In this article, Anne Richards, CEO of Fidelity, discusses the importance of decision making in the boardroom and how corporate resilience will boost a company’s chances of long-term success. We can all be guilty of “sweating the small stuff” sometimes, but now more than ever boards need to focus on what is most important, being prepared for inevitable shocks, identifying vulnerabilities to disruptive trends and actively seek out challenges, to ensure a resilient partnership with the community in which the business operates.
There are a lot of laws that govern decision-making in a boardroom. But there is one, known as Parkinson’s Law of Triviality, that every board should actively aim to break. This law, developed by historian C. Northcote Parkinson in 1957, states that the time spent on any item of an agenda will be inversely proportional to its importance.
He observed that that a committee responsible for a complex project, like constructing a power plant, was very likely to spend most of its time discussing the plans for painting the staff bike shed instead. It’s an easy trap to fall into. The powerplant discussions – that is, the ones about large, complex and highly uncertain problems – are difficult, and provoke questions to which there are no easy answers.
However, for a board attempting to govern a company in this uncertain world, breaking this law has never been so crucial. It determines whether the next crisis flattens or invigorates the company. It determines whether the business surfs the wave of a new trend or is engulfed by it. And it determines whether the social licence, the crucial, implicit contract that allows an organisation to exist in society, is strengthened or corroded over time.
These are questions of survival, something which is by no means guaranteed for businesses. Of the companies that made up the original FTSE 100 index in 1984, only 30 are still with us today. Meanwhile, in America, the average longevity of a company in the S&P 500 index has shrunk from 60 years, in the 1950s, to only 20 years today. There is no guarantee of long-term corporate survival. And, as the figures suggest, it’s not even all that likely.
As with previous crises, the Covid-19 pandemic has highlighted the importance of corporate resilience. All organisations are susceptible to shocks, both external and internal. A company that is not prepared will not survive them. So, a board concerned with resilience would do well to look at its business continuity planning, cyber risks and whether the company’s balance sheet can weather the unstable macroeconomic outlook.
Beyond this, and just as necessary, is a resilient partnership with the community in which the business operates. This involves asking some crucial questions, such as whether suppliers struggle with terms of trade, even in good times, and whether the company’s employment practices shift financial uncertainty from their own balance sheet onto the households of employees.
The next consideration for a board is to determine how vulnerable the business is to disruptive trends, something that requires some imagination and diverse points of view to do.
A boardroom that actively seeks out challenges to entrenched opinions, rather than shrinking away from them, will boost its chances of long-term success. And we now know that the lived experience of people from diverse backgrounds – their gender, age, race, class, sexuality and many more differences – contributes to that diversity of thought.
But whatever form the challenge takes, combined with an inclusive culture and long-term incentives, it serves to increase the flexibility and adaptability of the board’s decision-making process. This is an essential component of corporate longevity.
The final powerplant is to do with behaving in a way that maintains trust – trust with colleagues, trust with suppliers and of course trust with clients.
One way to do this is to look beyond short-term measures of returns and incorporate the full impact of the product or service being provided. At an environmental level, this includes a thorough assessment of issues such as how much water the company uses, how it treats waste, and how strong a grip the board has on CO2 emissions.
As investors, these are all things that we take note of when assessing the longevity of a business. Collectively, and over time, these considerations will change the cost of capital for companies, which will become increasingly tied to a company’s ability to demonstrate the sustainability of its business.
As we wrestle with a global pandemic and a changing climate, capitalism itself is on trial. More than half of people in 28 countries surveyed by Edelman in a report earlier this year said capitalism, as it exists today, does more harm than good. Only 18 per cent, globally, said that the system is working for them.
Capitalism is an enabling technology. It has given many people the tools to improve their lives in the same way as, for example, the web has done. But just like the web, there is a quirk that means it can fail to properly account for long-term negative impacts. In the case of capitalism these could be poor employment practices or environmental damage.
Boards have a significant role to play in this. One that ultimately could affect the very companies and organisations that the board has a duty to serve. Businesses both shape society and are shaped by it. And boards shape businesses. They need to be alive to the existential threats, the powerplants, as well as the bike sheds, and break free of Parkinson’s Law of Triviality.
Source – Fidelity International
This article is an edited version of a speech given to the FT Moral Money conference on Oct 1.