Top 10 Trends and Changes on The Board Agenda 2018

Every year, global executive search firm Case Rose | InterSearch together with Board Network – The Danish Professional Directors Association identify the strongest trends and tendencies which together will form the primary framework for the work of board directors in the year to come. We’re looking at what’s hot, what’s not and what’s next within Corporate Governance and Board Leadership – because we know that what drives the board will always most certainly cascade down to executive management and from there further down the organization.

Some trends are mainly due to hard law, some rely on soft law, some are the result of an international governance wave, while others are driven by either the financial markets or by industry developments, and finally some are the result of extremely powerful global megatrends. In this year’s analysis, we have identified the following focal points for ambitious boards to follow in 2018:

1.  Consciousness and Sustainability

Consumers, the press, NGOs and global agenda setters like the UN with its sustainability goals are the drivers behind this rapidly emerging trend. Boards will continuously be challenged to have a broader perspective than the traditional “top line, bottom line, dividends, share price-focus”.

Engaging with the community, working extensively with the company’s purpose and “why”, ensuring reasonable working conditions, protecting the environment, and extending the strategic focus from the next quarter and fiscal year to something much more long-term, ie. sustainable, will drive a consciousness-agenda that’s much more advanced than what we have seen in the past. The boards failing to do so will be punished – not necessarily in fines or the like – but through shitstorms on social media and consumers voting with their feet, and thus with plummeting share prices.

2. Over-boarding

Across the globe, we see institutional and other significant investors focusing heavily on the level of dedication to (and independency of other interest) that each member of a given board is exhibiting. In the not so far past, it wasn’t uncommon for non-executive directors to sit on a portfolio of 10-15 different boards – some even attending to a CEO job alongside.

Investor giants like State Street, Vanguard, BlackRock and proxy advisor firms like ISS and Glass Lewis are all tightening their respective definitions on when a non-executive director is to be considered over-boarded, ie. sitting on too many boards. The consequence? Usually they will vote against you at the next AGM, and while some may survive that, it won’t do anything to keep their regard of you particularly high as a strong NED-candidate on another possible board. Rule of thumb will be a maximum of 4-5 NED positions; or 1 chair position and 2 NED positions; or 2 chair positions; or 1 CEO and 1 NED position. What counts here are board positions on listed companies and state-owned enterprises.

3. Digitization - and Digital Committees

It’s not going away. On the contrary, the impact from digitization is flooding all industries with an unprecedented speed now. Digitization also made our list last year, but the matter is just getting more and more important. Organizations undergo heavily needed transformations and business models go through changes of a magnitude that was hard to envisage a decade ago. Boards need to keep up to speed with this – and it won’t be easy for everyone. On many boards, there is still a majority of +60 year old digital immigrants, and if they are lucky they might consciously be aware that there are things that they do not know. More unfortunate are those who are unconsciously incompetent – and who don’t realize what hit the company until it is too late.

To not end up like Blockbuster, Kodak or Nokia, boards need to invest heavily in their own development within this area. They can’t rely solely on calling in consultants or other digital experts from time to time, but must either go through extensive training to catch up with the development – or simply add the needed skill sets to the board by prioritizing this set of competencies in the board’s succession plan for itself. Constant care and due diligence from the board needs to be the guideline.

Our judgment here is that numerous boards across the world will anchor the responsibility for overseeing the board’s and the company’s digital development in a newly established “Digital Committee”.

4. Geopolitical Instability

Globalization has meant that value-chains spanning half-way or all the way around the globe, are making most companies increasingly face the impact of geopolitical as well as of local political changes – and in an increasingly number of instances outright instability.

Brexit, Russia/Crimea Crisis, the election of Donald Trump as president in the US, societal unrest in Turkey, president Duterte’s controversial style in the Philippines, political changes in Zimbabwe and South Africa, political dogma shifts in Saudi Arabia, controversies between Qatar and several other Middle Eastern countries, armed conflict in Yemen, Germany still struggling to form a new government 3 months after the election, and continued financial and political crisis in Argentina, Brazil and Venezuela, and a historically aggressive North Korea are all factors that boards need to address.

Practically all companies are having either global suppliers, global customers, global investors or global competitors. As a result, Scenario Planning as a strategic tool will gain much more traction among boards in 2018.

5. Transparency

Connected with consciousness and sustainability is also a greater demand for transparency. Transparency on companies and on their boards. Investors, customers, employees, the press and other stakeholders are all expecting better access to more and more honest information on what’s going on in the company and on the board.

They want to know the level and the components of the remuneration packages for Executive Management and the board itself, and they want to be sure that the company and its leadership is not withholding important information about the company’s financials, products or management practices. The #MeToo campaign has only accentuated this trend, and it is now obvious to most what President Nixon learned the hard way in his days; it’s not just about the act itself, it’s definitely also about the cover-up.

6. Data Privacy and Cyber Crime

It will be no surprise that increased digitization as a business model lever increases the focus on data privacy just as the risk for cyber crimes to be committed rises. For boards, the EU GDPR-directive must be taken very seriously. It impacts all businesses, from the smallest to the biggest, and it is a real game changer in terms of how companies store data on people, and how they deal with those data. Just as important are the penalties that can be faced if the companies do not comply.

Another facet is the cyber crime risks. When companies like shipping giant AP Møller-Mærsk can be as severely hit as they were in June 2017 by the virus WannaCry, no one can feel safe. The financial impact for the company amounted to over USD 170M, and while they are in a situation where they are able to sustain that, it should make all boards aware that no matter how well your organization seems to be protected, the risk scenarios of tomorrow are completely different from those of 10 years ago.

