The Winds of Change

The role of the board is in flux. As corporations contend with the global pace and magnitude of change, stakeholder expectations are rising, demanding a deeper value-add from the governance function. Boards are increasingly visible and their failures well chronicled. The recent lapses in governance at Silicon Valley Bank and FTX are the latest chapter in a familiar narrative that includes Nortel, Enron and Blockbuster. 

Meanwhile, Canadian civil society has demanded that corporate tone and attitude undergo a paradigm shift. In recent decades, as our corporations become more institutional, they’ve been accompanied by a parallel rise in market expectations, sometimes referred to as stakeholder capitalism. Canadians are increasingly looking towards the private sector for leadership, guidance and financial support on a host of important issues ranging from globalization and emerging technology to social justice and climate change. 

These expectations have thrust boards into the spotlight. Large institutional investors and asset managers like BlackRock, led by Larry Fink, are driving the push for companies to take more action on issues such as climate change. On representation and diversity, Canadian issuers now must legally disclose the diversity of its board and senior management teams on several dimensions, and meet targets designed to promote parity. 

There is ongoing debate about the societal and performance merits of stakeholder capitalism. That said, it’s meaningfully influencing director recruitment. Large proxy advisory firms like Institutional Shareholder Services (ISS) and Glass Lewis are regularly updating their voting guidance. As of this writing, shareholders of many Canadian corporations are now being urged to replace the Chair of a Nominating and Governance committee where less than 30% of directors are women. 

Women now represent 26% of Canadian corporate directorships, up 2.2% year over year. As of 2022, members of equity seeking groups represented roughly 1 in 10 corporate directorships, a 37% rise year over year. Board seats held by indigenous directors doubled. While it may fall short of some stakeholders’ expectations, it reflects a swift and concerted response and represents corporate Canada’s most serious progress to date on board refreshment. 

These are welcome changes. The social objectives are worthy and appear well supported by stakeholders. But how has this realignment played out practically? A recent survey of over 600 public company C-suite executives underscores much progress, while also capturing sentiments which gives pause.

Board members overwhelmingly embrace diverse perspectives around their boardroom tables. Unsurprisingly, they value the potential for these perspectives to sharpen company strategy and improve key shareholder and stakeholder relationships. Yet, it also revealed majority of directors remain unsatisfied with their Board’s current composition. Today, 89% of executives say one or more directors on their board should be replaced.

What’s more, while Boards do purport to be in favor of director refreshment, many disagree on the mechanics. Where not already in place or mandated, many directors have expressed some resistance to mandatory term limits or retirement ages.

A governing board that’s distinct from management first appeared in Elizabethan England. Structurally, little has changed in nearly 500 years. A board is still typically made up of a mix of directors, some with vested interests and some deemed independent. Directors are appointed through a variety of mechanisms, and they work at-large and in various committees with largely similar terms of reference regardless of industry or sector.

By contrast, the functional mandate of the board has evolved dramatically. Spurred by the breathtaking pace of innovation and global competition over the last 50 years, boards have graduated from being fiduciary stewards to strategic conduits. Today, boardrooms are serious sanctums for corporate vision. 

Irene Britt is an accomplished corporate leader and independent director for several boards, including Amica and Victoria’s Secret. She underscores the evolved view boards have taken towards value creation: “Boards [have always] prioritized total shareholder return (TSR). However, Boards today have expanded the conversation beyond conventional metrics to identify the other factors that drive TSR, including talent, strategy and risk. All of these are in the interest of shareholders.”

There is a shrinking margin for error around board composition. Like elite sports teams, winning organizations need a deep cast of top performers in the arena and on the bench. Unsurprisingly, this where best-in-breed boards separate themselves from the pack. Engrossed with their nomination processes, they are dogged about ensuring they have the right people at the table.

 

Final Thoughts

What’s clear – the task for today’s nominating committees is more complicated than ever. While the markets, regulators and society at large send evolving instructions about board composition, strong boards will continue to be defined by thoughtful, proactive nomination processes which prioritize director caliber and character while managing an evolving diversity matrix.

In this series, as Boyden continues this discussion with leading directors, we examine the shift towards board performance in greater depth and lay a roadmap to attract great directors and build better boards.