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Posted by Andrew & Nada on 23rd June 2020
Governance after the pandemic means stewardship of divergent interests

The Covid-19 crisis heralds big changes for how boards and top teams do business as the world undergoes a digital transformation. Can a stewardship approach help heal organisations strategic ‘fracture points’?

With lockdown now entering its fourth month, the deep longing for a return to normal is understandable as social distancing requirements continue to actively restrain the world’s economic recovery.

Beyond its devastating public-health consequences, the powerful disruption of Covid-19 has also shown how vulnerable business enterprises are, along with their inability to absorb growing financial burdens, resulting in inevitable wholesale redundancies.

The demand for digital transformation of the workplace has been one clear outcome of the pandemic. Regretfully, this has been accompanied by a ballooning of sovereign debt and the undermining of online privacy expectations.

Seven out of the ten highest market-valued companies of 2019 – Apple, Amazon, Alphabet, Microsoft, Facebook, Alibaba and TenCent’ - operate on prominent digital platforms which rely on big data but, before coronavirus hit, many boards still struggled to make sense of the value that digital technology offered their enterprises.

It’s important to note that these seven brands are not exclusively high-tech in nature. In fact, the adoption of online platforms has become a vital necessity for all sectors, ranging from health, food production and distribution, through to finance and publishing.

Directors are already beginning to reflect upon the nature of our future and the impact on the shape and functioning of their enterprises in a post-Covid-19, more digitalised world.

Whether an organisation is struggling or not, the imperative for reconstruction is now the primary focus. In rethinking mission, purpose and configuration, three critical drivers of governance have emerged:

  1. Build trust
  2. Identify ‘fracture points’
  3. Redesign the enterprise
  1. Build Trust

Does anyone trust a leader to reposition their enterprise? As well as profoundly disrupting economic activity, the pandemic has also magnified many unresolved tensions of the past. 

Trust today is in very short supply, and a number of concerns have persisted for good reason. Reaching a consensus on the firm’s competitive advantage has always been a hard task for the board and C-suite. 

The Kakabadse Global Governance and Leadership Survey team has identified that 34% of boards and top teams are unable to agree upon the competitive advantage of their enterprise and strategy to pursue. Political infighting becomes the norm, with directors undermining each other and creating deep-seated anxiety among staff and management in the process.

As this destructive behaviour becomes embedded in the enterprise, our surveys have also shown that 67% of board directors and top management are too inhibited to raise these critical but uncomfortable issues. This means that the Board and C-suite knowingly avoid doing their duty and, for reasons of personal discomfort, leave their organisations vulnerable and open to collapse. Trust inevitably falls as a direct result of this deliberate inaction.

The first step to combatting this is to consciously and openly recognise failings of the past and admit to their existence and impact. Evidence driven, public admission allows for a rethink on how to address deeply damaging legacies. From this disclosure, it is possible to build a new foundation of trust.  

The board has a central role in this process. Drawing on their responsibilities for oversight of the enterprise they can facilitate the surfacing of past issues and reconcile them. 

But making such an intervention requires action beyond the mindset of compliance. Board directors must actively consider how to balance the monitoring (compliance) and mentoring (stewardship) of the organisation, to encourage a new trust to emerge and with this confidence contribute towards and acknowledge their responsibilities.

  1. Identify ‘fracture points’

One of the greatest challenges faced by Board and C-suite directors is to generate and, to a greater extent, implement strategy. 

Our studies of government and private sector organisations have concluded that 20% of strategy challenge is focused on the design of new ways forward, drawing on emerging technology and considering geopolitical impacts. The remaining 80% of the challenge lies in the execution of strategy.  

The litmus test of a well-formed and efficiently delivered strategy is the level of support, or not, received from general managers, who may question being tasked with pushing through a strategy they feel is unworkable? 

A common complaint is: “I wasn’t involved early enough in the debate. I listen to our customers and could’ve told you what they and the supply chain both need.” Worse still is being blamed by the team below who resent being held to account, rather than receiving bonuses, when it was always obvious to them that the strategy provided from above would never work.

The place in the structure of the enterprise where intended strategy deviates from its original course is known as a ‘fracture point.’ 

Much has been written about the ‘governance fracture point,’ namely the tension between the Board and C-suite. However, much less has been said about the most damaging fracture point, which is the inadequate execution of strategy.

The ‘strategy fracture-point‘ surfaces the tense and often ongoing misalignment and misunderstanding between the C-suite and subsidiary managing directors, and the country heads. 

The strategy fracture point continues for some time, and research clearly shows that in order to minimise its damaging effects, ultimately, the board needs to facilitate positive connections between the C-suite and its general managers.

  1. Redesign the enterprise

Once a foundation of trust has been established and fracture-point attended to, the management and the board will be able to rethink the organisation’s purpose and configuration. The aim is to become adaptable, slim, resilient, and responsive to stakeholder needs. The key questions to be addressed are:

  • Will current notions of competitive advantage suffice, keeping in mind the need for adaptability?
  • Will the adoption of digital technology be necessary to stimulate economic growth and, if so, in what form?
  • Will venture capital be needed to fund the redesigned enterprise, and to what extent could this change the board’s configuration and dynamics?

Redesigning the enterprise requires the identification and separation of ‘nice to have’ from ‘essential.’ This distinction is critical for advancement into the new digital economy. New forms of organisation will emerge, including multi-sided platforms, which facilitate numerous interactions between the firm, its customers and suppliers; portfolio ventures; community-based organisations, and network entities.

Directors will further need to consider how these new forms will function. Platform-based, virtual and community-focused entities will create a new service experience for users and enterprises alike.

Such considerations will also force a rethink over scale and scope, and lead to questions about how performance incentives will be linked with organisational outcomes. This is all part of a wider context where working relationships may no longer be bound by formal contracts, but more by the evolving nature of competitive dynamics shaped by emerging technologies.

The board as good stewards

Where management is divided, the Board can only intervene by becoming good stewards. It is incumbent on the chair to specifically locate the strategy fracture point and then, with the support of the board, sensitively facilitate a meaningful dialogue between the top and general managers.

The high performing post-Covid-19 Chair and board director will be both steward and controller. To add value balancing the two according to the demands of context is a must and this responsibility specifically falls on the shoulders of the Chair.

In the future digital economy, the impact of big data, the interface between humans and AI-system and AI-system and humans will increase the number of critical interfaces in the emergent more fluid enterprise. Multiple fracture points will be the order of the day.  Having a board accustomed to only dealing with the governance and strategy fracture points leaves the organisation vulnerable.

The new organisational ecosystems call for boards, together with the management, to encourage innovative conversations and work towards greater levels of resilience.

Building a sustainable green economy requires the board to be proactive and as a result governance and leadership are likely to intertwine. The chair, not the CEO, will be the fulcrum of trust where the definition of duties and the new responsibilities of the board and management will be determined.

Looking ahead, the shift in governance that is required should be a move from compliance to the stewardship of divergent interests. Unfortunately, the signals coming from current practice indicate the exact opposite is taking place.

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This blog first appeared on Board Agenda: https://boardagenda.com/2020/06/19/governance-after-the-pandemic-requires-a-stewardship-approach/

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