Will the Shape and Accountabilities of Boards Need to Change Over Time in Order to Remain Fit for Purpose in the Future?


At the very heart of any corporate business model is the Board of Directors. The Board is the umbilical cord between the shareholders/investors and the business operation. It is the pulse of the organisation, setting the strategic direction the business will take, establishing professional governance procedures which dictate corporate behaviour and generally are the litmus test against which success or failure can be measured.

Board structures with all their various adaptations have foundations far back in history where small village groups operating as what we would today call co-operatives appointed elders to manage their affairs. A Chairman was elected (so called because as leader they sat on the only chair in the barn) who assumed the leadership position of the village. Over time, mainly driven by expanding trading rights, both internal and international, these leadership groups grew to include independent representatives who were appointed either for their market knowledge or trade/political connections. And so the corporate model as we know it today including board structures slowly evolved.

Over the years business, financial and market place pressures have to a large degree driven numerous changes in corporate organisational structures, more particularly where disruptive technology and or regulatory demands have been involved. However, in principle “The Board” as an iconic institution has remained solid and it has to be said in general terms delivered and served its purpose exceedingly well. 

However,  with the fast changing pace of today’s markets and intensive competition perhaps it's time to stand back and critically examine current Board structures to determine if they remain fit for purpose in tomorrow’s world. So let’s dust down our crystal ball and gaze into the future and see how Boards might look like in say a decade’s time. 

Firstly, it’s fairly obvious that Boards and their leadership functions will not disappear and be absorbed into some form of a new business model. Although in some professional forums such a change is being whispered but probably more as a straw man scenario and to gain attention rather than being given serious air time. No, what I'm suggesting is that accepting the various professional disciplines such as skills, knowledge and experience will in the future remain the main criteria for director selection, is there another factor at play which needs to be taken into consideration when looking into the future which might influence and improve Board performance. 

In asking this question my thought process naturally turns to the prime focus of any Board which is: 

“To provide professional leadership to the corporate entity thus ensuring the shareholders’ investment is protected through establishing a sound financial and operational business platform upon which a sustainable growth scenario can be built, thus increasing shareholder’s wealth".                                                                                            

You will notice in my definition, protection and growth of shareholder’s wealth is the prime function of the Board. Everything else strategic or otherwise builds towards and must enhance and support this prime objective.  Therefore if we accept the argument regarding the Boards prime function then it naturally follows that the shareholders must have the absolute right to appoint directors to protect and grow their wealth acting as custodians of their investment. 

This conclusion naturally brings into question some of the practises regarding Board composition that exist today and what changes, if any are required to future proof the current corporate model. You’ll notice I used the words “Board composition”as I believe this is at the very heart of the changes that will need to be made to ensure Board performance is fit for purpose in the next decade. So let’s discuss a few elements that currently influence and drive current Board composition practise.  

I've never understood from a professional point of view, the rationale behind the appointment of an Executive Chairman to lead the Board. Combining both Chairman and CEO roles into an Executive Chairman position looks like the old "Game Keeper Poacher“ scenario. How can one person regardless of how experienced they are, establish policy (Board responsibility) and then be held accountable by the Board for policy implementation (CEO responsibility). Surely this is not governance transparent and not in the interests of the shareholder. The same could be said for having company executives sitting on the Board as appointed directors. Again, an absolute conflict of interest and is certainly not in the shareholders' best interests. 

Both of these situations blurs the line between accountability and responsibility and greys the line between shareholder representatives who are the custodians of the shareholders wealth and executive leaders who have a variety of totally different performance drivers.   

Then you get the situation where Boards in their own right can appoint a certain number of directors without recourse to shareholders. I was recently involved in such a situation where a fairly substantial shareholder had no input nor was even aware that the Board had appointed a new director. Such a practise leads to introverted thought processes and strategic stagnation as well as unhealthy groupings and is certainly not in the interests of all the shareholders. 

There are a lot of outside pressures influencing board composition. For example the militant gender question requiring by legislation in some jurisdictions female director appointments. Normally the gender issue is wrongly disguised as diversity (diversity is not gender specific) but in reality is factored around a social engineering program. Such enforced legislation infringes on shareholder rights without any perceivable and tangible benefits but needs to be taken into account when making director appointments.  

Probably the most contentious issue around Board composition relates to that of the Chairman position. The accepted practise in most corporates today is that the shareholders elect the directors and then the newly constituted Board of Directors elect from within their midst the Chairman. In a lot of instances the individual to assume the Chairman position has already been identified by a small group of influential shareholders before the new Board is appointed. Then there is a perception in some quarters that the Chairman's role is simply that of being a facilitator, in house referee and or consensus builder around Board decision making. 

I'm of the other persuasion, believing that the Chairman position should be filled by a dynamic and respected proven leader who governs Board behaviour and ensures the Board remains focused on the key strategic issues based on improving business performance and meeting or exceeding shareholder expectations. 

Therefore, if the Chairman's position is so crucial in influencing and determining corporate success and has such an influence on protecting and growing shareholders’ wealth, it beggars belief that they, “the shareholders” have no input to this appointment. Instead the process is left to a group of directors whom have no financial skin in the game and whom have only just been elected to the Board.  

There are numerous other peripheral issues relating to Board composition that could be highlighted as requiring critical review, a point not lost on the current activist shareholders lobby groups.  However, the few factors I've outlined are perhaps sufficient to fuel the assumption that:   

"Board composition and appointment processes as we know them today will probably gradually change over the next decade providing more direct shareholder influence regarding the Boards strategic decision making and use of capital resources”.  

So if we are to polish our crystal ball and gaze into the future, what changes are we likely to see in Board composition say in a decade’s time. The following in no set order are my thoughts.  

