Expertise, as well as diversity thereof, is a key discussion topic when it comes to board composition. Not only during the hiring process, but also when looking at the tenure in and renewal processes of board.
The typical range of expertise prospective board members have to match up with includes (but is certainly not limited to):
- Thorough understanding of financial processes, and ability to dig deep – if needed – into balance sheets and accounting practices. While this is required by all board members in principle, it is in particular the key skillet of the Audit Committee on boards.
- Industry track record OR track record in an industry that features processes and capabilities that are desirable and needed for the industry of that particular board.
- In depth experience with different stakeholder groups. Beyond shareholders, that includes the regulator for the specific industry, their customers, the value generation model, and – lastly, typically overlooked, but certainly not least – the supply chain partners in the industry.
- Risk awareness: much beyond those ever present in each industry, but in particular those that come with societal changes, in addition to policy and technology risks.
- Having a vision of and sensitivity as to how the industry will or should look like in a decade, and the gap between ‘now’ and ‘then’. This includes a keen awareness of the biggest industry specific hurdles and pitfalls that exist.
- Authenticity and integrity: willing to take on difficult decisions not just because they are forced through urgent short-term priorities, but because they are needed for the company to prosper on the long run.
New risks, new capability requirements
According to a recent article by Board Agenda
“Experts point to a number of risks that have raised D&O (eds: Directors & Officers) concerns. These include insolvency claims; cybersecurity and data breaches; climate change and environmental issues; the #MeToo movement and other societal risks and merger objection litigation.
While insolvency is a risk as old as business itself, other risks have emerged in recent years to test directors.
One of these is cybersecurity […].
Meanwhile, environmental issues are behind a number of D&O claims, a trend that is likely to accelerate. Societal risks also continue to evolve, with increased personal accountability, changing attitudes and the rise of social media meaning that directors are increasingly exposed.”
We should expect to see more claims in the future resulting from societal change. People are now far less willing to put up with perceived injustices and failings in corporate conduct and culture.
Geraud Verhille, head of financial lines UK at AIG
The worrying conclusion of the development outlined in the above mentioned article is rather simple, but extremely worrying:
Stakeholder groups that so far have been – by and large – ignored entirely, are holding boards accountable by using the courts. And in this way are forcing boards to acknowledge their relevance and existence.
Sustainability (ESG) capabilities of boards: Grade = Insufficient !
More worryingly still though: At the origin of this raising tide of claims – and their success in the judiciary system – is the board directors’ lack of ability and capability in some of those key areas. Including sustainability (ESG).
Which leads us to look at the sustainability (ESG) capabilities and competency of boards.
There is admittedly not an awful lot of – and even fewer entities that have bothered digging deep into this issue. Luckily with the Boardreport there is some basic, but reasonably good data available for the at least the top 100 of two categories: stock listed (Fortune 2000) as well as family-owned. companies.
And the findings are sobering:
‘Family Business Special Report 2020‘, page 3
Top 100 of Fortune 2000:
- Only 63 have a dedicated sustainability committee.(63%).
- Of the totally 275 directors sitting on those committees, a meagre 48 (17.45%) actually have sustainability expertise worth mentioning (i.e. in line with the equivalent financial expertise required for the audit committee).
Top 100 of family-businesses:
- Only 42 of the top 100 family business have a dedicated sustainability committee (42%).
- Of the totally 173 directors sitting on those committees, a significant minority of 59 (34.1%) actually have sustainability expertise.
Interesting, but not surprising: family-business perform better than listed companies: They have a double the proportion of sustainability-savvy directors on their boards.
In both, stock listed companies as well as in family companies, the number of board directors with actual sustainability expertise is insufficient. That applies even if the board has a dedicated sustainability committee. If the same phenomenon held true for boards’ Audit Committees, legislators would not be happy and likely swing into action.
Considerable room for improvement
Shareholders – the stakeholder group that to-date still has by far the loudest and most recognised voice – should be worried. The absence of practical, tangible sustainability (ESG) expertise on the top 100 of Fortune 2000 and family-business is a manifestation of the risk. Across all industries and sectors.
It is indeed a harsh reminder that no industry, and only very, very few businesses, are getting ready to be ‘fit’ for the challenges they will face related to the environmental and societal shifts in the decades to come. The vast majority of companies still suffers from the ‘ignorance’ bias. Ignoring the expertise required to deal with these monumental challenges. And ignorance as to how quickly these will become survival relevant.
And yet, as the number of court cases on issues within the realm of ESG (sustainability ) is slowly but manifestly raising, both, directors reputation, and even livelihoods, may increasingly become at stake. Never mind the cold-faced ‘investability’ criteria that could fall through the floor.
