Future of Governance

Predicting the future of business is rife with complications. Few foresaw Donald Trump becoming US President, Brexit, or earlier the global financial crisis and tech crash. If key events that shape business and governance are hard to predict, how can boards prepare?

A better approach is extrapolating current governance trends into the future and understanding how boards might have to adjust to rising community expectations on business behaviour and ethics. Powerful forces that are influencing boardroom ethics will only grow.

The Governance Leadership Centre asked four ethics experts about the direction of governance and ethics over the next 10 years. There were common themes in their responses: the need for greater boardroom training on ethics, boards even more focused on corporate culture and behaviour, and applied ethics skills as a competitive advantage.

There was also a view on different board models that might evolve in the coming decade if there are recurring ethical failures in governance. That could include regulators having a greater say in director appointments or even industry associations providing salaried directors to boards.

Here are the responses of the ethics researchers/practitioners:

1. Dr Petrina Coventry FAICD

Professor at the University of Adelaide, non-executive director with a number of listed and not for profit organisations, business ethicist and private-equity partner.

Between now and 2029 there will be greater focus placed on character and background when making director appointments. Choosing a director based on skills and experience – or who is known to other directors on the board – will not be enough. Boards will have to consider a director’s character as well as their ability to govern through complex ethical issues, before their appointment.

Activist stakeholders will make more aggressive “calls” on a director’s individual and a board’s collective virtues during their tenure. It's a bit like the Wizard of Oz syndrome: stakeholders will want to know much more about the people behind the screen (directors); not just their skills and CV but their view on the world, evidence of moral character and ability to make complex ethical decisions. Stakeholders will test that the director’s ethical position aligns with the organisation's purpose.

Directors will increasingly need education in the area of applied ethics. It will not be enough to assume directors are equipped to make ethical decisions, given rising complexity in business. Boards will need new tools, frameworks and at times external advice to help them understand how to interpret and respond to decisions that involve a multitude of stakeholders with different needs. They will need to view applied ethics as a core skill.

More board decisions will be made on an ethical basis – companies acting in the right way – rather than just following the law. Too often, when companies face complex ethical decisions, their response is to wheel in the lawyers and adopt a compliance approach. They do what the law requires, even though the law often lags community expectations and ethics, the law can often be out of date or wrong.

Boards will recognise that if they continue to follow the low road (compliance) rather than the high road (having the character to do the right thing) their organisation will not be maximising value for stakeholders.

Also, due to the rapid and mercurial nature of changing technology and societal implications, there will be more focus on “existential ethics” in the boardroom in the next 10 years. Boards will be challenged to face up to their organisation’s responsibility to society and the planet, and directors will increasingly be viewed as keepers of their company’s moral code and character.

That trend is underway now as boards spend extra time on climate-change governance and other ESG issues, and will surely grow as boards govern for a more diverse group of stakeholders and view value as a long-term concept that goes beyond the organisation’s short-term profitability.

There will be tougher career consequences for poor ethical behaviour. I suspect some industry associations and professional bodies will take a harder line; ethics will play a greater role in who they admit and whether they retain their membership. We will see people “struck off” from industries for poor ethical behaviour, as happens in medicine and law.

The big unknown is what will happen over the next decade if organisations continue to have serious ethical failures and what that means for boards. If boards cannot govern their company’s ethics to the standard required, regulators might do it for them. It might be that an organisation, led by regulators or an industry association, appoints full-time directors to boards, monitors their governance performance and professional development, and rotates directors across boards.

There are obvious complications and challenges with this model, but the only way to get true “independence” on boards that aids ethical thinking, and better diversity, might be for someone else to appoint and monitor directors – and for those directors to move between organisations after a few years. We are already seeing regulators here and overseas taking extra interest in board performance and that will continue if ethical failures are recurring.

We might find that having part-time directors on boards as organisations grow and ethical decisions become more complex, is no longer sufficient to address governance challenges. At a minimum, we’ll see directors holding fewer board positions in their portfolio in the coming decade.

