Navigating the Fine Line Between Governance and Management
In its recent forecast, the Eurasia Group, a consultancy specializing in political risk analysis, ominously dubs 2024 the “Voldemort of years” — an annus horribilis that should not be named.
The global stage is fraught with conflicts that could spark larger conflagrations. These include Russia’s continued aggression in Ukraine, escalating tensions between Israel and Hamas, and internal strife within the United States. The alignment between Russia, Iran and North Korea is increasingly emerging as a geopolitical threat. A series of important elections — most recently in South Africa, India, Mexico and the EU, and soon to come in France, the UK and the U.S. — could shift the direction of policy significantly. Moreover, while artificial intelligence offers significant benefits, it also raises complex governance issues. Climate change persists as an existential threat, with ongoing debates over climate disclosure.
These themes came up for discussion at a session of the Directors Dialogue organized in Philadelphia on May 1 by Drexel LeBow’s Raj & Kamla Gupta Governance Institute. Many participants noted that the global risk landscape is becoming much too vast to monitor and increasingly ungovernable. In a strategic pivot, some firms are scaling back their global market presence in contradiction to demographic trends, choosing instead to diversify their supply chains — even at a heightened cost.
Despite a global retreat from international integration, corporate boards report a significant uptick in the frequency of oversight and governance activities. Yet, while the burdens of board responsibilities intensify, the average board size remains steady.
Implications for Boards and Directors
What are the implications of these global factors for boards and directors? Participants in the dialogue noted that directors must deftly navigate the fine line between management and governance, effectively acting as activists within the confines of the boardroom. It’s essential for board members to critically assess management’s recommendations, rather than adopting them without scrutiny, despite the inherent asymmetry of information.
While it’s crucial that boards refrain from usurping managerial roles, they must assertively hold management accountable for any subpar decision-making. This includes proactively engaging with management on sensitive political and social issues, determining the stance the corporation should take.
Boards should also rigorously review the processes and criteria that management employs in decision-making, considering the impacts on various stakeholder groups. Incorporating diverse political views from directors can provide management with a broader, more nuanced perspective on issues.
In the face of uncertainty, strategic agility is paramount. This is the organization’s capacity to swiftly react and adapt. Boards are tasked with identifying any barriers to this agility and ensuring that their composition effectively balances business acumen with specialized expertise, the participants said.
Boards should prevent management from being caught off-guard by foreseeable challenges. This involves scanning for internal risks and monitoring external developments for early signs of change. Directors should identify key indicators within the company that signal emerging risks or opportunities and map these risks across different business units and functions, linking them to cost and revenue drivers. Rather than focusing on isolated risks, boards should consider the broader implications of risk events.
It is critical for boards to remain informed on current geopolitical, social and economic issues. They should cultivate a board composition that embraces diverse, international perspectives and regularly invite external experts to board meetings to broaden awareness of external viewpoints. Discussions during board meetings should frequently address geopolitical, economic and social risks.
Finally, boards should rethink the structure of their committee charters, focusing on the decision-making processes, the manner of approvals and the protocols for escalating issues. It’s essential to ensure that the appropriate committees are in place to monitor pertinent risks effectively, the participants noted.
This article is part of the 2024 Directors Dialogue Digest series, Changing Leadership for a Changing World. Join the Institute’s mailing list for early access to valuable research, industry updates and more.
