Nobody knows for sure how a coming tsunami of digital disruption will affect governance. But one thing is clear: organisations will need to be more open and willing to accept ideas on strategy from a wider group of stakeholders. And boards will need to lead a new era of collaboration.
Directors and executives who believe only they have the answers, or are unwilling to listen to the market, will learn painful lessons. Capitalising on digital disruption, or not being crushed by it, will require a more collaborative, transparent approach with stakeholders.
Consider strategy. Typically, the executive team develops strategy and good boards shape the strategic plan, test its assumptions, monitor implementation and coach executives on strategy if needed. Offsite strategy workshops bring boards and management together on this issue.
It is almost heresy to suggest key investors should attend the organisation’s strategy offsite and give their views on what is needed in a separate session. But that’s what needs to happen, within reason, if organisations are to develop the strongest strategy in the digital era.
Capitalising on digital disruption, or not being crushed by it, will require a more collaborative, transparent approach with stakeholders.
I’m not proposing shareholders dictate strategy to companies or that organisations selectively divulge information on strategy to key investors. Listed companies have continuous-disclosure requirements and should never disclose sensitive information that can be leaked to competitors or the market.
Rather, my argument is that listed companies need to give key stakeholders, such as institutional investors and some activists, a better opportunity to comment on strategy and suggest alternative approaches or variations to existing strategy, with a view to lifting long-term firm performance and sustainability.
In effect, companies and boards need to find a way to encourage and listen to different views on strategy and disruption – without compromising their obligations.
Large organisations do this to varying degrees, usually in ad-hoc ways. For some, it is through investor-relations meetings between the Chairman and institutions. For others, it is about CEOs listening to the views of fund managers and stockbroking analysts in meetings. Strategy days are another device for boards to gauge the market’s view on its strategic approach.
But these forums mostly involve one-on-one meetings or are about the organisation presenting strategy to the market, rather than a genuine two-way exchange of ideas. Rarely is there an opportunity for key investors to come together with management and the board and pull the strategy apart.
This could involve, for example, a bank facilitating a meeting with a handful of commissioned fintech entrepreneurs and asking them how they would disrupt the bank’s strategy. This type of leftfield thinking can add new insights for boards on strategy if handled correctly. It can also help boards better assess and test strategy proposed by management.
To my thinking, the global surge in shareholder activism is partly recognition of this problem: some investors who believe they have good ideas to lift firm performance feel the board has not listened to them, despite being part-owners in the organisation. Their last resort is a combative, damaging, activist campaign to force change in strategy or on the board.
The emergence of so-called “wolf packs”, where investors join forces in activist campaigns, is another symptom of a closed approach to strategy and an “us-versus-them” mentality.
Investors should be working collaboratively with the board and management to improve strategy, not joining forces to work against it and become a threat to organisation continuity and board composition.
Key investors, for their part, are showing a willingness to consider different views on organisation strategy and sustainability. It’s more common in the United States for giant institutions to listen to the views of activists on an environmental issue, for example, and, if warranted, support them in their campaign to force change on a company.
Again, I’m not suggesting boards hand over strategy information to institutions or listen and respond to every shareholder activist. Boards must weigh up the interests of all shareholders and do what is in the organisation’s best long-term interests. Strategy is a foundation of the board’s role and not something it should ever lose control of.
But there’s scope for boards to better encourage institutions and activist investors to report views of alternate corporate strategy, in a controlled, company-led environment.
That might threaten executive teams who detest having their strategy pulled apart. Or infuriate CEOs who resist incorporating and implementing ideas suggested by outsiders. But top executive teams, like boards, should be open to new ideas and being challenged.
Surely, it’s more effective for the full board to hear different views on strategy from key investors in a company event, than for those views to be relayed only to the chair, in varying levels of depth, in one-on-one investor meetings. Or publicly through the media.
As digital disruption intensifies, boards will need to see activist investors as a source of ideas, not only a nuisance, and be prepared to adopt good ideas, even if it means a loss of face at times.
This collaborative approach with stakeholders must extend to investor-engagement programs. Chairpersons and chairs of executive-remuneration committees are spending more time on investor relations, often on Environmental, Social and Governance (ESG) issues. But boards will need to own their organisation’s investor-relations effort in coming years.
As with strategy, boards will need to talk to more shareholders on investor-relations matters and build stronger relationships. Having a core group of investors who understand the organisation’s approach to strategy and risk management has never been more important as digital disruption potentially increases industry and firm volatility.
This collaborative approach must extend to government relations. Too many large organisations, here and overseas, adopt a defensive, reactive approach to regulation. Some fight change and do not work proactively enough with regulators. High-performing boards know their organisation needs to work with regulators, not against them, more than ever in the digital era.
The need for greater collaboration also affects board composition. Market pressure for directors to hold fewer board seats and have more of an executive-type role is misguided. As automation and artificial intelligence unleash a new wave of disruption, boards will need directors who can look across industry, draw on diverse experience and drive collaboration within and outside the organisation. Directors who are well-read, highly networked, exceptional listeners and always looking for emerging trends. Directors who can bring people together.
This level of collaboration – across strategy, investor engagement, government relations and between boards and stakeholders – will challenge the governance community. For some boards, governance is about directors and executive teams sticking together, guarding strategy and seeing stakeholders as a job rather than a source of ideas.
This closed approach might have worked in the past. It will be less effective in the future as digital disruption requires boards to lead a new era of stakeholder collaboration.