Catalano says. “Those companies that were most technologically enlightened already are the ones that fared better. The more digitally savvy your board and leadership were, the better you were able to pivot into a virtual environment.”

Rethinking board composition: “Sage wisdom” vs. “In the know”

The disruption brought by the COVID-19 pandemic underscored another key change in board governance: rethinking who gets a seat at the table.

“There is a fundamental shift with the speed at which things are happening and your thinking can become obsolete fairly quickly,” says Chang Britt. “You have to have board members who will stay conscious of what’s changing and provoke management — in the right way — to be asking and answering the right questions.”

She believes this will drive a reshuffling of old models of who potentially makes a good director. “I think this will shift the focus to getting people who are much more in the know, who have their fingers on operational stuff, versus sage wisdom from many years ago.”

In many cases, the approach to board composition should mirror how the board manages disruption writ large, by connecting the dots between the external forces affecting the strategy and the company’s risk profile, Chomondeley says. “If you follow the strategy, the transitions within the company or in the economy leads you to understanding that there’s a new set of skills that we want, and because the skill set is new it leads us to a new set of directors. I would love to see more CHROs on boards, for example, because I think we are moving in a direction where boards will increase their oversight of human capital. Boards will also have to decide whether the company is a technology leader or a technology follower? If you are a technology leader, then maybe you need a younger digitally savvy person on your board.”

From “noses in, fingers out” to “manage your altitude”

For years the corporate board has operated under the NIFO principle: “noses in, fingers out.” In other words, make sure what the board is hearing from management passes the smell test, but otherwise, hands off. While the overall idea that directors are not there to run the business remains constant, board members are starting to think of their oversight role in a more nuanced way, and it’s driving a new kind of relationship with the C-suite.

“I picture an eagle that does a great job of flying very high so that they can see a lot, but when they need to, they can dive deep. But then they know when it’s important to go back up,” Catalano says. “I think it’s important for directors to understand the importance of managing that altitude, of not being afraid of descending when you need to impart wisdom or experience to an executive team who oftentimes is just trying to figure out the day-to-day.”

As pressure mounts on boards to provide greater oversight over a breadth of issues, directors increasingly expect management to come to the table in ways that meet the moment. According to the 2019-2020 NACD Public Company governance survey, only 56% of directors surveyed believe that the information they receive from management “is sufficient to support informed decision making and oversight.”

As board members become savvier about emerging issues, this impacts the way they engage with management. Pelletier points to the growing complexity of cyber risk as a place where she’s looking at her oversight role beyond just asking about phishing attempts or if the company has adopted the NIST framework.

“I really want to hear that there’s some muscle in the organization to weather a breach with some degree of confidence,” she says. “I want to hear about business continuity and resilience. Those are the conversations that I’m ready to have.”

Jamison says she is seeing this shift happen in real time, driven in part by changing expectations at the top.

“This next generation of CEOs grew up in a more collaborative world. They are much more teams-based as opposed to hierarchy-based. There us this whole corporate culture of it being okay to be vulnerable. They are like, ‘Let’s talk about this. I’d love your help. Here’s what’s keeping me up at night and here’s a bunch of information and here’s what I conclude from it. What do you think?’ It’s more interactive. In the same sense, I feel that boards are more open to management input. On the Tractor Supply board, we have management assess the board, and then we see if the management’s perception of us aligns with our perception of us.

“I think that’s really healthy. It reinforces that we’re not this omnipotent, all-knowing entity. We too can improve our performance.”



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