30 November 2022 - In this third in a series of blogs on Board Leadership, CISL Fellow Prof. Richard Calland builds on the argument about the new corporate governance framework for understanding the leadership responsibility of the board by shifting from the legal and conceptual issues of principle to the ‘how’ of governance. Specifically, what are the questions that a board should be asking itself and the executive of the company if it is to provide the leadership needed? The blog offers an Oversight Framework to help board directors think through how to position themselves to ask the right questions at the right time.
Why? Why now? Why not?
Sometimes the simplest questions are the most penetrating. Ask any skilled barrister.
What is the simplest, but most effective thing that a director of an organization can do? Answer: ask the right question, on the right subject, at the right time, to the right person.
Simply expressed, perhaps, but perhaps a little harder to execute in practice.
Board directors can't be effective if they don’t have sight of the real pressures, trends, risks and opportunities that the executive is navigating. But executives tend to be keen to communicate that they have things in hand and only engage boards on things for which they already have the answers (except, perhaps, in times of crisis – which, for obvious reasons, should ideally be pre-empted).
An effective governance system depends on effective information flows and robust discussion of key decisions. So for directors to get the insight they need, they need to be able and willing to pose sufficiently penetrating questions at the right time.
When I think about the relationship of the board and the executive, I am often drawn to another area of my governance work: politics and systems of government. In most democracies, the legislative branch of government often has the primary political authority and has the power on paper to appoint the executive and to hold it to account. But, as someone once pointed out, it is the executive branch of government that has the soliders, the money and the staff. De facto, it holds the real power, and parliament is usually having to play catch-up. In this context, often the most powerful weapon in the legislature’s armoury is the well-timed, and well-researched and composed, question. I think many boards are in a similar or equivalent position.
This is the mindset the board director must adopt. As a barrister myself, I learnt this fundamental lesson – to try and keep my questioning as simple and direct as possible. I also learnt that good cross examination of a witness in court requires careful preparation. The perfect question is sometimes intuition, but more often born of solid work in advance.
Clearly, you can only know what the right question to pose is if you are sufficiently well-informed. In addition, you may need to have the individual independence of mind, and perhaps even the courage, to challenge a holy cow and to go against the grain of the culture and current thinking of the rest of the board.
In the previous blog in this series, I advocated that the emerging international standard for organizational governance (ISO3700), in terms of board leadership, is very helpful for board directors wanting to take their fiduciary responsibilities seriously – a three pillar framework in which the governing body (the board) must direct, oversee and be accountable for the organization achieving its defined purpose.
In turn, standard proposes that “at its core” this will include:
a) setting and committing to the organizational purpose and organizational values;
b) determining the organization’s approach to value generation;
c) directing and engaging with strategy to generate value;
d) overseeing that the organization performs and behaves according to the expectations set by the governing body;
e) demonstrating accountability for this performance and behaviour.
To provide the necessary leadership to fulfil this important role in terms of this kind of capability, the board will need to be nimble and alert, robustly challenging to the executive (provided that it has the skills and knowledge to keep up with the executive – which is in my experience often not the case), and have a collective capacity for “strategic foresight” – to make sense of the swirling systemic pressures and trends, and to navigate a path through a treacherous social, economic and political landscape.
But I will come back to these issues of board capacity and composition next time. Instead, this blog aims to approach the topic from a different angle. It aims to assist boards of directors to think about both aspects of this challenge that they must confront and the standard they need to meet.
First, what are the sorts of questions that I need to be prepared to ask? Second, how can I put myself – and, thereby, the board I serve – in the best possible position to spot the right moment to pose the particular question?
To help think through what this might entail, in terms of being in the right ‘place’ to pose the right questions, here is an Oversight Framework – five sets of questions that will help a board direct, oversee and be accountable for the performance of the organization in achieving its defined purpose. As such, some are questions the board director needs to ask of him or herself in terms of meeting accountability responsibility and being able to exercise meaningful oversight. Others are questions that the board director will need at various times to put to the executive of the organization.
I. Context:
Have you fully understood the context in which you are doing business? Are you being apprised of the full social, economic, environmental complexity? Do you have the capacity to provide the company with ‘strategic foresight’ necessary to both understand but also confront the systemic shocks and pressures that are threatening the prospects of a sustainable, thriving economy?
To be able to pose the right questions to the executive of the organization, a board director, with his or her colleagues, will need to have a sufficiently rounded, ideally 360 degree, view of the world, to be able to recognize the interdependent social, economic and environment trends. Of course, few if any individuals can have this level of knowledge, so one is speaking here of a collective capability – some board directors will be strong on, say, climate science, and others on diversity and socio-economic equality, or the political and governance terrain. The executive also need to have this kind of systemic understanding, but they may be too ‘head down’ running the organization week to week to have the headspace for so much external complexity. Indeed, one of the over-riding leadership tasks – and opportunities – for directors is to keep their heads above the fray, looking at the big picture, and helping the executive to do the same and to relish the challenge. “Crave complexity!” should be the rallying cry from the board.
II. Impact and Risk:
Has the company’s impact on the world been comprehensively measured? Are the metrics robust? Are they subject to independent assessment? Are we transparent about the results?
