REVIEW OF FINANCIAL MARKETS


knowledge-based systems, use an algorithm to develop explicit knowledge of a problem, such as strategy of finance. The system is then used to arrive at a better recommendation faster. Even more advanced AI-powered systems such as DeepMind have the ability to solve very complex problems without being taught how to do it.15 With the emergence of the 4IR and


big data and accelerating velocity of change, the amount of data that needs to be processed by boards increasingly exceeds human processing capabilities. AI is unlikely to replace the human


director. But if well used, it could help individual directors and the board make better decisions. The combination of AI algorithms – to gather, augment, and analyse vast amounts of data – with the human experience is potentially a very powerful one that could lead to competitive advantage.


G. THEY MONITOR ORGANISATIONAL CULTURE A third factor identified by the Sustainable Foresight Institute’s surveys1


code before its demise in 2001. While this is an extreme case of organisational failure because of the absence of deeply ingrained and shared values that are a guide to action, the importance of a healthy organisational culture cannot be underestimated. EY articulates five ways to enhance board oversight of culture:16


1. Boards oversee how culture is defined and how culture and strategy are aligned.


2. Boards create accountability for how culture is communicated and lived – internally and to key external stakeholders.


3. Boards monitor how culture and talent metrics are measured to keep a pulse on how culture is evolving.


4. Boards provide oversight of intentional culture shifts to stay in step with strategy shifts.


5. Boards challenge their own culture. is that long-lived companies


have a set of deeply ingrained and shared values that are a guide to action. Values are the beliefs, the guiding principles and philosophies that drive behaviour in an organisation. In essence, values drive organisational culture. Companies with healthy cultures are


risk-aware. The characteristics of a risk-aware culture include risk management devolved to the workplace, participative management style, utilisation of knowledge and skills of employees at all levels of the organisation, and good communication and teamwork. Organisations with healthy cultures are therefore better able to demonstrate the relationship between culture, strategy, risk, and outcomes. Weak organisational cultures come in


The importance of organisational culture cannot be underestimated. After all, management theorist Peter Drucker famously said: “Culture eats strategy for breakfast.” With this quote, Drucker implied that a healthy organisational culture leads to better outcomes.


// ORGANISATIONS WITH HEALTHY CULTURES ARE BETTER ABLE TO DEMONSTRATE THE RELATIONSHIP BETWEEN CULTURE, STRATEGY, RISK, AND OUTCOMES //


many forms and very often lead to devasting outcomes. Consider Enron, whose board twice suspended its ethics


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H. THEY ADOPT AN INTEGRATED REPORTING APPROACH17 In 2010, the International Integrated Reporting Council was launched with several partners, including the Big Four accounting firms, to report on how the company’s strategy and operations impact the six capital stocks – natural, manufactured, human, social, intellectual, and financial – with an objective to understand a company’s financial and sustainability performance. Although voluntary, integrated reporting


has been widely adopted, at least in part, by many multinationals. In principle, a voluntary over


mandatory disclosure should be favoured because it is difficult to develop a disclosure framework that


works for companies in different industries and of different sizes and levels of complexity. However, given that failure to identify and mitigate material ESG risks poses a potential existential threat to the company, it can be argued that mandatory disclosure of ESG information is warranted. Consider the ESG disclosure requirements imposed by the US Securities and Exchange Commission (SEC).18 It is important though to highlight


that, to date, the SEC only mandates the disclosure of ESG information that is financially material as seen by the investor. In other words, this means any ESG-related information that would significantly alter the mix of information available to investors. These days, not disclosing any


material information about ESG risk is simply not an option for companies. By requiring mandatory disclosure, the SEC provides guidance as to what to disclose, therefore helping companies to paint a fair and transparent picture to investors about the ESG risks and what the company is doing about them. This has several benefits: 1) it creates trust among investors, especially institutional ones, 2) it reduces the volatility of cash flows, and 3) it avoids potential future litigation from investors who may feel that they have been misled by the company. Arguably, by requiring mandatory


disclosure, the SEC provides a service to companies: the risk of lawsuits resulting from a false or misleading company statement perceived to have misled investors is thus drastically reduced.


CONCLUSION It can be argued that Corporate Governance 4.0 is emerging and that many stakeholders, from shareholder to regulators and civil society, are increasingly welcoming this needed change in the way that boards provide stewardship to contribute to the sustainable long-term success of the company for the benefit of society. Building inclusive, sustainable, and more resilient businesses for the benefit of humanity – and not just the shareholder and in the short term – is a corporate director’s emerging duty.


THE REVIEW SEPTEMBER 2022


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