The corporate landscape is quickly changing, and everyone is wondering about the future of corporate governance. Unsurprisingly, what was trendy in the yesteryears may no longer be trendy today, and what is fashionable today might not be so tomorrow.
So, it’s up to corporate entities, starting with the board of directors, to embrace the changes and adapt – which, as you might have guessed, isn’t easy.
While we live in a corporate world of uncertainty and speculation, there are reasons to believe that the future of corporate governance is bright. Primarily, that’s judging by past and current trends.
We are looking at a future with more focus on AI oversight, corporate social responsibility (CSR), diversity and inclusion, and stakeholders’ engagement. We also look at a future emphasizing streamlined reporting, enhanced collaboration and transparency, C-Suite oversight, and reinforced ethical protocols.
Change is inevitable in the corporate world, and every board of directors who cares about staying relevant must evolve to match the changing business landscape. Not all evolutions, however, are flourishing. Some are, and some are not.
This guide will help you understand board evolution as a whole, including how it happens and the board’s status during the transformation process. Let’s dive in right away!
Key Takeaway:
- Many trends in corporate governance have cropped up over the years, from surging shareholders’ engagements in 2016 to AI transformation in 2023.
- New emerging trends in corporate governance include enhanced AI governance, ESG focus, stakeholder capitalism, CSR and sustainability, governance transparency, board diversity and inclusion (D&I), governance collaboration, streamlined reporting, ethical reinforcement, and G-suite oversight.
- Boards evolve, and an evolving board of directors goes through the action, transitioning, and governing phases.
- The founding board members do most of the heavy lifting in the ‘action phase’ as there are no executives. Executives are hired in the ‘transitioning phase’ as the founding members assume directing duties.
- Meanwhile, in the ‘governing phase,’ the founding board members establish a well-defined corporate governance structure.
- During board evolution, a board may be in a state of progression, regression, unrealized potential, or realized potential.
- The board is best described as being on an upward trajectory in the progression state. However, it is most successful at the ‘realized potential’ state.
- The roles of the board chair have evolved over the years. In addition to traditional responsibilities, the chair is now focused on strategic stewardship, risk oversight, D&I advocacy, and succession planning.
Historical Trends in Corporate Governance (2016-2023)
The existence of so many governance trends over the years proves that the boardroom landscape is constantly changing. Let’s highlight some of them from 2016 to 2023.
2026: In 2016, investors became more skeptical about individual directors and more interested in the board’s decisions and contributions. Moreover, there was a surge in shareholders’ engagement on ESG issues and an emphasis on corporate governance regulations that year.
2017: In 2017, organizations pushed for uniformity in governance as shareholders held the board of directors more accountable for the organization’s long-term performance. The board was also expected to oversee various corporate affairs to ensure the business’s success.
2018: In 2018, investors were expected to influence the company’s corporate strategy more, and engagements with policy-promoting investors increased. Additionally, companies focused more on board composition, especially on inclusion and diversity.
2019: The need for board quality was apparent in 2019. Directors advocated for effectively using governance frameworks to add value to stakeholders. ESG also took center stage in 2019 and is a major topic today.
2020: With increased internet penetration worldwide, there was an expansive network of remote workers in 2020, especially considering that most could not go to work in person due to COVID-19 restrictions.
2021: In 2021, more companies recognized the importance of corporate social responsibility in the corporate world—a trend that has also emerged this year. Board oversight also became a part of the company’s culture as boards of directors became more involved in trying to recover from the COVID-19 hit.
2022: In 2022, companies paid more attention to board effectiveness and gender diversity. The other trend for 2022 was enhanced standards governing sustainability reporting.
2023: In 2023, AI emerged in the boardroom, and its impact has been tremendous since then. More and more companies now see the need to embrace AI in the boardroom.
Emerging Governance Trends That’ll Change the Corporate Governance Landscape
This year and the next few years to come, the corporate governance terrain will change, and that’s primarily due to these emerging trends:
1. Enhanced AI Governance
Today, it’s no longer about whether artificial intelligence should make its way into the boardroom, as that has already happened. It’s, however, about the ‘extent AI can run the boardroom.’
AI governance plays two critical roles: administrative and judgment. AI performs routine administrative duties, such as scheduling board meetings and planning agendas. In judgment work, AI handles the analytical aspect of decision-making.
As time passes, there will be more emphasis on AI governance as robo advisors take over the boardroom. They are slowly replacing human directors around the boardroom table, and it’s only a matter of time before they completely take over the conversations.
