REVIEW OF FINANCIAL MARKETS


CORPORATE GOVERNANCE AND BOARDS NEED TO ADAPT QUICKLY


ALEXANDER VAN DE PUTTE, PROFESSOR OF STRATEGIC FORESIGHT AT IE BUSINESS SCHOOL, ON THE SECOND STAGE OF HIS NEW MODEL ‘CORPORATE GOVERNANCE 4.0’


Professor Alexander Van de Putte is chief strategy officer, chair of corporate governance and stewardship, and chair of the Academic Council of the Astana International Financial Centre. He is also professor of strategy and foresight at IE Business School, one of the world’s leading institutions. In this second extract from his ground- breaking book Corporate Governance 3.0 he assesses the changes boards must make now to cope with the new realities.


See Review of Financial Markets Aug 2022 (cisi.org/rofm-aug22) for further details and for footnotes to this piece.


much more difficult for large hotel groups such as Marriott International and Hilton Worldwide Holdings to remain competitive. To remain relevant, Corporate


Governance 4.0 companies and their boards increasingly need to reflect several characteristics.


A. THEY ARE PURPOSE DRIVEN Based on a survey conducted by the Sustainable Foresight Institute, annually since 2008, five factors drive the longevity of companies.1


One of these


factors only emerged in the 2016 survey: long-lived companies are being increasingly purpose driven. Purpose- driven organisations recognise the need to create value for all stakeholders, including society at large. Stakeholder governance considers


In corporate finance, a fundamental relationship exists between risk and return, and this provides the basis for the ‘time value of money’ concept. Another concept is becoming increasingly important: the ‘time value of time’ concept. The velocity of change has


dramatically accelerated, and given the emergence of the Fourth Industrial Revolution (4IR), this trend will continue. To remain competitive, organisations need to change at least as fast as the environment in which they operate to remain relevant. The boardroom is these days a more


challenging environment; therefore, boards have many more areas to oversee compared to during Corporate Governance 3.0, ranging from company culture, climate issues, social issues (including employee welfare), cybersecurity, and technology disruption. What should always be on the mind of directors is ‘how can we disrupt ourselves before we are disrupted by a competitor, including future competitors?’ For example, Airbnb, a start-up at the time, disrupted the hotel industry, resulting in increased room availability, reduced prices for customers, and therefore has made it


CISI.ORG/REVIEW


the diverse interests of all stakeholders and sees the shareholders as owners of shares in the company not as owners of the business. For stakeholder governance to be effective, a company needs to articulate a purpose about how it aims to create value for all its stakeholders and then needs to report – in a transparent, ethical, and accountable way – how the company has contributed to this and thus the sustainable long-term success of the company. Benefit corporations (B corps) have


been designed to deliver value to all their stakeholders, not just the shareholders. C corporations (C corps) are typically designed to maximise shareholder value and be shareholder centric. However, as argued by law professors Jill Fish and Steven Davidoff Solomon, C corps “have a purpose to do anything they can under the law”.2 Based on the views of former Delaware (US) Chief Justice Leo Strine, this view of corporate purpose does not seem so clear-cut.3 Given that directors of C corps may


take other stakeholders into account when discharging their duties, constituency statutes passed in the wake of anti-takeover defences in the 1980s state that there is no obligation


that they must under law. Although there are differences between the California Benefit Corporation and the Delaware Public Benefit Corporation, for instance, all types of B corps make it mandatory for directors to take into consideration the diverse interests of other stakeholders in all their deliberations and decisions. Even though C corps do not have an


obligation to create value to all stakeholders, it is really the company charter that gives the corporation the licence to operate. Therefore, C corps that have company charters that reflect a clear purpose and objectives to create value to all stakeholders can contribute to more sustainable and inclusive business growth as well as B corps. For example, Paul Polman changed the purpose of Unilever during his ten-year tenure as chief executive. Despite his ousting in 2019 following a shareholder rebellion, Unilever’s purpose to make sustainable living commonplace prevails today. Although a strong case in favour of


stakeholder governance and B corps to achieve this can be made, the future will likely see a combination of B corps and C corps with amended company charters to move us all towards stakeholder governance.


B. THEY ARE SKILLED AT SPOTTING DISCONTINUITIES IN THE EXTERNAL ENVIRONMENT A second factor identified during the annual survey1


conducted by the


Sustainable Foresight Institute is that long-lived companies are skilled at peripheral vision. Corporate Governance 4.0 boards


continuously scan the periphery in search of discontinuities in the external environment. As discussed in Chapter 9 of Corporate Governance 3.0, not everything can be accurately anticipated, but that does not mean that organisations should not try to identify discontinuities in the external environment. Boards need to provide oversight to spot discontinuities in the external environment, including black


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