A new report from professional services firm EY on the “Board of the Future” makes the case that growing demands and an outdated operating model are putting traditional governance under pressure.
EY spoke to nearly 100 board members and senior business leaders in Australian companies to pinpoint the key flaws and consider how governance trends may evolve.
“Boards play a crucial role in building successful economies, with strong corporate governance delivering the confidence that enables investment and growth,” EY said.
“But recent EY research reveals signs that a changing world and a perfect storm of pressures, are making it more difficult for board members to lead effectively and add real value to their organisations’ strategy.
“A trend of board governance failures is growing globally, threatening to erode trust in some of the world’s biggest organisations and deter top talent from seeking board positions.
“The problem, it appears, is that traditional, 20th century governance models are not fit for purpose in today’s volatile, uncertain world.”
Four challenges threaten viability of traditional board models
1. Growing regulatory and risk burden
Those interviewed, told us of regularly being tasked with 800+ page board packs ahead of meetings. This risk, compliance and regulatory overload is distracting boards from the strategic conversations that add real value. Added to an increased threat of personal risk exposure, mean Australian boards may struggle to attract top talent.
2. Outdated operating model
‘High touch, low tech’ boards face mountains of historic data and content with limited use of digital tools to interrogate and unlock value. This leave them with less time for meaningful strategic conversations and a lack of actionable insights to guide better decisions and respond effectively to volatility.
3. Looming gaps in skills and behaviours
Most boards have an emerging gap in digital literacy, as well as the ‘soft skills’, such as behavioural science, that are critical to successfully running today’s organisation. Diversity in its broadest sense also lags. The recognition that divergent thinking will be vital to better decision-making, innovation and value creation is still maturing.
4. An identity crisis around stakeholder priority and ESG
Boards are working out how best to meet public and investor expectations on sustainability and long-term value; and to square this with short-term demand for earnings. The shift to more inclusive stakeholder capitalism has begun for some (but, by no means all) though, for many of those making the shift, it is an early and sometimes uncomfortable transition. Deciding how best to ‘walk the talk’ rather than ‘talk the talk’ is an evolutionary process.
EY research predicts the board of 2030 will operate in an environment shaped by five key governance trends:
- Elevated stakeholder voice from more diverse groups
- More transparent decision-making
- Greater accountability – and consequences – for boards
- Faster, more unpredictable pace of change
- Complex business ecosystems that make governance more challenging
These trends are expected to change all key elements of the traditional board operating model, leading to less uniformity.
“As boards navigate these trends, they’ll need to break free of the homogeneity driven by a ‘comply or explain’ culture,” EY said.
“Boards will need to have the courage (and be encouraged) to stand out from the herd, if they really want to create fit-for-purpose governance.
“A convergence of challenges, combined with the recent focus on the COVID-19 pandemic, raises serious questions around the continuing viability of traditional governance models.
“The case for change is strong, but exactly how Australian boards decide to move forward with transformation is less clear and will depend upon each organisation’s own current situation, future strategy and long-term purpose.”
EY said the purpose of the report would start a robust conversation around the major pain points of modern governance, the trends and predictions about its continued evolution and, most importantly, how boards can build their own roadmap to the future.