This is where ESG-type measurement frameworks are useful, providing they are used to shore up performance and accountability within the organization and not as a way of green-washing to the outside world. Again, the board has a crucial responsibility to ask the right questions of the executive in relation to how it measures, records, and learns from its impact on the world, and then acts remedially to eliminate the negative and enhance the positive. The board is ultimately legally responsible for what is reported on by the organization. Any undue and unjustified secrecy will likely result in reputational harm or legal liability. Similarly, have you fully grasped the legal, political, social and capital market risks that face the organization? Is there a long-term strategy to not only mitigate but eliminate these risks?
III. Purpose:
Has the organization defined and articulated a clear social purpose? What positive benefit would society lose if the organization ceased to exist? Are the social purpose and sustainability objectives fully integrated into the core business strategy? Are the opportunities that will come from such integration and positioning fully understood and articulated in the business ambition of the company?
This is fundamental. As both the ISO37000 standard and PAS808 make absolutely clear, organizational purpose lies at the heart of the modern, sustainable organization – it should drive strategy and ethos; and the whole governance system should be geared to ensuring the organization can deliver on its purpose.
This, however, is easier said than done. Many business executives are so steeped in business as usual (BAU), that they may struggle to understand, let alone, execute this pivotal idea. This is where the board needs to lucid and tough, and unrelentingly principled. This is the most significant leadership role the board can play – by insisting on purpose being at the heart of everything.
Everything that the organization does should be in service of its purpose…and the leadership responsibility of the board director is to persistently question anything that is being done that suggests otherwise. Often the response will be ‘well, it's too soon’ or ‘we’ve never done it that way’ or ‘the shareholders won’t like it’ or ‘my KPIs are not aligned to this approach’. The simple questions of ‘why?’ and ‘why not?’ will be useful. This is where the board has to step in and step up, as part of its responsibility to direct and oversee the organization.
IV. Stakeholder engagement:
Are the right stakeholders brought into decision-making? Has a rigorous stakeholder mapping been conducted? Is the government relations & public policy game-plan & advocacy aligned to the social purpose and worldview? Does the organisation adopt strong public diplomacy positions? Are all of the company's lobbying activities aligned with this position? One of the ten recommendations of the McKenna report on net zero commitments of non-state actors published at COP27 is that corporate must align their external policy and engagement efforts, including membership in trade associations, to the goal of reducing global emissions by at least 50% by 2030 and reaching net zero by 2050: “This means lobbying for positive climate action and not lobbying against it.”
Again, the board has a critical role, sitting as it does in the middle of a busy traffic junction, between and betwixt shareholders, government, and social stakeholders such as unions and activist pressure groups.
The executive may be thinking within the box, rather than out of it. Or it may be a case of the executive thinking outside the box, but lacking confidence that the board will back them. If the board is well-constituted, with a professionally and intellectual diverse collection of non-executive directors, then it should be in a good position to assess the lay of the stakeholder land. The executive may have a less rounded view of society and may well be missing some critical stakeholders. So, the board will need to think carefully about which stakeholders should be engaged by whom.
In general, this would be an executive function, with the board directing and overseeing the stakeholder engagement strategy. But, in some cases, it may be necessary and appropriate for the board to engage a particular stakeholder directly – for example, boards need to be effective in engaging investors through the lens of long term value creation and having good conversations about necessary transitions, resets and associated financing, rather than just ticking the basic housekeeping boxes. Boards will need to be assertive in asking the right questions about who is being engaged and on what basis; and in ensuring that it is not a ‘stakeholder-washing’ tactic, designed to present the image of a listening organization without taking the consultation process with the external stakeholders seriously.
This is where the principle of accountability kicks in. It is clear that a failure to engage a full range of relevant stakeholders will expose the organization to potentially serious legal or reputational risk. Since the buck will stop with the board, it must be accountable for what happens.
V. Organisational Culture:
Are the internal incentives (such as remuneration and performance management) fully aligned with the strategic objectives? Is there a below-the-radar adverse political economy that protects vested interests within the company, surreptitiously defending BAU, and preventing transformational thinking?
This is where the role of the penetrative question can serve to pierce the surface and reveal the true underlying organizational culture. It’s where a culture of politeness in the board, and the ‘diligently coasting’ director that I wrote about in the foundational blog in this series, can also impede progress. Board culture is a really important sub-set of the overall organizational culture. Therefore, reflecting honestly on the board culture and dynamics will also be essential for successful board leadership, sometimes with the help of an independent outside expert or facilitator.
Awkward, but essential, questions will need to be placed on the agenda, such as: Whose voice is taken seriously and given airtime? Are sustainability-related issues left to the most junior (and often) female members of the board? Are the most respected voices ones that are delivering short-term commercial returns? If their children could see what they speak up for and fight for in board discussions, would they be proud?
Board leadership here requires the individual director to look in the mirror and check that they up to the job. Challenging a negative, unsustainable organizational culture - whether in the board, or in the rest of the organization – will require courage, yes, but often just putting the right question to the right person at the right time can have game-changing impact.
As Gandhi said, “if you don’t ask, you don’t get it”.
