The business environment of today continues to evolve quickly and becomes increasingly complex. Boards today continue to face new challenges – from regulations, governance, operations, to consumers. The complexity of leading a business will continue to intensify, and boards must be well-equipped to navigate a future and deal with matters such as climate change, sustainability and ESG, cybersecurity and AI, to name a few.

ICDM President and CEO Michele Kythe Lim (pic) said the known challenges underscore the urgency for companies to select wisely, choosing high calibre and dynamic board members to effectively perform in being partners to the company’s senior leadership, and dispense their fiduciary duties within expectations.

Simply put, the current business environment demands more effective leaders with a higher propensity to keep up with changes and provide the necessary strategic oversight for the continued success of their companies.

In an exclusive interview with BusinessToday recently Lim said the selection of board members defines the composition and culture of a board, which influences its ability to fulfil its oversight responsibilities. The right choice of the chairperson and directors ensures sufficient diversity (beyond gender), maintains independence to avert blind spots and groupthink in the decision-making process and better equips boards to respond to challenges that may arise while delivering value to their stakeholders. Getting the right mix of board members with the right blend of knowledge, experience, skills and qualities that align with the company’s objectives and strategic goals is not an easy feat, but it is not impossible with the proper internal measures and procedures in place.

The challenge is understanding that the board member’s role is complex especially in balancing duties across different positions. This applies whether the board member serves as an independent, executive, or non-executive member, or as chair of the board or a committee. Effective board members need to be able to shift their perspectives and even adapt their persona to best serve the needs of the particular board and company they are involved with. Board members also need to have the ability to navigate complex boardroom dynamics while also fulfilling their core responsibilities. Their success and ultimately, the success of the organisation whose boards they sit on hinges on keen observation of colleagues and the overall environment, alongside strong personal competence.

Effective board members demonstrate humility and a commitment to continuous learning, actively listening to foster strong relationships with both fellow board members and senior management. Ultimately, their goal is to bridge understanding and work collaboratively towards achieving the company’s shared vision of success. These traits cannot be overlooked, as the findings from the 2024 ASEAN Board Trends (ABT) Survey by the Institute of Corporate Directors Malaysia (ICDM) re-emphasises the imperative for boards to take stock of their board effectiveness, looking inward before looking outwards.

Professionalising boards

The concept of professionalising boards for ICDM is more about shifting to the mindset that board membership is a heavy responsibility that requires active participation and contribution that should allow a director to apply their experience and expertise for the benefit of the company. This thought process therefore means that companies should not be looking at their mates, and that individuals who take up these directorships should not expect to cruise along. Gone are the days where board seats were retirement rewards, and it is crucial that anyone in a board position or who hopes to take up a board position recognises this shift.

In today’s environment, we want to move towards setting a benchmark of standards for board directorship so that it is seen as a profession with responsibilities attached like any other. It is a job with high expectations and specific key performance indicators (KPIs) that requires formal oversight and continuous professional development throughout the profession.

The enduring principles of improving governance and accountability continue to make up the foundational building blocks of professionalising boards. These are ethical leadership and integrity, regulatory compliance, effective risk management, value creation and stakeholder engagement. However, in recent years, the discourse around professionalising boards has focused on specific tenets such as diversity, ESG and sustainability, continuous learning and development, board culture, effectiveness evaluations and succession planning, Lim said.

Some of the more recent developments are:

Diversity beyond gender on boards as a basis for improving the overall quality of debate and decision making on boards. This is to counter the still dominant composition of finance, legal or technical representations.

The incorporation of ESG & sustainability considerations and the management of environmental risks and opportunities are likely to lead to new policies, laws and regulations, as well as changes to supply chains and stakeholder expectations. This undoubtedly has a bearing on corporate decisions and the exercise of duties by directors.

Expectations for continuous learning and development for boards, as a commitment directors must be ready to do to remain relevant and effective in their roles. Continuous professional development must be formally tied in with the basic qualifications required for directors to sit on a board to set a minimum standard.

