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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. Hence, it is time for a discussion about the role of boards, how and to what they should contribute.

Blog post by: Turid Elisabeth Solvang, Founder & CEO FutureBoards, 

A shifting focus for boards

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.

This shift requires a change of mindset of corporate leaders; from financial to inclusive capitalism, from short term profit to long term value creation in a sustainable way, from silo to integrated thinking. Board directors must rethink what are their responsibilities, to whom are they accountable, and how do they make themselves understandable, not only to the company’s shareholders, but also the wider group of stakeholders that are affected by the company’s activities.

While many board directors are struggling to grasp what IS the role of business in society, they also have a long road to walk to figure out how to communicate how the company creates values across its multiple capitals; financial, manufactured, human, intellectual, natural and social, and how everything is interconnected.  Nevertheless, this is critical to companies that plan to survive in the 21st century. Which implies that there is a whole new way of doing business.

Central to the new business regime are strategies that ensure long-term value creation for all stakeholders. As the board is the highest decision-making body of the company, it is up to boards to develop and decide on these strategies.

Investors are pushing

Large institutional investors have been among the first to respond to the call for action. Larry Fink, CEO of BlackRock, delivered a clear message to boards in his 2018 letter to CEOs when he stressed how “… our clients- who are your company´s owners- are asking you to demonstrate the leadership and clarity that will drive not only their own investment returns, but also the prosperity and security of their fellow citizens.”

Echoing BlackRock is the Norwegian Bank Investment Management. “As a long-term investor, we benefit from sustainable development in the markets and in the companies we are invested in”, states the Norwegian Bank Investment Management, which is a majority stakeholder in BlackRock and an investor that enjoys great respect internationally for its ethical and responsible investment strategy.

Companies that fail to comply with the expectations of the Norwegian Bank Investment Management are quickly removed from investment portfolios. Not “only” because of the company´s failure to follow ethical, social and environmental guidelines but also because it is no longer about how much money a company has made but increasingly about how the company has made its money.

The role of corporate governance codes

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.

However, leading corporate governance codes are increasingly placing a much stronger emphasis on the company’s place in society.

In 2017, the UK´s Financial Reporting Council celebrated 25 years of advising corporate governance with publishing a proposed revised edition of the UK Governance Code. The revised edition that was published in 2018 stresses “the need for good corporate governance for successful long-term value creation for society”. Sir Winfried Bischoff, Chair of FRA put it this way: “This new Code, in its new shorter and sharper form, and with its overarching theme of trust, is paramount in promoting transparency and integrity in business for society as a whole.”

The new recommendation emerges shortly after the fourth edition of South Africa´s ground breaking King Report on Corporate Governance was published. The King Report has, since the first edition was published in 1994, influenced corporate governance thinking globally. The report is grounded in the belief that businesses have a responsibility for the societies in which they operate, which is a belief the KING IV report further cemented.

The Nordic Corporate Governance model

The Nordic Corporate Governance model is generally regarded a North star with regards to integrity, transparency and responsibility, has distinctive features that differ not only from the Anglo-Saxon model, but also from Continental European models, and even within the Nordics.

A large majority of the listed companies have dominant majority owners. Consequently, a fundamental principle is “to provide the shareholder majority with strong powers to control the company, while providing minority shareholders with effective protection 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.

Another aspect that reflects ownership structure is the role and composition of the nomination committee, which predominantly comprises representatives of the largest shareholders. 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.

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 the Nordic countries – 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.

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 who will lead the way to arrive at a common understanding of how, and by whom, companies should be governed in the future?

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Turid Elisabeth Solvang, Founder & CEO FutureBoards, Former Chair of European Confederation of Directors Associations