Boardroom Briefing
Companies face unprecedented shifts in climate, AI and digital technology impacting workflows and transforming the business landscape. These are not just risks to be managed – they are tools for value creation.
The board of directors (Board) must be the strategic force steering the company through complex and emerging challenges. To transition effectively, the Board must deal with three key issues:
- Systemic changes that will affect the CEO Board relationship.
- Disruption is the norm and demands proactive leadership.
- Lack of skill and knowledge diversification at the leadership level.
Responding to systemic changes
In the 2024 global study, The CEO Response, 95 percent of CEOs expect ‘groundbreaking systemic changes’ where unprecedented changes will cause significant and systematic shifts in the next decade.1 Change also presents significant opportunities including leveraging the regulation and rapid advancement of emerging technology such as AI, and the management of natural and humanitarian crises caused by climate change.
Inevitably, climate escalation is increasing the incidence of extreme weather events such as the Queensland floods, which result in shocks to business models, supply chain disruption and adverse profitability impacts. For certain businesses, this poses an existential threat. If climate change goes unchecked, the physical risks extreme weather poses to certain unprepared organisations could place up to 25% of EBITDA at risk within the next two decades, depending on sector and geography.2
Boards face ever increasing complexity in their role in guiding CEOs and their companies, which demands they enhance their competencies to remain current and to be able to hold their executives to account. It is important to develop and implement a formal framework to assist Boards and give directors the peace of mind knowing they have considered relevant aspects and properly discharged their Board roles.
Tackling leadership disruption
Boards should ask if they are ready to lead in an environment where disruption is the norm. As cybersecurity risks rise in complexity and scale, cyber resilience extends well beyond an IT issue. Boards should consider whether investing in robust security should be a core business priority and ensure this is included in operational imperatives and continuity planning.
Existing governance structures do not encourage directors to proactively drive change, with the mentality of “don’t rock the boat”. This can create a culture of not raising tough or sensitive issues unless specifically initiated by the Chair.
A modern Board should adopt an open learning mindset focused on responsible leadership, where stakeholder perspectives are sought and considered including hearing what critics have to say. The directors then assess which issues (for example, within sustainability or AI) are critical for value creation, and which are less or not important, noting that certain issues may become relevant if laws change.
Advancing skill and knowledge diversification
To execute on responsible leadership, each Board must have the relevant diverse skillset and preparedness to address evolving challenges and remain competitively agile as industry boundaries blur. In a global study involving the Climate Governance Initiative, only one in four directors felt confident in their expertise and knowledge to meaningfully assess and respond to sustainability risks and opportunities.3
It is not uncommon for existing boards to be largely homogeneous and comprised of long-standing executives from the same industry.
To manage this, Boards should include relevant subject matter expertise in the skills matrix. To make informed decisions and to prioritise efforts on key use cases that align with business imperatives, the Board must first be aware of what AI or climate change means for the business. The priority is to add directors with appropriate technical knowledge and a track record of effective communication. Depending on the entity’s size and industry, there are options to:
- bring onto Boards new directors with specialised expertise;
- upskill some or all current directors (noting there are various expert roundtables and short courses available);
- adopt a committee approach either by creating a sub-committee focused on key subject areas (eg sustainability reporting) or by expanding the remit of an existing committee (eg audit and risk committee); or
- outsource the role to consultants or sustainability/technology experts.
As an action priority, the Board should arrange for the skills matrix to be formally updated so that the upskilling and decision-making process becomes hard coded into how the Board and its committees operate. This can include specific skills and technical expertise criteria for Board directors.
In the medium term, Boards must strike a balanced approach by continuing to recognise the advantages of directors with traditional management experience and avoid a “knee jerk” overreaction where specialised experience is prioritised to the exclusion of management experience.
Finally, whilst advanced skillsets and knowledge can be acquired, Boards must continue to uphold trust and integrity as the cornerstone of corporate governance.
Overall direction
These key areas encompass enhanced governance and futureproof the business. Boards should conduct regular effectiveness reviews to uncover any blind spots, identify key areas of reform and adjust priorities as needed. The Board charter or governance document must reflect this review process including the assessment criteria and targeted outcomes. Finally, the relevant suite of supporting policies that govern the business should be evaluated by your internal or external legal teams to ensure alignment with rapidly changing current laws and regulations. Please speak to the authors if you have any questions about how to implement these steps.
This article was written by Thomas Kim, Partner and Kenneth Lee, Special Counsel.
1 Egon Zehnder, The CEO Response (October 2024) <https://www.egonzehnder.com/the-ceo-response>.
2 World Economic Forum, The Cost of Inaction: A CEO Guide to Navigating Climate Risk (December 2024) <https://www.weforum.org/publications/the-cost-of-inaction-a-ceo-guide-to-navigating-climate-risk/>.
3 Climate Governance Initiative, Board Stewardship for a Resilient Business (23 September 2024) <https://hub.climate-governance.org/Article/board-stewardship-resilient-business> .