Board effectiveness evaluations also demonstrate a board’s commitment to CG excellence and delivering value to stakeholders. Through independent evaluations, honest self-assessments, peer reviews, and other feedback mechanisms, boards can hold each other accountable and maintain a healthy check and balance that enhances the quality of governance and raises stakeholder trust and confidence in their leadership.

Limits on board seats, tenure, to succession planning to support the company’s long-term strategic vision and uphold board professionalism. A clear talent strategy and succession plan prepares boards for unexpected vacancies, ensuring that there is always a qualified individual ready to step into key roles while also developing future leaders within the organisation. This will ensure smooth leadership transitions that prevent disruption in governance or operations, which are critical risks to mitigate in ensuring the resilience and stability of a company.

“We are seeing a clear shift in the public service towards professionalising leadership roles, especially in the adoption of good governance principles and practices. It is a cultural and mindset shift which will take time, but surely, there is an understanding and appreciation that better leadership, builds better culture, builds better companies and organisations. Now more than ever, boards, directors, leaders, need to realise that critical role of setting the right tone from the top. Setting the right behavioural standards starts with you, as a leader, for the senior membership and staff to emulate.”

In Malaysia, board members often hold large stakes in the companies they belong to, how would corporate leadership skills help them do better, in doing away with familiarity or personal relationships in appointing leaders?

It also goes without saying that board members who invest time and resources in developing their corporate leadership skills are better able to deliver on their roles and responsibilities as well as to navigate the inevitable challenges or pitfalls of personal relationships in the boardroom. It is in the company’s best interest to develop these skills, enhance directors’ ability to manage conflicts of interest and ensure decision-making is objective. To avoid blind spots and groupthink, directors also need the latitude to candidly and openly convey their feedback and perspectives for the good of the company, which can prove difficult among a board with a culture built on familiarity and entrenched interests.

As such, a merit-based approach leads to a more diverse board in terms of gender, ethnicity, independent thought and professional background, promoting a wider range of perspectives and ideas to benefit the organisation’s future. Limiting board tenures also mitigates these risks by discouraging overboarding. Structured succession planning and an updated remuneration framework will encourage boards and NRCs to identify talent within the organisation or attract quality talent from the outside to eventually groom potential successor candidates, thereby maintaining stability at the top.

Beyond nurturing an open platform for discussion, boards and committees should also carefully consider the selection of a chairperson leading the pack, who ideally cultivates a progressive culture at the board level. An effective chairperson should be able to unify its members’ diverse and independent perspectives fairly to drive meaningful discussions around the strategic oversight of companies. The Chair is the ‘first among equals’ whose role and leadership capability require a specific skillset that determines the impact of board deliberations, thus further underscoring the weight of nominations and the selection process.

This is why it is important to professionalise board leadership – from knowing and understanding the skillsets needed, to putting in place the remuneration packages that are commensurate with the responsibilities. It is also crucial to instil the right values and culture in the leadership, starting from the top down. Professionals will be better equipped to manage the familiarity and personal relationships in the boardroom which can often lead to biases and hesitation to speak up with conflicting standpoints on governance issues. This inevitably skews the balance of independent perspectives in a manner that can be counterproductive to the effectiveness of the board in governing. Developing directors’ corporate leadership skills and building boards based on merit promotes also objectivity and impartial decision-making to better mitigate risks, foster ethical leadership, and enhance accountability and transparency while facilitating stakeholder confidence.

And we are seeing a gradual shift in the selection of board directors as the awareness of how the board composition and performance impacts company performance continues to grow. In the past, the selection of board directors was typically based on familiarity and trust, relying on personal and professional networks through recommendations to fill board seats.

This is still the case in some businesses, particularly family-run businesses and smaller companies, where the executive leadership usually constitutes the majority of the board, and the issue of fiduciary duty to the owners doesn’t apply in the same way. As the size of companies grew after the earliest industrial revolution, a more structured approach to nominating board members began to take place.

