THE DUTY OF DIRECTOR DEVELOPMENT
DEVELOPING BOARD SKILLS IS NOT OPTIONAL AS EXPECTATIONS RISE
One of the recurring themes of this column in recent months has been the ever-increasing expectations being placed on boards and individual directors by regulators and investors, in particular in relation to environmental and social issues and the treatment of stakeholders.
For example, in February the European Commission announced plans for a Directive1 that will place a legal duty on company boards to identify and address human rights abuses and adverse environmental impacts throughout the company’s value chain; and we are seeing year-on-year increases in shareholder resolutions on environmental issues.
The focus of investors’ attention is broadening to cover not just environmental and social (E&S) policies and public reporting but also whether the board has the necessary skills and expertise. In a policy statement published earlier this month the International Corporate Governance Network (ICGN), the global investor-led organization, noted that the attributes required at board level “may include experience in… climate change, biodiversity, human rights, workplace conditions, technology and data security”2.
Investors recognize that a company’s best-laid plans can go astray if they are not overseen effectively – and that without the right skills and experience at board level those plans may not be particularly well-laid in the first place.
There are many ways boards can acquire the necessary expertise. There is a tendency to think only in terms of board composition, but while getting that right is essential it is not without its challenges and is unlikely to be sufficient on its own.
As the ICGN list shows the term E&S covers a multitude of different issues, all of which draw on different expertise and experience. And of course, E&S is just one aspect of the board’s overall responsibilities. For these reasons, many boards attempt to identify candidates with broad-based experience or expertise rather than single-issue experts who may be unable to contribute more broadly. There is no room for passengers on the board these days, if there ever was.
However, even the most carefully constructed board is unlikely to capture all the relevant skills and perspectives that it ideally requires. If somehow it manages to do so, that will not be the case for long unless it takes steps to keep up with the ever-changing environment in which the company operates.
Constantly churning board members is neither practical nor desirable. It is much harder to chart a clear course without a steady hand on the tiller. So boards need to find other ways to enhance their knowledge and understanding.
This is where regular board briefings and training can be invaluable, something that ICGN recognizes in its policy statement. It notes that “while all corporate board members should be well versed in sustainability topics of relevance to their companies, this knowledge and expertise can come from different channels, including regular training… and broadening of the directors’ induction programmes”.
Briefings might be given by senior management and in-house or external experts, and as a standing agenda item at board meetings or as part of a board away day. Many companies do all of these, and some go further by arranging bespoke board training covering the specific challenges affecting the company (one of the services Nestor Advisors and Morrow Sodali offer our clients).
As well as ensuring that the board as a whole stays up to date, companies should encourage individual directors to think about their own development. No matter how experienced they might be no director is ever the finished article. Some national corporate governance codes recommend that the Chair should discuss their training needs with each director at least annually.
It is particularly important for first-time directors to understand the role and duties of a director as part of their induction as well as being briefed on company-specific issues, all the more so when their current or previous experience is as a senior executive. My experience is that the difference between being a manager and a director is not always well understood.
In last month’s newsletter, I discussed the tensions that can exist between subsidiaries and their parent company. It is common practice for senior managers from the parent to serve as directors of the subsidiary, and they often interpret their role as protecting the interests of the group without appreciating their legal duty is to act in the interests of the subsidiary, even where that conflicts with what they might think is in the interest of the group.
These are not the only circumstances where executives can struggle to adjust to their new role and responsibilities. Some senior managers who become executive directors of their own company continue to protect their own patch rather than consider the company’s wider interests, while some executives who join the boards of unaffiliated companies as non-executive directors find it hard to resist the temptation to micromanage.
Switching from being a manager to a director can be a difficult transition. It requires a different mindset and perhaps also a different skill set. Professional education of the sort provided by national directors associations can be of great assistance.
That is why Nestor Advisors and Morrow Sodali are delighted to be supporting ecoDa, the umbrella organization representing the main national institutes of directors in Europe, and its new European Board Diploma. This is a new program designed to equip existing as well as new directors with the necessary knowledge and behavior to succeed in their roles.
Given the rate of change in markets and the global environments, boards collectively and directors individually need to keep learning in order to stay on top of the job. Education and training should not be thought of as an optional extra but as part of their duties.
Nestor Advisors has considerable experience in developing and delivering bespoke board training and briefings for clients. To find out more about our services, please visit our website or contact info@nestoradvisors.com or +44 (0)20 7628 3497.
Click here for more information on ecoDa’s European Board Diploma.
1. Just and sustainable economy: Commission lays down rules for companies to respect human rights and environment in global value chains, European Commission, 23 February 2022
2. The Governance of Sustainability: An Investor View of Board Effectiveness, ICGN, 30 September 2022