02 Oct. 2017 | Comments (0)
On Governance is a new series of guest blog posts from corporate governance thought leaders. The series, which is curated by the Governance Center research team, is meant to serve as a way to spark discussion on some of the most important corporate governance issues.
Every threat to society and business—social, economic, environmental—is also an opportunity. An opportunity to grow shareholder value. That’s the big lesson for companies from the research I conducted for A Better World, Inc.: How Companies Profit by Solving Global Problems…Where Governments Cannot. What it takes is a combination of expertise, experience, and imagination for a board of directors to envision the company’s greater value in the global marketplace. Boards comprised of people with a diversity of backgrounds, perspectives, and mastery are in the best position to understand how the company can use its unique capabilities to find innovative solutions to the world’s most compelling challenges.
Boards must be qualified to recognize global threats and opportunities
Boards must be equipped to anticipate and function best in a global landscape that continues to shift, often dramatically. Unfortunately, such boards are too rare. “Few board directors view cybersecurity as a strategic threat,” according to Harvard Business Review (February 22, 2017). “Most boards are seriously unprepared for Brexit,” according to an article in the Financial Times (June 12, 2016). Consider additional conditions that boards must deeply appreciate in order to envisage the threats as well as the opportunities: From ecosystems loss and climate change, to the shift in U.S. leadership and America’s withdrawal from the Paris Climate Agreement. From the massive migration of refugees worldwide, to the emergence of killer viruses and infectious diseases (NPR, February 14, 2017). From the rise of populism from people who feel left behind by the new economy, to the failure to prepare people for the millions of jobs that are unfilled.
Opportunities abound for companies whose leadership—board and CEO—see what’s possible. For example, Unilever recognized that 2.5 billion people are involved in smallholder agriculture globally, accounting for an estimated 500 million small farms producing 80 percent of the food consumed in emerging markets, from Southern Asia to sub-Saharan Africa. Unilever realized what might be accomplished with an infusion of capital for skills training and capacity-building to help such smallholder farmers to increase yields and their incomes, while farming their land more sustainably. This would be a boon for economic development in impoverished regions. It would also improve quality end-products, save costs, and maintain or increase sales for a company like Unilever, one of the world’s largest suppliers of food, home, and personal care products (Korngold, Huffington Post, February 13, 2013). Furthermore, Unilever discovered and implemented this solution through effective stakeholder engagement and nonprofit partnerships (with Acumen, for example).
In order to flourish, companies must fully grasp the vast growth in emerging markets, create innovative products and solutions for these consumers, and partner with nonprofits to help advance regional economies. “Globally, the middle class is already spending $35 trillion (in 2011 purchasing power parity terms) annually, and could be spending $29 trillion more by 2030.” Brookings further predicts that the greatest gains will be in Asia. (Homi Kharas, Brookings, February 2017.)
Additionally, spending by African consumers and businesses totaled $4 trillion in 2016. That is expected to grow to more than $5.6 trillion in the next decade. Household consumption is expected to reach $2.1 trillion in 2025, while business spending is expected to grow to $3.5 trillion by 2025 (Harvard Business Review, September 20, 2016).
Assess a company’s long-term value by looking at the board
Given the tremendous threats facing society and businesses, along with such opportunities to grow compelling value, the case for building highly qualified and diverse boards is quite clear. Unilever’s board of directors is an excellent example. This is a company whose board members bring rich and vital experience and perspectives from a variety of industries, sectors, and countries. Under its leadership, Unilever is in a league of its own, envisioning and building a company to grow long term shareholder value.
Boards must alter their composition in order to achieve the company’s greater potential
Unfortunately for shareholders, the vast majority of directors of the largest publicly held companies are still quite homogeneous. S&P 500 board members are 80 percent men, with an average age of 63, older in fact than the average age of 10 years ago. (At 63, board members grew up when school materials were mimeographed; most were first exposed to the Internet at the age of 40.) Furthermore, in spite of extraordinary opportunities in emerging markets, directors of non-U.S. origin account for only 8 percent of directors on the boards of the top 200 S&P 500 companies, fewer than one per board; they are primarily from the U.K., India, Canada, France and Germany—only one of which is an emerging market country. Among the top 200 S&P 500 companies, minorities account for only 15 percent of all directors—fewer than two per board; the percentage of companies with at least one minority director dropped from 90 percent in 2005 to 86 percent in 2015. Women account for 20 percent of the total number of directors, with the average number of women per board at 2.16 (Spencer Stuart 2015). Among MSCI World companies, women hold 17.3 percent of board seats (MSCI 2014).
The evidence is clear that diverse boards are more effective in growing the company’s value. (MSCI, 2015; MSCI, 2014; Barta, 2012; Credit Suisse, 2012). Moreover, investors recognize the importance of board composition and diversity as a requisite for board effectiveness. “Around 70 percent of investors we spoke with said board composition and assessments should be a board priority in 2017 Most stressed the importance of having a diversity of talent, thought and tenure on the board that evolves over time in ways consistent with strategy,” according to Ernst & Young (2017). With investors driving the shift to better qualified and more diverse boards, companies will be pressed to improve board composition to grow shareholder value.
The views presented on the Governance Center Blog are not the official views of The Conference Board or the Governance Center and are not necessarily endorsed by all members, sponsors, advisors, contributors, staff members, or others associated with The Conference Board or the Governance Center.