Today, the nomination of board members is a more meticulous and structured process that places more emphasis on formal qualifications, diversity or independent oversight, ensuring a rigorous and fair selection process. The role of nomination and remuneration committees (NRCs) is increasingly critical in succession planning and identifying talent to maintain leadership continuity, and committees must be more discerning about their recommendations for board positions. The NRCs are a lever that boards can rely on to mitigate risks, especially to align board composition with the business strategy and evaluate performance and leadership competencies to adapt to the changing business landscape. In raising the bar on board directorship, remuneration also needs to rise to be commensurate with the level of responsibility expected of boards to attract better quality talent, which is also under the purview of NRCs.

However, it will take some time before the process fully transitions away from personal networks. From ICDM’s Malaysian Board Practices Review (MBPR), 88% of board sourcing was through personal networks or nominated by shareholders/parent companies. Only 8% were identified through independent search institutions.

Boards need to look at other independent sources for board nominations and appointments to ensure they select suitably qualified candidates to fulfil the needs of the position, especially as new skills may be needed for future challenges. Although boards realise the gap in skillsets now, such as entrepreneurial, HR, digital, marketing and more, current board sourcing practices do not support the search for widespread and quality talent. This is where boards must consider leveraging independent professional sources, outside of the company’s network – such as ICDM, where companies will have to pay a fee to source for specific talent who may or may not be local.

Asked on how does ICDM view corporate governance today, Lim said, corporate governance (CG) excellence ultimately is about the culture and mindset. An organisation may have adopted international best practices but if the company promotes and rewards otherwise, the frameworks that have been put in place will be ineffective.

These frameworks have to be values driven, tracked, measured, reported and properly evaluated to achieve the intended outcomes. Increasingly, leaders need to understand and appreciate the impact of poor CG on the company, the risks and ultimately, downfall of companies that fail to put in place the necessary checks and balance at all levels, especially at the senior leadership levels.

On a macro level, developments in areas such as sustainability, ESG, technology and AI, which pose new opportunities and risks, are areas that corporate leaders should already be adapting and integrating into their business strategies. Other issues that should be on the radar of boards in the region include economic stability, talent management, innovation, cultural dynamics, supply chain management, corporate governance reforms, health and safety, stakeholder engagement, and compliance.

However, there are vital issues at the board level that companies must address too. ICDM’s recent 2024 ASEAN Board Trends report uncovered the four (4) key threats that board members in the region expect to be more prominent. These include having the right talent and leadership, diplomacy in managing macro and geopolitical uncertainties, sustainable and effective operational strategies and board-management dynamics. The report also revealed the five (5) critical areas specific to board governance that require immediate intervention to address these issues, reinforce board effectiveness, and ensure effective governance.

She said, these include:

To realign the board agenda and set priorities at the peer level and with their management to ensure no corporate priorities, challenges, or risks are overlooked.

Improve board-management relationships and dynamics to support the alignment of organisational priorities and expectations by having more meaningful discussions around expectations.

A progressive and forward-looking board architecture and culture to ensure diversity and the right mix of board members in the blend of knowledge, experience and qualities to steer companies strategically.

Board effectiveness at taking stock with more meaningful deliberations that cover potential blind spots and enhance decision-making.

Navigating board sustainability challenges to fulfil their oversight role, including the need for knowledge and human capital.

The implication of these threats and critical areas in governance goes back to the increasing weight of the role of boards in the fiduciary duties of leading organisations in today’s business environment. No doubt there will always be new threats and emerging risks that boards will have to contend with, but the question always comes back to the board’s preparedness to proactively address these issues before circumstances compel them to tackle these critical areas.

“Essentially, boards must better govern themselves before they can effectively provide the oversight for their organisations in the current environment. Boards also need to have wisdom and humility, not just insights and foresight, to actively learn, listen and evaluate, as they take the first steps to address the inadequacies in themselves and among their peers with courage, honesty, and openness to feedback to evaluate their effectiveness better,” Lim added.