2. Increased ESG Focus
The term ESG (environmental, social, and governance) is no longer new in the corporate world. For quite some time, it has been a critical metric for measuring a company’s performance across environmental, social, and governance issues.
ESG demonstrates a company’s, especially the board’s, commitment to environmental sustainability, social responsiveness, and good governance. It offers a competitive advantage, builds stakeholder relationships, and attracts investors.
Now, more emphasis is being placed on ESG compliance, especially by investors. Companies are vastly investing in ESG reporting to facilitate better accountability and compliance. They want ESG to be part of the corporate strategy, decision-making frameworks, and risk management protocols.
3. Stakeholders’ Capitalism
Each day, shareholders are becoming more interested in their businesses’ affairs. They don’t just leave it to the board of directors, as they used to.
Many shareholders have a say in what happens in the boardroom, especially when it comes to strategic planning, board composition, executive compensation, and succession planning. They can do that through policy advocacy and participation in the executive board.
However, not just shareholders but also other stakeholders, including customers, employees, suppliers, and the community, are interested in the company’s affairs. All these stakeholders have some level of expectations and needs that need to be met, and more importantly, they have concerns that they expect the board to address.
Ultimately, balancing the interests of all stakeholders creates better, longer-term value for the company. Stakeholder activism promotes ethical conduct, improves capital allocation, and enhances accountability.
4. Heightened Focus on CSR and Sustainability
Companies are increasingly becoming aware of their business surroundings, and it’s up to the key decision-makers (the board) to enforce standards, policies, and protocols that promote corporate social responsibility and sustainability.
Now, governments are ramping up efforts to crack down on businesses with a massive carbon footprint and those that overlook the interests of their communities. Boards of directors are equally forced to ramp up their compliance efforts to be in good books with the regulators.
5. Enhanced Transparency
Stakeholders want more visibility into the board’s operations. They demand clear disclosures on how the board runs and open communication channels. Transparency has become an essential pillar of corporate governance.
Sadly, companies are folding down daily because of the lack of transparency, especially in financial reporting. Investors quickly lose faith in the board of directors when they can’t get the answers they want.
A good number of boards, however, have realized the importance of transparency in their corporate governance structure, and they are stepping up efforts to ensure there are buts and whys.
6. Emphasis on Board Diversity & Inclusion
With studies indicating considerable behavioral changes and improved performance in the boardroom due to board diversity and inclusion (D&I), companies nowadays have no choice but to ensure there are no biases in their board composition.
More women are now joining the board of directors and making meaningful contributions. However, D&I is more than just gender parity. It’s also about other socio-demographics like ethnicity, age, race, and religion. It’s also about socio-economic considerations and diverse industry experience.
7. Improved Governance Collaboration
There’s an increased need for real-time collaboration in the boardroom. Boards of directors see the need for board members to work together, have strategic discussions, and decide collectively. Everyone must be on the same page, even if they aren’t in the same room.
That has increased the use of online collaboration tools like Boardable, Convene, Diligent, Authomize, OnBoard, and Governance at Work. These tools improve decision-making, secure the handling of sensitive information, improve transparency, and facilitate easy access to crucial data-driven insights.
8. Streamlined Reporting
Proper governance requires that all board-related duties and tasks are centralized in one user-friendly platform. Whether it’s meeting scheduling, document sharing, or inventory tracking, everything goes through a simplified, automated process that makes it easy for the board to make strategic decisions and account for everything.
More companies are investing in the best business management software and financial corporate management solutions (or FCPM) to improve their financial reporting, analysis, and accountability.
9. Enhanced Ethical Standards
There’s no more room for unethical corporate practices. So many businesses have fallen due to compliance failure and corporate misconduct, and every smart board out there wouldn’t want to fall victim. Consequently, boards are quickly reinforcing standards that promote ethical values.
Boards ensure that every board member and everyone involved understands them. Companies are establishing clear protocols that all employees can comprehend and be obliged to follow, especially when they know the consequences of failing to do so.
10. Surging C-Suite Oversight
C-suite leadership, especially top executives like the CEO (Chief Executive Officer) and COO (Chief Operating Officer), might make critical corporate decisions but must be answerable to someone. Someone has to oversee them, and that’s where the board comes in.
Overall, the board needs to provide enhanced oversight of its operations to ensure accountability, fairness, and ethical responsibility. There is also power separation between the C-Suite leadership and the board, with clear protocols on who reports to whom and when.
