Boards must focus on long-term value, culture and talent to drive organizational transformation in a post-COVID-19 world.
There is no question that the COVID-19 crisis has fundamentally changed the way businesses operate. Expect the unexpected is the new mantra, yet some changes appear inevitable: a greater number of employees will work from home more frequently, supply chains will be reorganized to maximize agility and flexibility, and technology will feature more prominently.1
Customer behavior will also shift. The experience of COVID-19 will reset the relationship between customers and business, with many more customers demanding that the businesses they purchase from play a role in addressing key societal challenges. The rise of social capital – the networks around companies and their shared norms, values and understanding – which was evident before COVID-19 shook the world, is now firmly on the agenda.2
There are numerous ways boards can assist their organizations address these areas, but three that provide the foundation for the support structure boards must deliver are:
- Defining – and living – a strong purpose that drives long-term value
- Instilling a culture of continuous change
- Developing a future-fit workforce
While these might sound rudimentary, the EY global board risk survey of 500 board directors and CEOs conducted in late 2019, before the pandemic, reveals that boards historically did not consider these as major immediate or short-term concerns, or did not believe it was their responsibility to address them.
Perhaps this could be attributed to the role of the board versus management, but given their fundamental importance in driving organizational transformation, especially in a post-COVID-19 world, boards should work proactively with business leadership to address them. In doing so, boards should adopt a two-speed approach, focusing on building a resilient enterprise while also laying the foundations for future success.
Anchor long-term value with redefined purpose
The COVID-19 pandemic has reshaped the relationship between business and society. The general population now don’t just see businesses as providers of goods and services, but as organizations that have a vital role to play in solving humanity’s greatest challenges.3 In short, COVID-19 has shone a light on how business behaves. Some businesses are already responding. For example, at the height of the COVID-19 pandemic, one of the world’s largest consumer goods companies partnered with a consortium of businesses in the aerospace, automotive and medical sectors to manufacture at least 10,000 ventilators for UK hospitals.
This heightened scrutiny means capital and talent will shift from organizations that create value only for their shareholders to those that create value in the long term, across a broader group of stakeholders, including employees, consumers, society and shareholders.
As the new normal emerges, globalization, climate change, income inequality, inclusivity, the ethics of artificial intelligence (AI) and other huge economic and societal issues will again dominate the agenda, and businesses will be expected to play a role in addressing them.
Before COVID-19, our survey indicated that board directors didn’t recognize these challenges as major business risks. For example, climate change didn’t even feature in their top 10, likely because they consider it the remit and responsibility of their management teams.
But with customers’, investors’, employees’ and other stakeholders’ expectations of business reset by COVID-19, it’s never been more important for businesses to redefine and reactivate their purpose.
What role should the board play? With senior executives firmly focused on guiding their organizations through COVID-19 in the short term, the board has a responsibility to drive long-term thinking on how they create and measure long-term value and deliver outcomes for a broad set of stakeholders.
Instill a culture of continuous change
When surveyed, board directors considered misaligned culture to be only the 13th-most important business risk over the next 12 months. It’s a risk they now overlook at their peril.
Never has corporate culture been more important. Businesses will be unable to respond swiftly to new customer demands and market realities without an agile culture of curiosity and entrepreneurialism. Nor will they be able to attract and retain millennials and Generation Z if their culture and values do not reflect those of younger workers. In parallel, employees will not positively engage with new technology and reskilling initiatives, which are an essential component of business transformation, if there is no culture of innovation and experimentation in place.
One such example is a global supermarket chain that recently launched a WhatsApp chatbot to inform customers about when stores are at their quietest, thereby helping reduce the risk of COVID-19 crisis.
How can boards and senior management effectively mitigate cultural risks? As detailed in Five ways to enhance board oversight of culture, the first step is for senior executives and boards to collaboratively define the culture they want, ensuring it’s aligned with company strategy.4 It’s then up to senior executives to disseminate that culture throughout the rest of the business.
Board directors should also ensure incentive structures encourage behaviors that fit in with the new culture, and that vital cultural metrics and insights are collected and reported to the board. These might include social media, employee review sites, turnover rates and exit interview data. Yet, our study shows that today’s boards are not confident with reporting on culture: with only 15% describing themselves as “extremely confident” in the reporting received from management on culture and conduct risk.
In their oversight roles, boards have an obligation to ensure that management revisits how culture is preserved in light of increased remote working. New joiners may feel particularly isolated if they start a new position in a home-working environment. Onboarding, training and team socializing will need to be rethought if greater numbers of employees work from home in the future.
Think strategically about talent
CEOs know the importance of people to their business. In the EY global board risk survey, they rank people issues, such as talent shortages or a failure to upskill, as their top business risk. Board directors, on the other hand, rank people issues as only the seventh-most important risk.
Perhaps boards don’t consider talent risk to be a major threat. Or perhaps they don’t consider it to be their responsibility. Either way, boards were misguided to not place as much emphasis on talent risk as CEOs did pre-COVID-19. And today, talent and workforce issues have become even more important, so boards must give it the attention it deserves.
Using COVID-19 pandemic as a catalyst, boards should lead a fundamental discussion about the new normal for work. Based on the COVID-19 experience, it is likely to make sense to allow more staff to work remotely more frequently, for example.
Executive remuneration also requires immediate board attention. Boards will no doubt want to be able to attract and retain talented executives to help guide their business through the current uncertainty and to seize the opportunities the new normal will present. But a careful balance needs to be struck between competitive remuneration and a package of benefits that is perceived to be excessive. Specifically, more boards should engage constructively with leadership to discuss the potential long-term benefits of forgoing a proportion of executive remuneration and dividend payments in favor of prioritizing jobs and retaining trust within the organization.
Indeed, the CEO of a large supermarket chain waived 25% of his fixed salary for two months and asked all Group Executive Committee members to waive 10% of their fixed salary for the same period.
Boards cannot forget the age-old risks of whether their businesses have the talent required for future success. The pace of technological change and its rapid adoption within businesses, which has accelerated as a result of COVID-19, means the skills profile of the workforce of the future will look very different to today. Notably, the workforce will need to be equipped to work with automation, AI and other digital technologies that are relentlessly being deployed to give companies a competitive edge. Failure to upskill and recruit appropriate talent may severely erode long-term growth prospects. With this in mind, boards must work closely with senior management to address talent risk head-on.
Key Questions for Boards to Consider:
- As board members, are you focusing on how your organization is generating and measuring long-term value for multiple stakeholders?
- How are you re-evaluating executive remuneration to incentivize long-term value creation?
- Have you revisited the business purpose of the board itself?
- If yes, what has materially changed and how are you working with management to reframe and reimagine your future?
- If no, what opportunities are you perhaps overlooking to redefine the culture your business should aspire to?
- In this time of reflection, were you, as a board director, truly living your business’ culture and purpose? With hindsight what would you now do differently?
- Do you receive reporting on HR and cultural issues from the business? If yes, are they sufficient to facilitate strategic dialogues and decision-making?
- Are you actively working with senior executives, particularly HR leaders, to revisit and redefine talent risk and how it can be addressed?