Since the onset of Covid-19, corporate boards have faced a string of difficult decisions. Take the question of dividend payments: Ordinarily, the decision would be a relatively straightforward matter of applying a stated dividend policy, following past practice, or choosing an amount based on shareholder expectations and the company’s earnings for the period. But this year, with COVID-19 decimating the economy and looming uncertainty about the depth and duration of the crisis, the decision became a complex matter of weighing and balancing multiple factors — at least for companies flush enough to consider it at all.
Boardroom dividend discussions ranged over a series of considerations: the equity and symbolism of returning cash to shareholders at a time when employees were being laid off or furloughed; the potential future opportunities gained (or lost) by following (or going against) government calls for dividend cuts; the reputational and signaling effects of maintaining versus suspending or reducing the dividend; the expectations of shareholders and the proportion reliant on dividend income; the company’s cash position and strategic plans; and what would be prudent in the face of extreme uncertainty. A decision that would typically require only a few minutes of board discussion — if that — became an hour-long (or more) deliberation. And then there was the discussion about how to explain the decision in the company’s public communications.
In the end, some boards decided to maintain the dividend. Others decided to suspend or reduce it. In the UK and Europe, where policymakers and central banks urged cuts, the major banks and many companies followed their guidance. In the U.S., most of the large banks committed to maintaining their dividends, though authorities and experts disagreed about the wisdom of that choice. Whatever the final decision, however, the process of reaching it was far from straightforward.
This is just one example of the reality that boards are facing as a result of COVID-19. The new environment is characterized by an increasingly complex set of pressures and demands from various stakeholder groups, heightened expectations for societal engagement and corporate citizenship, and radical uncertainty about the future. These factors are complicating board decision-making and challenging the shareholder-centric model of governance that has guided boards and business leaders for the past several decades.
The shareholder-centric model appears to be giving way to a richer model of governance that puts the health and resilience of the company at its centre. The pandemic has made all too clear that society depends on well-functioning companies to meet its most basic needs — for food, shelter, communication, you name it — and that companies do not exist solely to maximize returns to shareholders. It follows that boards, which by law are a company’s governing body, should be concerned not just with returns to shareholders, but with the full range of factors that enable the company to create value over time. Paradoxically, this enlarged purview does not diminish boards’ accountability to shareholders, but it does imply changes in the nature and scope of that accountability.
The shareholder-centric model is giving way to a model
that puts the health and resilience of the company at its centre.
Whether COVID-19 is truly an inflection point for corporate governance is yet to be seen, but there is no doubt that the pandemic has challenged core premises of the agency-based model of governance in ways that have important implications for boards. In this article, I will suggest three ways the board’s job is likely to change in the post-COVID era.
NEW REALITY #1: More Structured Attention to Stakeholders
Shareholder primacy is the cornerstone of the agency-based model of governance, but if the pandemic has shown anything, it is the importance of each and every stakeholder group to a company’s ability to function, let alone thrive and succeed over time. In the face of COVID-19, some companies struggled because their customers disappeared. Others saw their workforce reduced to a skeleton crew of essential employees. Still others grappled with supply chain disruptions, unsustainable debt or insufficient capital to fund their operations.
Since the onset of the crisis, it has become common practice for management to update the board on the situation regarding each stakeholder group, and many boards and senior leaders have declared the health and safety of employees and customers to be their top priority. Some investor groups as well have weighed in on behalf of putting employees first during this perilous time.
The crisis has validated the logic of interdependence behind the Business Roundtable’s 2019 statement on corporate purpose, in which 181 CEOs pledged a commitment to each of five stakeholder groups — customers, employees, suppliers, communities and shareholders — and reversed its endorsement of shareholder primacy. Coming out of this crisis, boards and senior leaders will find it even harder to say that shareholders — or, for that matter, any stakeholder group — has standing ‘primacy’ over all the others. In the life of a company, there are times when employee interests must come first, times when customer interests should take priority, times when public need is paramount, and times when the interests of shareholders should be the prime concern. As reactions to COVID-19 showed, much depends on the nature of the interests at issue and the circumstances of the company.
