As an international Executive Search company, Alhambra International is committed in Key Issues in Corporate Governance as it plays a crucial role in identifying executive talents capable of navigating evolving boardroom dynamics, addressing mounting expectations, and driving sustainable long-term growth in organizations worldwide.
In this article, based on a research made by Harvard Law School Forum on Corporate Governance, we analyze the evolving role of Directors in response to changes in the business environment, mentioning key principles for effective board operation, pressure points for Directors, anticipated challenges, and the importance of engaged boards in driving sustainable value creation.
The rapid pace and multitude of channels facilitating information dissemination in today’s world have intensified scrutiny on boards, raising the bar for transparency and accountability. Directors, whose reputations may have been meticulously cultivated over years, are not exempt from such pressures, especially with activist investors targeting underperforming entities, management style and decisions impacting shareholder value. It was the case recently with judges’ decision to invalidate Elon Musk’s colossal, multibillion-dollar compensation plan.
Moreover, the business environment has become increasingly complex, marked by macroeconomic uncertainties, geopolitical tensions, regulatory flux, political polarization, cultural clashes, cybersecurity vulnerabilities, the ascent of generative AI, and the imperative of transitioning to sustainable energy sources. Navigating through these issues is under the competence of boards.
Inlight of these shifts and uncertainties, it is imperative for boards to adopt practical strategies to enhance their effectiveness. Key Principles include:
- Prioritization: Aligning the board agenda with the company’s strategic priorities and risks, ensuring focus on issues with significant short, medium and long-term impacts.
- Collaboration with Management: Cultivating a relationship of trust and openness with management to facilitate timely information exchange and ensure the board’s input is integrated into daily operations.
- Soft Skills: Acknowledging the importance of soft skills such as leadership, diplomacy, and judgment, which are essential for fostering constructive dialogue and consensus-building within the boardroom, especially with individuals with strong personality and assertive leadership.
- Balancing Near- and Long-Term Objectives: Serving as a counterbalance against short-term pressures and guiding management in shaping the company’s long-term trajectory.
- Innovation: Embracing innovative approaches to governance, disclosure, and risk management tailored to the evolving needs of the business. Innovation is one of the key drivers of growth and collaboration with startups through open innovation or corporate venture capital should be monitored by boards.
Directors will continue to face mounting pressures in various areas:
- Individual Director Performance: Increased scrutiny on Director’s qualifications and contributions, with a focus on measuring individual director performance and engagement. Individual Director Performance has to be assessed besides the proper functioning of the board! It should be included as a major recommendation of the board governance principes, especially in the main EU countries.
- Director Participation in Shareholder Meetings: Expectation for directors to actively engage with investors and demonstrate independence from management during meetings. This independence is sometimes always perceived as a challenge especially when CEO are also acting as Chairman and/or when the CEO is also the main shareholder of the company.
- Engaged vs. Overstepping Board: Balancing the board’s oversight role with avoiding interference in management responsibilities, particularly in areas like cybersecurity and climate risk.
- Focus on Director Bandwidth: Heightened attention on director commitments and the need for realistic assessment of bandwidth, amid evolving expectations from investors.
- The Stakeholder Balancing Act: Navigating competing stakeholder interests while making well-rounded business decisions, especially in politically charged environments. This is especially the case in state owned companies or companies evolving in regulator based environments such as climate and/or energy transition.
Several trends are anticipated to shape the boardroom landscape in the coming years :
- Evolution of ESG: ESG considerations will remain integral to business decisions, with a focus on concrete actions and disclosures grounded in business practices. This is a strong requirement especially in Europe with CSRD the directive by the EU Commission enhancing corporate sustainability reporting standards within the European Union (EU). The directive which aims for companies to disclose transparent and reliable information regarding their environmental, social, and governance (ESG) performance should be monitored by the board.
- Regulatory Pressure: Continued emergence of new rules and regulations, particularly in areas like climate disclosure, human capital management, and AI governance. That’s the case in Europe with the Green Deal covering all sectors of the economy, notably transport, energy, agriculture, buildings, and industries such as steel, cement, ICT, textiles and chemicals. and also in the digital area with the DMA (Digital Market Act), DSA (Digital services act) and more recently AI act, the first regulation ever made on Artificial Intelligence.
- Politics and Business Intersect: Increasing influence of politics on business decisions, with a focus on issues like diversity, equity, inclusion, and labor rights. The EU CSRD’s Standards for DE&I are clearly defined with separate measures and requirements and complete national legislation.
- Shareholder Activism: Persistent activism targeting strategic improvements and operational enhancements, alongside growing scrutiny of governance, environmental, and social issues. According to Skadden Publication, shareholder activism continues to Increase in Europe with public activist campaigns soaring in 2023, to 89, sharply up from the 53 launched in 2022, a 68% increase.
- Cybersecurity Threats: Heightened cybersecurity risks fueled by advances in AI and geopolitical tensions, necessitating enhanced board oversight.
- Demand for AI Governance: Growing stakeholder demand for board oversight of AI deployment and ethical guidelines to mitigate risks. Board Directors should be informed and ever trained with the new AI act recently announced in Europe by EU Commission member Thierry Breton.
- Energy Transition Focus: Accelerated shift towards green energy, prompting companies to revamp operations and demonstrate commitment to emissions reduction targets. Industrial companies are particularly targeted, especially transport, energy, agriculture, buildings, and industries such as steel, cement, ICT, textiles and chemicals. We are living now a new revolution with the decarbonization of the industry!
- Executive Compensation Scrutiny: Introduction of new disclosure requirements related to the timing of stock option awards and material nonpublic information. Some CEOs’ Compensation packages are under scrutiny, it’s the case of Carlos TAVARES which compensation soars to 39.5 M $ in 2023 and which has to be approved by shareholders on April 16th during general assembly.
While the expanding responsibilities and expectations placed on boards present challenges, they also open up new opportunities for value creation and strategic positioning. Engaged boards, acting as strategic partners to management, are particularly poised to navigate complexities, identify priorities, and steer companies towards sustainable long-term growth.
In conclusion, Directors must remain vigilant and adaptive in the face of evolving boardroom dynamics. By embracing best practices, fostering collaboration, and staying attuned to emerging trends, boards can fulfill their fiduciary duties and drive meaningful value creation for all stakeholders.
Pierre MAURIN – Senior Partner ALHAMBRA INTERNATIONAL