There are four major eras of corporate governance. The dawn of corporate governance goes back to the 1930s when US corporations first began selling stocks to a wider set of owners, and we have seen many changes in the decades since.
The Early Days of Corporate Governance
This first era – corporate governance 1.0 – has been characterised as a less-engaged oversight model that was perceived by many as a remote and distant ‘rubber stamping’ of management recommendations, often with cronyism rife at board level.
In the 1970s, institutional investing driven by pension funds and the creation of big institutional investors marked the beginning of so-called ‘fiduciary capitalism’.
Governance 2.0 arrived after the Enron/WorldCom debacle, a scandal that served to highlight how existing practices did not have a deep enough understanding of management activities and lacked important financial control. The result was the Sarbanes-Oxley Act (SOX) and increased regulations.
The advent of the reforms post-Enron gave rise to an important feature that is now the catalyst for deeper board engagement: the exec session. This is where directors (unsupervised by management) can discuss areas of opportunity, concerns and so on, which in turn led to the now best practice of an annual strategy offsite where directors are exposed to in-depth strategy and near- and long-term management plans.
Governance 3.0 was catalysed by the Business Roundtable statement released in 2018, where the largest global multinationals articulated the need to shift from a shareholder-centric to a stakeholder-centric model, with ESG as an imperative. ESG principals are seen as foundational to a company’s success with all stakeholders. ESG is the umbrella covering a company’s vision, mission and purpose. Companies are coming to understand the critical importance of ESG on their brand, as well as how it enables them to attract employees, customers and investors. At this stage, it’s fair to say that many US companies are still playing catch-up when it comes to putting in place ESG frameworks to be accountable to stakeholders.
A Time of Change
The last few years have seen seismic changes in standard practice. Covid-19 accelerated the digital transformation of companies as people work virtually in a hybrid environment; social unrest, exacerbated by the death of George Floyd and wider questions around institutional racism, has catapulted diversity, inclusion and equity into sharp focus.
Today, millennial and gen Z workers make up 50% of the workforce, bringing with them a push for greater work-life balance. Safety, data privacy and connection to community have all become areas of greater focus.
Almost two years of working from home has triggered the ‘Great Resignation’, where as much as 20% of the workforce in certain industries (technology, for example) have resigned and changed jobs. Connection to the company culture – once critical to workplace morale – is now strained as a result of staff being based across the globe.
Simultaneously, the biggest institutional investors are prioritising ESG reporting with a particular focus on environmental and climate measures.
What Lies Ahead
Now we are at the dawn of corporate governance 4.0, which is about future-proofing and tech-enabling our companies to stay relevant and competitive. Most boards do not yet recognise this.
Above all, governance 4.0’s purpose is to immunise stakeholders against the company losing momentum, relevancy and growth.
In this new model of corporate governance, directors need to be both a competitive asset and an accelerant for the business, not only performing oversight but helping to move the company forward. The biggest risk for corporations is that the company becomes stale in its product or service offering and its business model for engaging with customers.
Legacy companies experience low growth. The key challenge for companies wanting to stay competitive and relevant is how to operationalise their data to drive insights and outcomes. The knowledge of true tech enablement and digital transformation using artificial intelligence (AI), machine learning (ML), deep learning analytics and big data is one of the key next gen board competencies in governance 4.0.
The adoption of ESG and stakeholder governance in 3.0 are now table stakes. The future challenge for boards is to continue to help companies be innovative and entrepreneurial for the future.
The velocity of change is exponential. The last two years of Covid lockdown are commonly accepted as having accelerated digital transformation by five years.
We now expect businesses to interact with the same ease of our smartphone apps in all aspects of business. We expect a consumerisation of how data and offerings are served up to us.
A company that invests in AI, ML and deep learning, and is able to leverage their data lake to drive rapid time to insights and actions, is a company that will thrive and grow.
Consumer companies around the world know how to analyse the personas of their customers and hit just the right ‘button’ to hook their interests. Now businesses have the opportunity to understand employees as well as their customers by applying this same technology to have better insight throughout all company functions – from HR and marketing to manufacturing and the supply chain. Enabling this tech creates a competitive differentiator through yielding precision data for decision making.
Using technology to engage with your employees, many of whom are in a hybrid work model, can help build loyalty and intimacy if you curate innovative tailored career paths to build engagement. For example, companies could create their own on-demand content syllabus and offer certifications. It’s widely known that gen Z and millennials value career planning more than they do near-term compensation. Companies need to use tech tools in all parts of the business.
The Importance of Future-Proofing
In the era of corporate governance 4.0, it is all about future-proofing your company. The velocity of change can be measured in the precipitous drop in a corporation’s life cycle. Today 50% of companies are no longer independent after ten years. Duration on the S&P 500 has dropped below seven years. Chief executive tenure is around 4.5 years. The reason companies disappear is the exponential rate of change. Companies are not reinventing their business models, their go-to-market strategy, or embedding AI, MI and tech into each functional area.
Companies once thought digital transformation meant having a website that worked a little better, or automating part of the back office. That is no longer the case. Companies need to invest in upskilling and augmenting their workforce. They need to understand how to adapt and embed all forms of hyper-automation into both the front and back office, the customer journey, the customer experience and all the way through to shipping. Most importantly, companies must harvest their data and make it all actionable.
Companies’ competitive relevance quickly erodes unless they are truly tech-enabled in every aspect of their business. Boards are responding by repurposing nominating governance committees to also include ESG, as well as creating new ESG and tech committees.
The role of the board has shifted from governance 1.0, which was a remote distance oversight board, to governance 2.0, which brought compliance and reform to the boardroom after Enron, to governance 3.0, which is marked by the shift from shareholder to stakeholder capitalism and an ESG-centric mindset, to present-day governance 4.0, where the long-term competitiveness of a company is completely interwoven with tech enabling every business function.
The board’s role as a fiduciary for all stakeholders is to future-proof the company. Boards must check if management is properly assessing the risk of the velocity of change. Does leadership see the new interlopers who may blindside their established business model?
When we look back five years from now, governance 4.0, the era of future-proofing, will seem like something we all should have embraced sooner!
Modern Governance With Diligent
As governance continues to evolve, it’s imperative that businesses find a governance platform that can evolve and grow with them. Diligent’s Modern Governance platform enables organisations to thrive in today’s complex world, bolstering performance with strong governance practices that facilitate visibility and empower data-driven decisions.
Betsy Atkins, Diligent