These lessons from COVID-19 imply a more active role for boards in monitoring companies’ relationships with their core stakeholders. That may mean asking management to continue the COVID-born practice of periodic reporting to the board on the status of each group or, more formally, to establish goals and a reporting process that will allow the board to track the company’s performance for its stakeholders more systematically over time.
Boards will also want to take a more active role in ensuring that trade-offs among the interests of its various stakeholders are handled in a way that is consistent with its obligations to these groups and with the long-term health of the company. For that, it will be important for directors to have a shared understanding of the company’s purpose and strategy, as well as a framework defining the company’s stakeholders and responsibilities to each.
Many companies say they have commitments to all of their stakeholders, and that may well be true. But few boards have a structured process for overseeing those commitments or for tracking the company’s performance for its non-shareholder stakeholders. If they do, it is not something that is regularly reviewed and discussed in the boardroom in the way that performance for shareholders is regularly reviewed and discussed. To the extent that stakeholder concerns come into strategy or M&A decisions, it tends to be somewhat ad hoc or by exception rather than a routine part of the analyses that boards receive.
In the wake of COVID-19, boards will likely face increased pressure to incorporate stakeholder perspectives and voices, especially those of employees, into their oversight and decision processes. They will also be challenged to show that the company is performing well for all its stakeholders. External pressure aside, boards that have learned from COVID-19 will want to do this for their own purposes.
NEW REALITY #2: More Attention to How Business and Society Intersect
The pandemic has brought home the tight connection between business and society, and underscored the threat posed by risks stemming from large-scale societal problems that proponents of the shareholder model have traditionally regarded as outside the purview of business. The pandemic has shown that, theory aside, companies cannot so easily disconnect themselves from society-at-large.
COVID-19 started as a public health crisis and quickly evolved into a financial and economic crisis of epic proportions. As the virus made its way across the globe, few, if any, companies were spared. Some saw demand for their offerings collapse overnight, while others faced a deluge of orders. Many had to invent new ways of working in a matter of days, if not hours. Stock prices plunged and then fell into a pattern of unprecedented volatility. In the face of uneven and, in some cases, ineffective responses by governments and with economic recovery dependent on stemming the public health crisis, many companies stepped up to fill the gap even as they struggled with their own problems. In the many meetings and updates during this period, directors found themselves reviewing management’s plans not only for steering the company through the crisis but also for helping combat the virus or aid in the relief effort.
Many companies rose to the occasion, retooling their production lines to make needed equipment, providing open access to otherwise proprietary information, offering their facilities or services to health authorities or bringing their capabilities to bear on the crisis in other ways. Others acquitted themselves less well, and got caught in the public’s crosshairs for seeking to take advantage of government programs intended for those less fortunate. Many boards and senior leaders were forced to grapple with vexing questions of public responsibility at the same time that they were struggling with a crisis for which they were ill prepared.
For at least a decade, calls have been mounting for business to help address systemic concerns such as increasing income and wealth inequality, environmental degradation, climate change, racial and ethnic discrimination, declining public health and education, rising corruption, deteriorating public institutions and, yes, increasing risk of pandemics. While some business leaders have heeded the call and found innovative ways to help address these problems, many others have looked the other way or defined the problems away as ‘social issues’ and therefore, by definition, outside the scope of their legitimate concern as business executives and fiduciaries for their shareholders.
COVID-19 has shown that these issues are not only legitimate areas of concern for business but also, and more importantly, sources of both risk and opportunity. Like market forces, societal forces can profoundly affect the business and competitive environment. Coming out of the crisis, boards will want to work with their company’s leaders to ensure that the company’s risk management and oversight systems encompass the risks arising from these large-scale societal problems. They will also want to ensure that the company’s strategic planning and resource allocation processes take these problems into account, so that the resulting activities, at a minimum, do not exacerbate these problems and, ideally, help to ameliorate them.
In the wake of COVID-19 boards can expect institutional investors, governments and the general public to renew their calls for companies to pay more attention to societal problems and to take a more active role in helping address them. By the same token, boards themselves will increasingly be expected to oversee the business and society interface. Instead of being the exception, robust oversight over sustainability, corporate responsibility, societal engagement, corporate citizenship, ESG — whatever you want to call it — will become the rule.
