Diligent recently launched a new category called modern governance to bring boards of directors and leadership teams up to the speed of today’s digital world. Simply put, modern governance is the practice of empowering leaders with the technology, insights and processes required to fuel good governance. The importance of good governance is best understood in its absence…
According to a May 2019 Diligent Institute report, recent “governance shortfalls” occurring at 14 companies have cost shareholders $490 billion in value when measured one year later. Yet, the same report also delivers a powerful argument for good governance by demonstrating that companies with strong governance (top 20%) outperformed the bottom 20% by 17 points or 15% over a two-year period. In other words, good governance is a competitive advantage.
Diligent is lucky to work with more than 650,000 board members and governance professionals around the world. Through our interactions, we’ve learned a few things: Good governance is dynamic—it can look a little different from one organization to the next. Yet, there are a few modern governance principles that hold constant. We’ve translated these into action items for today’s boards.
1. Re-examine the governance structure you’ve inherited.
When you join a board, you’re inheriting a governance structure (i.e., an existing set of rules, roles and processes that govern the board and the broader organization).
Last year, at Diligent’s Directors’ Experience in Napa Valley, State Street’s Rakhi Kumar, Senior Managing Director and Head of ESG Investments and Asset Stewardship, challenged board members to re-examine the model and principles by which they govern:
Too often, boards fail to ask why things are the way they are. The inherited governance structure may not be wrong, but it should be purposeful. Boards should be able to explain why it operates the way it does to their investors.
— Rakhi Kumar, Senior Managing Director and Head of ESG Investments and Asset Stewardship at State Street Global Advisors
It’s this kind of introspection that led Netflix to design and adopt a transparent board-management communication model, which caps board materials at 30-page outlines and focuses discussions on strategy. A similar self-examination led the Prudential board to reformat their proxy disclosure to align with six internalized governance principles, which they adopted from the Investor Stewardship Group. Our recently published book, Governance in the Digital Age, was written to guide boards through this kind of governance analysis. Based on interviews with dozens of corporate directors, the book aims to answer: How might the modern age necessitate a new era of governance—and what are progressive boards and directors doing to make that happen?
2. Focus on board composition.
It’s quite simple: today’s organizations must have the right mix of people sitting around the boardroom table. Modern governance organizations align board skills with long-term strategy; they see diversity of all kinds as an advantage, not a requirement. However, executing on these succession-planning principles is where many boards fall short. This is one area where data is vastly underutilized.
Modern boards should have today’s universe of board candidates at their fingertips. This type of functionality is available for boards and must be utilized to identify gaps, monitor peer composition, gauge candidate supply, and recognize conflicts of interest.
3. Improve visibility around key risks and opportunities.
With business risks growing in number and complexity, today’s organizations can’t afford any blind spots. They also can’t chance complacency. Irrelevance befalls companies that fail to innovate fast enough. We’ve seen this time and again with legacy companies once believed impenetrable.
It’s not enough to simply identify key organizational risks—boards must then design the dashboards, reporting frameworks, and info-gathering networks that allow them to monitor these risks and identify red flags. A modern governance product solution alerts boards to predicted shareholder voting actions, enables reputational risk monitoring, and enhances visibility across peer groups.
Expanding board members’ knowledge around industry trends and emerging technologies is equally important to ensure key business opportunities don’t fly under the radar undetected. How is your board empowering and challenging itself on a regular basis?
4. Avoid easy cyber mistakes.
Board and company leaders are notoriously guilty of using text messaging or personal email to share sensitive information and materials. Even when the information they’re sharing is not sensitive in nature, these unencrypted communication channels can be used as entry points for bad actors. Organizations that practice modern governance do not make these mistakes; they centralize board and management communication through secure messaging tools and document sharing through protected data rooms. The best part? Secure communication is no longer at the cost of convenience, but it has all the functionality and ease of everyday messaging and collaboration tools.
As the pace of today’s business landscape picks up speed, boards and company leaders can’t leave their governance practices behind. When organizations have the right tools in place, good governance becomes a powerful enabler—and a competitive advantage.
Stay tuned as we continue to explore the impact of good governance. If you’re ready to talk to Diligent directly , don’t hesitate to drop us a line.