Corporate boards in an unstable political scenario

Current political, economic and financial uncertainties have raised the question of how companies can navigate such an environment, surviving events that are complicated to predict and whose effects are quickly propagated. One way to do so is through strong action by corporate boards. This body – which safeguards shareholders’ interests through the definition of development strategies, the selection of the CEO or general managers, and control of the auditing process – could play a decisive part in supporting the management of political risks stemming from the current context of global instability.

Trade conflicts, wars, diplomatic tensions, economic trends and financial crises constitute variables in the face of which business actors, just like political analysts, react to reduce negative repercussions. In this framework, the board of directors must integrate political-risk management plans into corporate strategies, even by enforcing its risk oversight activity in order to build a long-term resilient organization.

Indeed, the board ought to ensure that managers properly implement measures set up for containing political threats, and carefully transmit critical information to various organizational levels to spread a solid awareness of events that take place outside one’s own unit. The first step to make the board effective consists in analyzing its design through three areas that can drive members’ behavior.

Structure. This relates to the board’s size, leadership and committees. In the book Back to the Drawing Board, Boston Consulting Group (BCG) adviser Colin Carter and Harvard Professor Jay Lorsch argued that a board should be small to improve the quality of interactions among members and reach decisions. In addition, as the two professionals explained, CEO duality – that is, where the chief executive officer is also chairman of the board – should be abandoned. This practice is typical in American companies, where the degree of autonomy exercised by independent directors when specific situations require prompt action can be diminished because the leader of the board is also the CEO.

Composition. This relates to the attributes of the board members. In 2016, the Global Survey Report published by consulting firm Spencer Stuart in collaboration with the WomenCorporateDirectors Education and Development Foundation, Professor Boris Groysberg, and researchers Debora Bell and Yo-Jud Cheng highlighted that female directors reported higher concerns about risks than male directors. Furthermore, women tended to favor tools to trigger board turnover that would ensure new approaches in response to external pressures. Unfortunately, the percentage of women in leading positions is stagnant. Despite several studies demonstrating a positive correlation between gender diversity and corporate performance, in 2018 the global consultancy firm 20-first showed that only 22% of executive committee seats were filled by women in the US, 15% in Europe and 4% in Asia.

Processes. This relates to the ability to collect and apply key information. Even if a board formed by independent directors is able to adopt objective and pragmatic solutions, the increasing complexity of the environment implies the need to have recourse to professionals with a deep knowledge of a market’s features and geopolitical dynamics that affect the organizational path. This know-how is not always found among independent directors who sit on more than one board. The variety of their roles could result in difficulties that curb the development of a cognition of every company’s structure and each industry’s characteristics.

Studying boards’ design is necessary but not sufficient. Indeed, the evolution of a boardroom culture is essential to handle challenges in the turbulent global arena. The effectiveness of choices associated to structures, compositions, and processes depends on views that sustain the board as a team, and not only as a group. This attitude involves identifying and comprehending values, beliefs, and assumptions that drive directors’ behavior, and which must converge to create a common identity able to achieve better business outcomes.

Board members have to implement close cooperation, encouraging critical discussions, exchanging information, and building mutual trust. However, according to PwC’s 2018 Annual Corporate Directors Survey, 45% of 700 interviewed directors thought someone on their board should have been replaced. This data element reveals how different personalities in this setting still impact boards: from “crusaders” who raise issues to protect external stakeholders, to “strategists” who want to get their interests accepted and “supporters” usually in line with the CEO.

Nowadays, a team – independently of its position along the chain of command – can navigate political uncertainty only by adopting a collectivist spirit that takes into consideration individual differences to build a bridge connecting discordant skills, mindsets, cultures and experiences. Toward this direction, the effort of corporate boards should be addressed to enable firms successfully to face shifts triggered by the evolution of international relations.