Cyber Risk Management needs to be anchored either in the Audit Committee or in a Risk Committee, and specific digital and cyber risk competencies must be recruited to the board.  

7. Customer Focus and Consumerization

In the future, boards will focus more on the future than on historic performance, ie. spend more time on strategy, competitive edge and sales and (relatively) less on governance and control.

Not unfamiliar to B2C companies, the consumer increasingly stands out as the King. However, also B2B and B2G companies are facing this to a much higher degree today than ever before. This is why market leaders within MedTech are working on nudging consumers via e.g. Social Media to create a pull instead of the traditional push effect for their products. It’s also why combined B2C/B2B/B2G industries like Telco are working on providing much more loyalty driving experiences rather than mere hardware products (like the old telephone answering machine) or off-the-shelves services like “talk and text as much as you like for only USD 30 a month”.

When borders between our work life and private life began to vanish around 10 years ago when people started bringing their own smartphone devices to work etc., it was also the beginning of a time where vendors of IT equipment could no longer just rely on their relations with the Head of IT.

Loyalty schemes are proving especially important in industries like Travel & Leisure, Retail, Telco, Media, etc. The trend is moving fast and boards also in other industries need to stay alert – or they will be missing the train of opportunities.

8. Even More Diversity Focus – and Diversity Committees

From a remarkable large number of credible sources, we see the same pattern; that heterogeneity improves not only innovation processes and risk management, but also financial results on both top line and bottom line.

Boston Consulting Group, IMF, McKinsey & Co, Catalyst, Credit Suisse, Nordea, MSCI and Copenhagen Business School have all conducted research with the conclusion that gender diversity on leadership teams and boards are good for company results. Add to that greater diversity in competencies, age, cultural backgrounds, ethnicity, etc. and you have a winning team as long as the team agrees on the same goals and is aligned on strategy and execution.

However, in many countries there remains a huge gender gap on the boards despite severe pressure on the subject from the media, the EU and many others. Different countries have applied different ways of trying to influence the development towards greater gender parity. From quotas in e.g. Norway, France, Germany, Italy, etc. over "hard law with soft goals" in Denmark to more voluntary yet in some cases relatively effective measures like The 30 Percent Club in countries like the UK, South Africa, Canada, USA, Australia etc.

From our view, what gets measured, gets done. If companies are required to look for more diversity, they will. If not, they might do so, but not necessarily. What we foresee however is that companies in 2018 to a much higher degree will embrace the issue and ride the positive wave for being leading on this – instead of finding themselves on the defense due to doing nothing. The means? We will see new ”Diversity Committees” formed on boards in a large number of companies, with responsibility of monitoring and facilitating diversity efforts throughout the entire organization – not least on the board itself.

9. Adaptation to a Learning Organization

An estimate from World Economic Forum from 2015, shows that 65% of school kids today will end up in jobs than don’t exist today.

It’s not unheard of that job functions disappear – think of coopers, thatchers, blacksmiths, ropemakers, telegraphists and many, many more job titles which have disappeared over the course of the last century or two. However, job functions now vanish with an alarming haste – but are being replaced with new ones almost instantly.

To absorb and sustain the disruptive and dramatic changes than sweep over the business society these years, companies need to embrace a new paradigm; that we continuously need to learn our employees (and managers and leaders) how to learn. Linear schooling from the past might have been fine when we took use of mainly our crystalized intelligence, however when technological exponentiality drives us to use our fluid intelligence much more, we need to adapt to a learning organization rather than just sticking to our guns and staying in our core business. Such “core businesses” are a thing of the past as disruption of business models makes new combinations of industries possible to an unthinkable extent just 5 years ago.

At board level, boards need to sanction this for the organization as such but they also need to realize that they themselves need to constantly evolve and learn. Continuous board educations and board mentoring are just two of the most obvious tools which boards will take even greater advantage of in the year to come.

10. Board Effectiveness driven by Board Evaluations

Our Global Board Survey 2017 – Advancing Boards showed an increase in the use of board evaluations across the world. With 1.017 chairmen and board members from 52 countries, we saw the numbers go up from 47% in 2015 to 52% of all boards in 2017. We would be surprised if that number isn’t up to over 60% within the next year or two.

With boards facing much higher expectations from all sides, the usual 4-6 meetings of 2-4 hours are no longer sufficient. Neither is having the right CVs on board. Companies like Lehmann Brothers, Blockbuster, Enron, American Apparel, Nokia and Air Berlin all had some very experienced people with terrific track records on their boards. What they might not have had was the right board dynamics nor sufficient time spend on more forward-looking items like strategy, competitiveness, customers and sales.

Board Evaluations is the no 1 tool to measure and communicate around board dynamics, especially when they are done by 3rd party facilitators to avoid bias and internal politics on the board.

Merry Christmas and Happy New Year

Only a few boards will probably face all ten of the above trends during 2018, but most boards will face some or most of them. They are generic enough to apply to a great variety of industries, ownership structures, judicial systems, governance models and cultural differences across the world, yet at the same time distinct enough to stand out as our top picks as not only whims of fashion, but real supertrends. In that sense, it seems quite clear that 2018 will yet again be an even more busy year for boards than 2017 has already proven to be.

On that happy note, we would like to wish everyone a Merry Christmas and a Happy New Year,

Jakob Stengel, Global Head of Board Practice, Case Rose | InterSearch

For more information, pls. go to www.caserose.com, www.intersearch.org or www.boardnetwork.dk