How nextgen decision-makers can meet tomorrow’s challenges

A shifting risk landscape and the need to build a sustainable enterprise for the future are forcing boards to rethink their purpose.

In brief

• Pressure is mounting on boards to adapt and recalibrate how they operate.
• Boards need to prioritize the strategic remit and find solutions that support this. Technology can be part of the solution. 
• Boards should revisit and review their organizational purpose to ensure long-term value creation as a key component.

Next generation (nextgen) decision-makers on the threshold of leadership positions within private or family enterprises will inherit or adopt operating models, institutions and systems that have served the organization well in the past. The board is one such institution.  Admittance to the board is a destination many nextgen leaders may seek and need to prepare for. Nextgens seeking to serve or currently on boards need to ask themselves, how do I add value to the board dynamic? How do I influence the board, so the organization is ready for the future ahead?

A look at the board today, what lies ahead and how the board could evolve to continue to bring long-term value for the future is a starting point. Organizations have evolved dramatically in the past few decades: supply chains have globalized; technology has enabled much of what we do; and new enterprise models have emerged to facilitate these shifts.

But one component of the traditional business model has remained largely unchanged: the board. New sub-committees may have been added and diversity may be beginning to prevail, but essentially board operating models still look as they always have.

So, what’s the impetus for change? After all, many organizations have continued to perform well financially over the short term despite recent turmoil. In fact, according to the EY Family Business Index, the largest 500 family enterprises worldwide have collectively generated US$7.28 trillion in revenues, employed 24.1 million people, and constitute the third largest economic contribution in the world (after the US and China) by revenue – despite the global economy  shrinking by 3.5% (pdf) in 2020.

But this is changing. First, the risk landscape has become more disruptive. According to the EY Global Board Risk Survey 2021 of more than 500 board directors around the world, 87% of boards say market disruptions are becoming more frequent and 83% say they are increasingly impactful. Second, there’s a need for a nimbler approach to seize transformation opportunities: more than eight in 10 boards believe their business strategies need to be more agile and evolve more quickly. Third, there is mounting pressure from a wide range of stakeholders to deliver long-term value.

The following three drivers mean that current board operating models should be re-evaluated to ensure they evolve to serve a broader, stakeholder-driven purpose:

1. Elevate business risk and transformation planning to the top of the agenda
2. Diversity at the board level can bring in the skills needed to navigate business transformation  
3. Make purpose your path to prosperity

These initiatives are interlinked. For example, making progress on board diversity can accelerate changes in how the board operates. “The interplay between board diversity and risk, how the board operates, and board governance is very topical today,” confirms Kay Matthews, Board Director, Main Street Capital, Coherent Inc. and Silicon Valley Bank. “My hypothesis is that the more diverse your board is, whether that’s with respect to gender, ethnicity or other characteristics and experiences, the better you can identify and manage risk and potentially change how the board operates.”

1. Elevate business risk and transformation planning to the top of the agenda

One of the most significant obstacles holding boards back is how meeting agenda time is allocated: 59% of board directors say allotting more time for open discussion of emerging trends and potential disruptions would improve risk-management oversight.

Yet boards are struggling to focus on longer term strategically important topics such as transformation planning because they are too bogged down in necessary but nearer term aspects such as financial reporting and traditional risk and compliance: 43% spend the most time on financial reporting, but only 18% think they ought to.

Bring risk and transformation to the fore by having a focused risk committee in addition to the board’s focus on audit and the financial reporting. Traditionally risk and audit have been grouped together into one board committee, but this can leave little time to focus on emerging risks because you have to do a deep dive on the financial accounts at least twice a year,” explains Vickki McFadden, Board Director, GPT Group, Allianz Australia and Newcrest Mining. “So, it makes sense for some boards to have a very focused risk committee.”

Boards can reduce the amount of time they spend on routine tasks for more focused and strategic discussions that will lead to better decision-making and outcomes if they adopt technology – and AI in particular. For example, AI can read, review and validate financial reporting, which in turn will free up capacity for more in-depth discussion and decision making. Equally, by analyzing large volumes of data over time, AI can quickly establish trends and patterns that would have taken years to uncover due to the scope, speed and scale improvements that AI brings.