NEW REALITY #3: More Attention to Board Composition
The pandemic’s disparate effects and ensuing national outcry over racial inequity have put a spotlight on board composition, especially as it relates to directors’ race and ethnicity, a topic on which the agency-based model has been ambivalent at best. In his classic article on corporate social responsibility, economist Milton Friedman portrays the ideal “agent” (the theory’s term for a director or manager) as a generic male wholly devoted to maximizing the wealth of shareholders to the point of suppressing his own personal commitments — and even his responsibilities to family and community. In other words, the theory regards directors’ identities and personal characteristics as largely irrelevant for their roles.
This void in theory has been filled in practice by a custom of appointing directors with backgrounds as CEOs or CFOs, positions traditionally held by white men, and of drawing board candidates from existing directors’ own networks. The result has been a self-perpetuating system of boards populated mainly by white men of a certain seniority and background.
Over the past decade, the gender disparity has been moderated somewhat by the push for more female directors. According to a study of 3,000 companies by Institutional Shareholder Services (ISS), the percentage of board seats filled by women went from nine per cent in 2009 to 19 per cent in 2019. But racial and ethnic disparities persist and they are stark. Another ISS study found that only about 12.5 per cent of directors at the 3,000 largest U.S. companies are members of racial or ethnic minorities, even though these groups make up 40 per cent of the population. According to a 2019 study by Black Enterprise, nearly 38 per cent of S&P 500 companies have no black directors on their boards.
A board’s role is to provide strategic guidance and oversight, and directors must bring the appropriate skills to address a company’s specific business needs and circumstances. The pandemic and the national awakening to racial inequities in all walks of life have made it abundantly clear that a diversity of experience and perspective in the boardroom is also crucial for boards to do their job. Monitoring the company’s relationships with its stakeholders, assessing strategy, overseeing risk, reviewing societal engagement, assessing pay practices, overseeing management’s diversity and inclusion efforts — these are just a few of the standard board tasks for which the insights of directors from different racial and ethnic groups would appear to be essential inputs. Studies have shown that the addition of female directors has altered board discussions and made them more robust. The addition of more directors from underrepresented groups is likely to have a similar effect.
Like market forces, societal forces can profoundly affect
the business and competitive environment.
Quite apart from the benefits to companies and from the moral case for affording individuals of all races and ethnicities the opportunity to be considered for board positions, the inclusion of directors from minority communities is also important for combatting the racial inequities that cut across society. Experts say that the pandemic’s disproportionate effects on African Americans and other underrepresented minorities are driven in no small part by social and economic disadvantages borne by these groups. These disadvantages are unlikely to be rectified until more leaders who understand these problems occupy positions of power and influence in business and the boardroom.
Pressure to take action continues to mount. Institutional investors are already calling on boards to disclose their plans for adding Black and other underrepresented directors to their ranks, and at least one shareholder lawsuit has been filed against directors alleging breach of fiduciary duty based on the board’s lack of racial diversity. California lawmakers recently passed a bill that would require the boards of publicly traded companies with headquarters in that state to appoint at least one director from an underrepresented community by 2021. Some companies have pledged to add Black or other underrepresented directors of their own accord.
Navigating a Shifting Corporate Landscape by Cornell Wright (Rotman JD/MBA ’00)
Many people still believe that shareholder interests are at odds with stakeholder interests , but that is a false dichotomy. Most enlightened businesses view the interests of shareholders and other stakeholders to be largely aligned from a longer-term perspective. That means focusing on how your talent is being managed, as well as your relationships with the communities in which you operate. Failing to address these issues is simply not sustainable.
Some companies still resist this mindset , and in many ways these tensions are inherent in our structures. Even though boards are meant to take account of the interests of all stakeholders, they are elected each year by shareholders. And quarterly reporting is still widely practiced as it is viewed as the easiest metric to measure performance. Compensation systems also reward short-term thinking in many cases, and activist shareholders sometimes demand near-term returns so there are lots of competing factors that can drive short-term views.