2. Dr Tracy Wilcox

Academic Director, Postgraduate Program at UNSW Business School. Expert in business ethics and sustainability.

The issues that boards will grapple with over the next 10 years will be very different from today. The world is changing quickly, business complexity is intensifying and shareholder activism is expanding. In years past, people signed a petition against a company; today, activists can mobilise millions of people worldwide via social media, as with the climate-change strike.

Boards will govern much more for the needs of a diverse group of stakeholders, beyond shareholders. That is happening now but when making decisions in the future, boards will think deeper about how that decision affects employees, customers, society and the planet. The multi-stakeholder component of decisions will create greater ethical challenges for boards, which will have to balance outcomes for potential winners and losers in decisions.

Boards will respond to stakeholder needs in several ways.

First, through true diversity. Not only around gender or race, which are important, but ensuring different stakeholder groups are represented on boards - employees for example, as is the case in Germany. If boards are serious about governing for a diverse group of stakeholders, they will need to ensure key stakeholders are represented and that could change board composition as we know it. Boards that keep appointing directors from the same small pool are not “future proofing” their organisation.

Second, ethics training will become a much bigger part of a director’s professional development. Boards will need specialist skills on ethics and sustainability to confront the governance challenges ahead. We cannot assume that a director who had a long executive career can always understand the needs of diverse stakeholders, and balance tensions between short-term and long-term organisation performance. I am not suggesting directors will need a Master of Philosophy; rather, applied ethics skills learned through executive education.

Third, boards will focus much more on ethics and organisation culture – a trend that is clear today. Technology will be a key driver. Boards will want to know that the organisation’s data scientists, for example, are considering the ethical implications of their work, and following codes of ethics. And that the firm has an ethical approach to artificial intelligence, machine learning and other emerging technologies that have significant implications for governance.

Boards will also respond to ethical challenges by adopting the “precautionary principle”. That is, being more proactive in mitigating risks, even when the magnitude of that risk is not clear and there is no legal imperative to act on it. Essentially, it is about boards saying, “we can’t be certain how this risk for the organisation will play out, but let’s act early to mitigate it”, rather than reacting when it is a problem or a regulator demands remediation. Good boards will ensure their organisation gets in front of the law through a strong focus on ethics from the boardroom to front-line staff.

Financial markets will also have a greater say on organisation ethics in the coming decade. That has been underway since the 1990s with the focus on environmental, social and governance (ESG) and will grow. Firms, and by default boards, with demonstrably poor ethics will get marked down by investors, and vice versa. The cost of boards not thinking sufficiently about the ethics of complex decisions, or not having the skills to do so, will rise significantly in the next decade.

3. Dr Andrew John

Associate Professor of Economics at Melbourne Business School, lecturer in ethics and corporate social responsibility.

Two trends will drive the evolution of governance and ethics over the next 10 years. The first is increasing public expectation of good business behaviour. The second is rising business complexity.

As for the first, trust in institutions worldwide has declined this decade but that may be partly because the community has higher expectations of how a company should behave.

“Being a good corporate citizen should be business as usual, not a marketing campaign.”

These expectations strengthen the business case for organisations behaving ethically and for boards to ensure that happens. The notion of boards interpreting their fiduciary duty narrowly in terms of the organisation’s short-term profitability is in the dustbin. High-performing organisations will have high ethical standards that attract, engage, and retain talent. Ensuring organisations behave ethically will be fundamental to long-term business success and sustainability.

Boards will also focus more on the link between ethics and risk management. We know from the academic literature on corporate social responsibility (CSR) that organisations which hold themselves up as a paragon of virtue risk greater scrutiny and community backlash. Being a good corporate citizen should be business as usual, not a marketing campaign.

