Are boards on board with new realities?
Turid Elisabeth Solvang, Founder & CEO FutureBoards, Former Chair of European Confederation of Directors Associations writes:
We are in a perfect storm of perpetual change. Around us, technology, business models, and markets are in constant transition and transformation. Boards must learn on the watch to navigate unfamiliar and treacherous waters. What is at stake is their company’s future.
Paradigm shifts in the corporate world
While the challenges and opportunities of the 4th industrial revolution are still top of the agenda, geopolitical unrest, climate change and financial instability are also deeply affecting the corporate world.
The scope of change is massive, the pace is extremely rapid, everyone is affected, and huge expectations are firmly placed on the shoulders of company owners, boards, and management. Meanwhile, flying in on the banners of sustainability, responsibility and long-term value, along come new perspectives on the nature and purpose of the company, and how it should be governed.
In times of great uncertainty and rapid change, we need strong standards. Corporate governance codes provide good guidance. But while companies and capital markets become more and more globalized and integrated, standards for good corporate governance remain shaped by local ownership structures and founded on national legislation, culture and traditions. Let’s, for example, take a look at the Norwegian corporate governance model.
The Norwegian corporate governance model
The Norwegian code of practice for corporate governance, launched in 2004, much resembles those of our Nordic neighbors, and in their turn strongly influenced by the Cadbury Report which were introduced a decade earlier. Nevertheless, the Norwegian code has distinctive features that differ not only from the Anglo-Saxon model, but also from Continental European models, and even from those Nordic models (PDF).
A large majority of the Norwegian listed companies have dominant majority owners. Consequently, a fundamental principle in the Norwegian corporate governance code is “to provide the shareholder majority with strong powers to control the company, while providing minority shareholders with effective protection (PDF) against abuse of power by the majority”.
This principle is the origin of a strict, hierarchical chain of command between the general meeting, as the company’s highest decision-making body, the board, which keeps tabs on management, and executive management, who runs day-to-operations. This is why executives do not serve as board members of listed Norwegian companies. Furthermore, CEOs of listed companies are prohibited by law from serving on the company’s board. (On the other hand, “say on pay” and board directors elected by employees are already included in legislation).
Another aspect that reflects ownership structure is the role and composition of the nomination committee, which predominantly comprises representatives of the largest shareholders, and, as stipulated in the code, should not include the board chair or directors. The intention is to ensure that board recruitment is unbiased and objective, but the flip side of that coin could be that nomination committees do not have sufficient insight into the company’s operations.
One aspect of Norwegian board composition is well known outside our borders: Boards of listed companies are required by law to include minimum 40% of either gender. The requirement, often referred to as the gender quota law, but actually an amendment to the Norwegian companies act, came into full effect on 1 January 2008 after fierce debate. Non-compliance would place a company in breach of the companies act, for which the penalty is dissolution of the company. Now, nobody wanted that - so the amendment proved almost immediately effective! Today, as we celebrate the 10th anniversary of the gender quota amendment, the law is generally regarded as uncontroversial and taken for granted.
Should corporate governance be borderless?
The examples listed above illustrate a few aspects of what is considered “good corporate governance” in Norway – which differs from the UK model, as well as from many other national corporate governance codes, which all have their specific characteristics.
In this increasingly globalized world, we not only need to ask whether such differences in practice are necessary, but also if they are sustainable in a world where much corporate activity reaches across borders almost all the time. We also need to ask how the codes address the company’s role in global society and the board’s responsibilities to stakeholders other than shareholders.
Because, while companies and their board directors are trying to cope with new realities on the agendas of corporate boards, a new set of governance principles are emerging; purpose, values, responsibility, sustainability, stakeholder approach, and long-term value creation.
How can we arrive at a common ground and a common understanding of how and by whom our companies should be governed in the future? Has the time come to reassess and define the purpose of companies and the role of the boards? And in that effort, will the FRC and the UK Corporate Governance Code keep leading the way?
We do not know what our future brings, but we can be quite certain that it will be different, and that the changes will affect both the composition of boards, and the way boards work.