The dawn of corporate governance goes back to the 1930s when US corporations first began selling stocks to a wider set of owners.
We have seen many changes in corporate governance over the decades.
There are 4 major eras of corporate governance.
This first era of corporate governance 1.0 has been characterized a less engaged oversight model that was perceived by many as remote, distant, “rubber stamping” of managements recommendations and sometimes with a “crony” board.
In the 1970s institutional investing driven by pension funds and the creation of big institutional investors was the beginning of so-called “fiduciary capitalism”.
Governance 2.0 was post Enron / WorldCom debacle highlighting governance that did not have deep enough understanding of management activities and lacked important financial control. The result was Sarbanes Oxley Act and increased regulations.
The advent of the reforms post Enron have two important features that are the catalyst for deeper board engagement: The exec session where directors (unsupervised by management) could discuss areas of opportunity, concerns, etc. The exec session led to the now best practice of an annual strategy offsite where directors are exposed to in depth strategy and planning of managements near and long-term plans.
Governance 3.0 was catalyzed by the Business Roundtable statement released 2018 where the largest global multi nationals articulated the need to shift from shareholder centric to stakeholder centric model where ESG becomes an imperative. ESG principals are seen as foundational to a company’s success with all stakeholders. ESG is the umbrella over a company’s vision, mission, and purpose. Companies are understanding the critical importance of ESG on their brand enabling companies to attract employees / customers and investors. Many US companies are playing catch up putting in place ESG frameworks to be accountable to stakeholders.
Covid accelerated the digital transformation of companies as people work virtually in a hybrid environment, social unrest is punctuated by George Floyds death catapults diversity, inclusion, equity into sharp focus.
Millennial and gen z workers make up 50% of workforce and prioritize work life wellness and balance. The importance of safety, data privacy, connection to community become an area of great focus.
Almost two years of work-from-home triggers the “great resignation” where as much as 20% of the workforce in certain industries such as technology resign and change jobs. Connectivity to the company’s culture is strained by the distances on the company’s social network.
Simultaneously the biggest institutional investors are prioritizing ESG reporting especially around environmental and climate measures.
Now we are at the dawn of Corporate Governance 4. 0 which is about future proofing and tech enabling our companies, so they stay relevant and competitive. Most boards do not yet recognize this.
Governance 4.0’s purpose is to immunize stakeholders against the company losing momentum, relevancy, and growth.
In this new model of corporate governance 4.0 directors need to be a competitive asset and an accelerant for the business, adding a perspective that not only performs oversight but helps move the co. forward. The biggest risk for corporations is that the co. becomes stale in its product or service offering and its business model for engaging with its customers.
Legacy companies experience low growth; the key challenge for companies staying competitive and relevant is operationalizing their data to drive insights and outcomes. The knowledge of true tech enablement and digital transformation using AI, ML, deep learning analytics and big data is one of the key next gen board competencies in Governance 4.0.
The adoption of ESG and stakeholder governance in 3.0 are now table stakes. The future challenge for boards is to continue to lean in to help companies be innovative, entrepreneurial for the future.
The velocity of change is exponential. The last two years of covid lockdown are commonly accepted a having accelerated digital transformation by 5 years.
We now expect businesses to interact with the same ease of our cellphone apps in all aspects of business. We expect a consumerization of how data and offerings are served up to us.
The companies that forward invests in AI / ML deep learning and leverage their data lake to drive rapid time to insights and actions is the company that will thrive and grow.
Here is an example of how a traditional legacy business applied their data to the challenging problem of getting their frontline $16 an hour workers to get vaccinated.
This food packing company was stubbornly stuck at only 37% of frontline works vaccinated. They offered the workers a one-time bonus of a thousand dollars. This did increase vaccination rate by 30% but they were still stuck at 67% vaccination rate. The company then used traditional AI / ML algorithms to crawl the web, used the meta data about their employee’s normal behavior pattern to find insights. They identified that their frontline workers stopped for coffee and a donut on the way in for work, and also bought a lotto ticket. By offering a $10k company sponsored lotto and giving a ticket to vaccinated employees, they increased the vaccination rate to over 90%.
Consumer companies around the world know how to analyze the personas of their customers and hit just the right “hot button” to hook their interests. Now businesses have the same opportunity to understand employees as much as their customers by applying this same technology to have better insight throughout all company functions – HR, marketing, manufacturing, supply chain, etc. This tech enabling will create a competitive differentiator yielding precision data for decision making.
Using technology to engage with your employees, many of whom are in a hybrid work model, can help build loyalty and intimacy if you curate innovative tailored career pathing to build engagement. I.e. companies could create their own Netflix
In this current era of corporate governance 4.0 it is all about future proofing your company. The velocity of change can be measured in the precipitous drop in a corporation’s life cycle. Today 50% of companies are no longer independent after ten years. Duration on the S&P 500 has dropped below 7 years. CEO tenure is around 4.5 years. The reason companies disappear is the exponential rate of change. Companies are not reinviting their business model, their go to market strategy, or embedding AI / ML and tech into each functional area. Companies thought digital transformation meant having a website that worked a little better and perhaps automating part of the back office. That is not the case. Companies need to forward invest in upskilling and augmenting their workforce. Companies need to understand how to adapt and embed all forms of hyper automation into both the front and back office, customer journey, customer experience, all the way through shipping. Most importantly, companies must harvest and make actionable all their data.
Companies’ competitive relevance quickly erodes unless companies are truly tech enabled in every aspect of their business. Boards are responding by repurposing nominating governance committee to also include ESG. Companies are also creating new ESG / tech committees.
The boards’ role has shifted from governance 1.0 which was a remote distance oversight board, to governance 2.0 which brought compliance and reform to the boardroom post Enron, to governance 3.0 which is marked by the shift from shareholder to stakeholder capitalism and ESG centric mindset to, to present day governance 4.0 where the companies long term competitiveness is completely interwoven with tech enabling every business function.
The boards role as a fiduciary for all stakeholders is to future proof the company. Boards must check if management is properly assessing the risk of the velocity of change. Does leadership see the new interlopers who may blindside their established business model?
When we look back 5 years from now, governance 4.0, the era of Future Proofing, will seem the obvious thing we should have embraced sooner!