The CSR literature shows organisations that are perceived to have good corporate social responsibility develop a form of insurance in the community. When a crisis emerges, the organisation is likelier to get the benefit of the doubt from the public if it has shown consistently strong ethics and behaviour over a sustained period. Boards should give some thought to how their approach to ethics throughout the organisation could minimise damage if something goes wrong.

As for the second trend of rising business complexity, it is hard to predict where artificial intelligence and other technologies will go, but the increasing business complexity over the next 10 years is a near certainty. Boards will need to consider the ethical implications of technology—including, but not limited to, data management and privacy—and anticipate that technologies may be a source of crises and scandals. The challenge is that boards and even executive teams will find it harder and harder to keep up with their organisation’s own technologies.

One possible board response to complexity is to add more technical expertise, either among directors or through external advice. Consider recent problems: Boeing’s board was criticised for lacking technical expertise in the 737 Max crisis; Volkswagen’s board missed the “cheat device” scandal over emissions performance. In both cases there was a clear lack of technical expertise at board level. If boards lack technical skills, how can they understand the intersection of technology and ethics and make complex decisions in this area?

I believe the board response in the next 10 years will be to “normalise” ethical thinking and ethics discussions. Too often we avoid talking about ethics, because it is an uncomfortable part of business conversations. We need to avoid thinking that debating questions of ethics or values is tantamount to an accusation of unethical behaviour.

If boards want to encourage deeper discussion about the ethical impact of governance decisions on diverse stakeholders, they need to create space for it. Boards of the future could do this in different ways: by ensuring there is more focus on ethics in board agendas, by the formation of ethics subcommittees, or even by conducting ethics off-sites in the way there are strategy off-sites.

At an individual level, directors should also develop better skills in self-awareness and decision-making bias. With appropriate training, directors will be better able to identify and understand both their own biases and those of their peers. There will be greater focus on board interactions and dynamics, and how those feed into ethical decision-making.

Given rising community expectations and growing complexity in business, stakeholders may legitimately question whether the model of part-time directors holding a portfolio of roles is still the best way for boards to operate. A better approach might be for directors to hold fewer roles and focus more on each, opening up positions for others. Board diversity will benefit.

Most of all, boards will need the capacity to respond to unexpected challenges imaginatively. Boards will need to experiment with new governance approaches and models – a one-size-fits-all approach to governance and ethics will not work.

4. Cris Parker

Head of The Ethics Alliance, a program at The Ethics Centre, and director of the Banking and Finance Oath, a pledge of integrity and commitment in the financial services industry.

In my opinion, a much stronger “language of ethics” will develop in boardrooms over the next 10 years. Directors will be well versed in ethics, had ongoing training in this area, and see ethics as a core governance skill. The boardroom approach to ethics will be much more applied. There will be less anxiety about discussing ethical issues or a director’s ethical viewpoint on an issue, which might be very different to your own, because boards have skills in this area.

Bias training will become a staple of director training. As an example: experienced directors are generally good at what they do, but there is a risk of a “halo effect” which could create an unwillingness or a perceived need to challenge a successful Chair. Such biases can cloud ethical decisions.

Directors will spend greater time ensuring a high level of ethics is embedded throughout the organisation, particularly in technology. Top data scientists, for example, will tell you that the ethics of data needs constant monitoring and boards will need to be satisfied that this is happening. More boards will consider forming an ethics committee or another structure to focus more director/executive resources on the topic and have time to do deep dives into ethical issues.

Directors will need extra time to address a changing value equation for organisations. The true value of organisations is in their people, their culture, their contribution to society and how they balance difficult decisions that affect stakeholders differently. Boards will get better at debating and deliberating the ethics behind complex decisions, and being more transparent about how they arrived at decisions that might disappoint some stakeholders.

I believe boards will be more open to activists and others with a different point of view in the coming decade. Rather than see activists as a force to oppose, boards will try to understand their views through engagement and if they have merit, act on them. Climate change is an example. Good boards will engage with activist groups to understand their view and it not unreasonable to think boards and activist groups could work together on some issues, or even appoint an activist as a director.