Board Evolution
Boards of directors evolve as they mature—it’s no longer a secret. However, every board must understand its position in the evolution process to manage its expectations. Let’s examine the key stages and statuses of the board evolution process.
Key Stages of Board Evolution
All boards of directors go through key stages of evolution identified with specific behavioral and organizational changes. These stages are as follows:
Stage 1 – Action/Doing Phase
In the action or doing phase, the board, which comprises the founding members, assumes the role of the top executive as the CEO is not in place. At this stage, the board is trying to establish itself and the business, and the founding members are willing and ready to do the heavy lifting.
Overall, board members in the action phase are described as invigorated, innovative, action-driven, and entrepreneurial. They devote numerous hours to improving the company but have little time to meet their fiduciary responsibility. Thus, they may fail to institute formal policies and governance protocols for succession planning and refreshing the board members.
Some of the duties of the founding board members at this stage include:
- Raising money for the company
- Managing products
- Coordinating publicity
- Developing the business plan
- Assembling the right workforce
- Product delivery
Stage 2 – Transitioning Phase
During the transition phase, the board is more driven to stabilize the company’s operations and become successful. This is when they hire top executives with clear duties and responsibilities, such as a CEO, executive director, and general manager.
At this stage, the board assumes a more disciplined approach to overseeing the company’s running instead of being directly involved in its day-to-day management. They leave that to the top executives and management.
Another critical note is that the board makes core decisions as a unit (the entire board and not individual members). The biggest challenge, however, is conflict management, which the board lacks the right tools and protocols to deal with.
Stage 3 – Governing Phase
Once a company grows and attains real success, the board develops a robust corporate governance structure, outlining key roles and responsibilities. It’s able to do the following:
- Set strategic direction
- Perform its fiduciary oversight responsibility
- Hire and fire top executives
- Set measurable long-term goals for the company
- Monitor its success
- Set effective performance measures
The biggest challenge with the governing phase is that sometimes board members become too complacent given that the company is already successful and has established management and top executive leadership.
Statuses of Board Evolution
Upon going through the various evolution stages, the board of directors is likely to find itself in one of these statuses:
1. Board Progression
A board in the progression state always takes deliberate steps to maneuver between various stages. Such a board has a CEO who understands how to manage and oversee the company’s operations, allowing the board directors to focus on the big picture. Instead of being a working board, as in the action phase, the board becomes a directing board.
2. Board Regression
The regression state is the direct opposite of the progression state. Instead of adjudicating its management role to the CEO and his team, the board returns to being a working board (stage 1) until a capable CEO is in place.
3. Unrealized Potential
Sometimes, a board gets everything (or shall we say most things) it needs to take the next big step. That includes financial resources, a necessary workforce, suitable policies, and working systems. Unfortunately, for one reason or another, the board fails in its mandate and is said to have ‘unrealized potential.’
4. Realized Potential
A board described as having ‘realized potential’ maximizes available financial resources, workforce, policies, and working systems. It can maximize its capabilities at every stage of evolution.
The Evolution of the Role of the Board Chair
The role of the board chair is quickly evolving. It’s no longer just about chairing board meetings, inducting new members, advising top executives, and appointing subcommittees. It’s now more than that, and here are some emerging trends:
- Strategic stewardship – Modern-day board chairs must actively engage in creating business strategies.
- Risk oversight – As the corporate landscape evolves, risks will likely crop up, and the modern-day board chair has to be on top of things.
- D&I advocacy – With more emphasis on diversity and inclusion (D&I), board chairs must ensure that.
- Succession planning – Board chairs are now responsible for ensuring continuity when a board member steps down or is asked to do so.
Wrapping Up!
There’s no doubt about the future of corporate governance. There’s much to look forward to embracing in and around the boardroom. It’s also clear that boards evolve; when they do, it’s a matter of making adjustments and needed changes to stay relevant.
As the Center for Corporate Governance, our mandate is to promote good corporate governance practices and prepare corporate entities for the present and future. Through our tailor-made corporate governance training, we offer hands-on approaches and data-driven insights for cultivating a conducive corporate governance culture in the boardroom.
We invite everyone from business owners and entrepreneurs to boards of directors and top executives to sign up for this fantastic program and get the most out of it. Our program is tailored to the needs of modern corporate entities, and we serve all sectors, including the public sector, private organizations, and nonprofits.