  • The base assumption of appointing the most qualified and experienced individuals as directors will assume a far greater importance than ever before. The old mate’s school which to a degree has in the past influenced director selection will gradually diminish in relevance as activist shareholders demand more accountability and transparency associated with performance from the Board.  
  • Director selection will place a greater emphasis on ensuring that the right matrix of experience and skills sitting around the table are collectively matched to the corporate requirements associated with reviewing and supporting the strategic plan and objectives of the business. This focus may identify new skills required around the Board table that aren't even thought of as being important in today's market. Tomorrow’s Board and its directors will be more holistically diverse than ever before while being almost twined in obligation and service to the strategic objectives of the company plus working more closely than ever with the company’s shareholders.  
  • Director tenure will be restricted probably to three years with one renewal if reappointed. Director appointments will be on a staggered basis thus ensuring retention of the intellectual and corporate knowledge around the board table. 
  • Board Governance Charters will be more holistic and focused and will become the major platform which will influence sound professional behaviour around the board table. These Governance Charters will be made available (perhaps in an abbreviated format to preserve confidentiality) to shareholders and senior executives. They will be reviewed annually by an independent professional, thus enabling a critical assessment to be made regarding the health of the Board, its decision making abilities, its strategic thought processes and its professional behaviour. 
  • There will be no executive director positions on the Board. Corporate executives will be prohibited from standing for any Board position. 
  • The Chairman position will be subject to a separate and independent appointment process by the shareholders. The Chairman's tenure will be for four years with one renewal if appointed, with annual reviews assessing performance undertaken by an independent professional.  
  • We will witness more females and minorities elected as directors, being a direct result of social or legislative pressure. However, this will not be a negative in terms of performance as individual skills and experience will remain the criteria upon which selections are made. Rather this diversification will provide a more representative matrix around the board table, resulting in more justifiable and inclusive decision making processes. 
  • Due to shareholder activist groups there may be a number of seats on the Board reserved and allocated to shareholder only appointments. In larger corporate structures, particularly public companies finding shareholders with suitable qualifications matched to the Board requirements will not be a problem but in smaller companies this might be problematic and care will need to be taken not to water down qualifications, simply to fulfill a self-inflicted shareholder requirement.  
  • The number of sub committees will be reduced to very few with the Board taking more direct accountability and responsibility for these functions. This change will be driven to a large extent by government legislation where directors will be held personally, directly and legally accountable for any corporate misdemeanour or malpractice regardless of their individual involvement or not. This is already beginning to take effect in some countries, where director liability insurance is no longer available and legislation is holding the Board and its directors individually accountable and liable for certain decision regarding policy. 
  • Board meetings will become more regular and may even become a two day event. The increased time involvement by the Board will be driven by the increased accountability for decision making required by the shareholders, plus the predicted increasing complexity of the market place. The danger which all Boards will need to be absolutely focused on is not to cross the line into operational and executive responsibilities. Boards set policy and executive implement these policies. Correct and robust governance charters should re-enforce this position and act as Guardian of the professional protocols required.  
  • One issue that is rarely mentioned and in most instances is strenuously avoided when discussing future Board structures is the           question of religious persuasion. We have seen how effective the pressure being applied by the activist shareholder groups has been and the high jacking of the diversity argument by the gender equalisation group, so is it possible in a decade or so we'll see the same pressures being applied by religious groups?  Already in a number of jurisdictions around the world, director appointments are subject to religious persuasion. Could this be something which we should consider as a possibility which will influence Board behaviour and performance when we take a look at future Board composition? 
  • Without any doubt, Boards of the future will need to be more positive in their communication with their shareholders. In particular shareholders will require more information regarding the future strategic direction the company is planning to take. Today’s annual reports are full of numbers with numerous side bars but the narrative is weighted heavily towards explaining past recent performance. Most annual report narratives are extremely light on any meaningful detail regarding future strategic initiatives. 
  • In the future Boards will need to produce more information on future activities backed by assumptions for shareholders. We are already beginning to see this happening with some Boards producing what is being called a “Statement of Corporate Intent”, a document only available to major shareholders under strict confidentiality agreements. Boards of the future will need to grapple with how they keep their shareholders fully informed taking into account the confidentiality of the information provided.     

So in conclusion, there is one undisputed fact and that is that: 

“Board composition in a decade's time will not be recognisable when measured against what is normal practise today and directors will be held more accountable by their shareholders”.  

How Boards and shareholders manage all the various pressures they collectively face in todays and the future markets, will dictate to a large degree what changes evolve over the next decade in terms of Board composition and behaviour. The time frame associated with these changes is not certain. 

However, Boards and shareholders alike need to apply restraint to any knee jerk reaction and rather than allow the applied pressures of the various Lobby Groups, including governments to force change they need to be proactive and where ever possible endeavour to influence change in their favour. The one professional corporate instrument that will provide guidance and support in this task is the “Corporate Governance Charter”.   Ensuring this document is robust in the extreme, is professionally constructed, regularly reviewed and up dated will provide a platform which will moderate any extreme decision making. It will also provide a sound basis upon which any changes can be measured and balanced against risk and rewards factors. 

Obviously, not everyone will agree with my comments and that's only natural when I'm making assumptions based upon gazing into the future using a crystal ball, which at times can become extremely cloudy. However, if through this article I have triggered a thought process even if different from my own which leads to directors and shareholders thinking about making their Boards fit for purpose in the future, then this article would have fulfilled its objective.

Board composition in a decade's time will not be recognisable when measured against what is normal practise today and directors will be held more accountable by their shareholders.

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