The challenges for boards of directors have never been so great. The trend is unlikely to be reversed in 2021—quite the contrary. Besides the fact that boards of directors have to handle a continuing crisis to find ways to avoid bankruptcy, they must also plan for the post-crisis period appearing at the horizon.
Identifying all the issues that arise at board level in 2021 would amount to an endless inventory exercise. But among them are expectations that the business world will take on a greater societal role, with clearer accountability and critical monitoring of its responsibilities.
Due to the crisis, digitalisation has taken on an even greater scope. Companies will also come up against the difficulty of recreating a collective dynamism among individuals who are certainly connected, but lack physical interactions.
It is also true that that the board must broaden its approach to the management of risk. In fact, beyond the risks linked to the operations of the company, companies are confronted with an increasingly important risk of litigation.
For these reasons, a major challenge taking place at company level is to make compliance a strategic exercise. To minimise the risk of penalties and deterioration of the brand image, reputable companies have always given themselves the means to comply with existing rules.
From now on, it is no longer a question of complying but rather of foreseeing societal expectations by developing a set of rules regardless of whether legislation is anticipated or not, and implementing them at operational level. This means putting an ethical and anticipatory approach at the heart of board decisions. Digital tools can allow companies to ensure that they are in strict compliance with existing rules, but more is expected of boards of directors today.
Simple compliance with rules, which was an exercise left mainly to service departments, is transcended by a strategic and transparent compliance exercise that concentrates on boards of directors.
It is true that boards have been invited for a long time to make strategic choices by aligning themselves with—or departing from—the recommendations of corporate governance codes. Nowadays this exercise has been taken to the next level by calling for a holistic approach.
Ethics provide a competitive edge
The ethics of boards of directors is now a way to create a competitive advantage. As expressed at one of our past webinars: “The definition of doing the right things has changed.” This is particularly true at the level of corporate tax strategy. It is about adapting to constantly changing tax regulations, but it is also about anticipating the expectations of society today and tomorrow.
Directors should be prepared to have their decisions questioned. The narrative and the quality of the reporting will be essential.
The European Commission wants corporate boards to develop and disclose a sustainability strategy, including appropriate due diligence throughout the supply chain, and sustainability targets. The intention is to request more strategic and targeted actions from companies, to price what matters and to move away from business as usual. The new legislation is expected during the second quarter of 2021.
If the intention is good, the risk is great that the European Commission will be too prescriptive in its expectations and force companies to only consider compliance as a box-ticking exercise—which could be, in a sense, a step backwards.
The neglected role of corporate governance codes
Unfortunately, the European Commission no longer seems to sufficiently value the role of corporate governance codes. These codes set and promote high standards, which are constantly adapted and allow companies to benchmark their practices.
The race for excellence passes through codes which evolve much faster than the law. Training of directors is also completely ignored by the European legislator. It is however the most certain way to change mentalities and promote leadership which commits itself to objectives vis-à-vis what is possible and desirable to implement. The rating agencies themselves assess the performance of companies against standards and not just the law.
The Covid crisis constitutes a stress test on boards’ effectiveness and their leadership role. It is undeniable that board members will have to assess themselves in the light of the strategic responses they will provide. The performance of boards of directors will be evaluated on their ability to point the company in a direction that goes beyond legislation and provides ethical leadership. Successful companies are those that walk the talk and set a framework that forces innovation.
Béatriz Richez-Baum is director-general of ecoDa, which represents the main national institutes of directors in Europe.