2. Diversity at the board level can bring in the skills needed to navigate business transformation  

Surprisingly, given the almost daily diversity debate in the global media, boards are not convinced of the need to evaluate board composition and augment skill sets. Just 30% believe this would improve their risk-management oversight. 

Family enterprise boards could do more to embrace talent across a more diverse spectrum. Only 31% of the 500 largest family businesses worldwide have a female family member on the board and the majority (54%) of those that do hail from Europe, followed by the Americas (30%).

To reflect the organizations and societies they serve, boards must, by design, seriously consider their current and future composition. It is not just the ethical thing to do – it also translates to greater commercial success.

“At some point between 2035 and 2040, we will reach the time when the majority of people in the US are people of color,” says Herman Bulls, Board member at USAA, Comfort Systems, Host Hotels & Resorts and American Campus Communities. “If you don't have that diverse perspective in your boardroom, you’re not going to be as effective and therefore competitive going forward.”

The data speaks for itself.  Research shows that female representation on boards, for example, can be linked to better financial performance and better climate governance and innovation.. 

Beyond gender, diversity also encompasses a myriad of other components such as culture, race and age.  The next generation of leaders can bring professional expertise, valuable technology and digital capability, and insights into the current generation of consumers and employees. Generational attitudes differ on sustainability, for example. Gen Z and Millennials are more likely than older generations to favor sustainable lifestyles and share information about sustainable products with peers. 

If the average family business board member is 61 years old, and one in five businesses have a next generation member (aged 40 or younger) on the board or in the management team, the board needs to consider whether it has the skills it needs to lead for the future. It is embracing diversity across gender, age culture and race as well as “non-observable” diversity, such as collaboration, creativity and constructive challenge, to unlock untapped thinking.

3. Integrate long term value into the entire organizational value chain

Stakeholder expectations of businesses are growing and changing: 66% of C-suite respondents to the EY Long-Term Value and Corporate Governance Survey believe that recent events have increased expectations from stakeholders that their organizations will drive societal impact, environmental sustainability and inclusive growth. 

Family enterprises are known inherently to take a long-term business view and take actions to protect their family reputation and legacy. They are particularly well-suited to focus on sustainability. Many family-driven or family-funded companies have indeed already demonstrated how to build businesses on sustainable grounds or pivot to sustainable practices.

Boards have an opportunity to strengthen their corporate governance around stakeholder commitments, embed purpose into their business strategy and ensure accountability. Organizations must also demonstrate transparency by measuring and reporting on their progress. Family enterprises perform well here. Despite some 600 environmental, social and governance (ESG) frameworks being in use today, 78% of the 500 companies listed in the 2021 Family Business Index already report on their sustainability progress.  They may, however, need to close the gap between ESG reporting in the public domain and integrated reporting by accounting for these intangible assets, to more accurately reflect the true long-term value of the organization.

Questions for boards to address

1. Confirm if there is a gap between the board’s desire to improve risk-management oversight and the actual time spent on longer term strategically important topics such as transformation planning. Bring in technology solutions, artificial intelligence that can review data to reveal insights into enterprise risks and opportunities and elevate the discussion. Assist boards think through the benefits of a risk committee.
2. View the board and potential new board appointments from future skills / experience needed, specifically technology transformation, generational consumer trends, lateral thinking. Be aware of the mechanisms and processes the board and nominating committee has in place to ensure diversity is a key consideration or design principle when looking to appoint new members. 
3. Build businesses on sustainable grounds or pivot to sustainable practices to drive societal impact, environmental sustainability and inclusive growth. Assess if there is a gap between ESG reporting in the public domain and integrated reporting by accounting for these intangible assets, to more accurately reflect the true long-term value of the organization.

Methodology

The EY Global Board Risk Survey 2021 is a survey of 510 global board directors from organizations with greater than US$1b revenue and across industry to uncover their perception of enterprise risk management (ERM) within their organizations.

Conclusion

Nextgen leaders can assist boards to reconsider how they operate to keep pace with the modern stakeholder expectation that organizations should create value in the long-term. In parallel, the risks in this increasingly complex world are now more interconnected than ever. There are opportunities for the board to reframe how they approach the oversight of risk management: starting with an overarching view of organizational purpose; ensuring diverse mindsets and skillsets are present within the boardroom; and employing the use of technology to improve the efficiency of board decision-making to free up time to focus on the creation of long-term value.