This pandemic period serves as a case study for balancing the needs of all stakeholder groups. If you think back to last March when the world went into various stages of lockdown, companies had to think very quickly and prioritize employee safety. They weren’t saying ‘But wait , if we send our employees home, that will impact productivity for this quarter’. Instead they were saying, ‘If we treat our employees properly at this difficult time, that will come back to us in a positive way over the coming months’. This has been a period where companies have had to balance so many different priorities and focus on relationships with employees, suppliers, communities and more. Financial institutions have stepped up to provide accommodations for their customers, for example, like delaying mortgage payments. They recognize that a short-term gain that is a long-term negative for the business doesn’t make sense.
Working with some of the country’s largest corporations, I’ve noticed some shifts in my clients’ priorities. It has happened in stages. Last March, people were very focused on figuring out how to put in place systems that would allow them to operate. There were concerns around liquidity and fortifying balance sheets, those kinds of things. As time passed, the focus shifted. I think the big story for large companies is just how adaptable and resilient they have proven to be. Companies are well past crisis management at this point , and they’ve adapted their business models in many respects. They’ve figured out how to operate in this new world, which in many respects is very different from a year ago.
The economy is picking up. In Q3 of last year there was unprecedented uncertainty and a massive global slowdown and shutdown. But as we came through the summer and into the fall, we saw rising markets and confidence because people were seeing light at the end of the tunnel. Today, in Q1 of 2021, the M&A market is quite buoyant . The number one factor that drives M&A is confidence, and there is a level of confidence around where we are today but more importantly, around where the world will be in six, nine and 12 months. We’re seeing a lot of transactional activity across sectors, particularly in technology and healthcare.
Crisis management is an interdisciplinary practice. Any big crisis has many different dimensions to it, so you need multidimensional thinking to address it . You need to look at the financial aspects, employee aspects, suppliers and customers, to name a few. By its very nature, ‘crisis management’ means that you’re focusing on the here and now. That’s why really good crisis management focuses in part on the here and now, but also in part on what’s next . You have to be careful not to be myopic and just solve the problem right in front of you. You need to think ahead to where things are going—and consider where you want to get.
So, when will the economy be healthy again? I’d say two things. First, markets today are very healthy, and that is a function of many factors including the fiscal stimulus strategy from the Bank of Canada, which is creating extraordinary market conditions. Second, at the same time we have a very challenged economy in terms of high unemployment and lack of opportunity. The pandemic has shone a bright light on inequality and the fact that some people are doing really well while others are struggling. Coming out of this, there will be an even greater need to make sure we’re supporting people and helping them get back on their feet.
I hope most leaders would agree by now that a high degree of structural inequality is not good for anyone. One of the great strengths of Canada is our strong social safety net, but we also need to work on genuine equality of opportunity. I believe that will be a big focus in the next six to 12 months as we figure out how to restore what has been lost—and how to continue to build on initiatives that have been underway for some time.
Cornell Wright (Rotman JD/MBA ’00) is the Chair of Torys’ Corporate Department and former co-head of the firm’s Mergers & Acquisitions Practice. In December 2020, he was appointed as an Executive-in-Residence at the Rotman School of Management.
For many boards, it will be necessary to develop
new channels for identifying talent
Boards that have not done so will want to review their director skill matrices and their board succession plans with an eye to enhancing racial and ethnic diversity in a way that is consistent with the company’s strategy and the board’s need for other types of diversity — industry, geographic, domain expertise, gender and the like. For many boards, it will be necessary to develop new channels for identifying talent, new approaches to onboarding directors, and more deliberate processes for building board cohesion in order to achieve their goals and realize the benefits of having a board whose membership is truly diverse.
Giving more structured consideration to stakeholders. Paying more attention to how business and society intersect. Reviewing and addressing board composition. As boards look to the post-COVID era they will want to assess their readiness to meet these new demands.
At a time when old assumptions are being questioned, they will also want to ensure that their members have a shared understanding of the board’s role and responsibilities — and of their individual role and responsibilities as directors. In the flurry of COVID-inspired activity, it is important that boards not lose sight of their central functions as governing bodies of the companies they serve.
Lynn S. Paine is the John G. McLean Professor of Business Administration and Senior Associate Dean for International Development at Harvard Business School. She is a co-author of Capitalism at Risk: Rethinking the Role of Business (Harvard Business Review Press, 2020).
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