Corporate governance dates back to the 1930s when American corporations first began selling stock to a wider group of owners.
We have seen many changes in corporate governance over the decades.
There are 4 major eras of Corporate Governance.
This earlier era of Corporate Governance 1.0 was characterized by a less hectic oversight model that was perceived by many as remote, distant, “rubber stamping” of management’s recommendations, and sometimes accompanied by a “crony” board.
Institutional investment driven by pension funds and the creation of large institutional investors in the 1970s was the beginning of so-called “credible capitalism”.
Governance 2.0 was a post-Enron/WorldCom debacle, which lacked a deep understanding of management activities and lacked significant financial controls. The result was the Sarbanes Oxley Act and enlarged regulations.
The advent of Enron’s post-reforms has two important features that have been a catalyst for deeper board involvement: executive sessions where directors (not supervised by management) can discuss areas of opportunity, concerns, etc. The execution session led to the best practice now being an annual strategy offsite where directors are exposed to in-depth strategy and management’s plan of near and long-term plans.
Governance 3.0 was catalyzed by the Business Roundtable statement released in 2018, where the largest global multinationals clarified the need to move from a shareholder-centric to a stakeholder-centric model where ESG became mandatory. ESG Principles are seen as the cornerstone of the success of the company along with all the stakeholders. ESG is the umbrella of the company’s vision, mission and objectives. Companies are realizing the vital importance of ESG on their brand enabled companies to attract employees/customers and investors. Several US companies have been instrumental in establishing the ESG framework to be accountable to stakeholders.
As COVID accelerates the digital transformation of companies as people work virtually in a hybrid environment, social unrest in the wake of George Floyd’s death turns diversity, inclusion, equity into sharp focus.
Millennials and Gen Z workers make up 50% of the workforce and prioritize work life wellness and balance. The importance of security, data privacy, community engagement has become an area of great attention.
Nearly two years of work from home triggers the “Great Resignation”, where 20% of employees in certain industries such as technology resign and change jobs. Engagement with company culture is strained by distance on the company’s social networks.
At the same time, the largest institutional investors are prioritizing ESG reporting, especially around environmental and climate measures.
We are now at the beginning of Corporate Governance 4. 0 which is about future-proofing our companies and enabling technology, so they stay relevant and competitive. Most boards don’t recognize it yet.
Governance 4.0 aims to immunize stakeholders against losing momentum, relevance and growth of the company.
This new model of corporate governance requires 4.0 directors to be a competitive asset and an accelerator for the business, adding a perspective that not only oversees but helps move the co. Ahead. One of the biggest risks to corporations is that co. Your product or service offering and connecting with your customers gets stale in your business model.
Legacy companies experience less growth; The key challenge for companies to stay competitive and relevant is how to operate their data to drive insights and results. Real technical competence and knowledge of digital transformation using AI, ML, Deep Learning Analytics and Big Data is one of the key next generation board competencies in Governance 4.0.
Adoption of ESG and stakeholder governance in 3.0 is now table stake. The future challenge for the boards is to continue leaning towards helping companies become the innovative, entrepreneurial leaders of the future.
The speed of change is exponential. last two years covid Lockdown is generally accepted as accelerated digital transformation by 5 years.
We now expect businesses to interact with our cellphone apps in all aspects of business with the same ease. We expect to consumerize how the data and offerings are delivered to us.
Companies that invest in AI/ML deep learning and leverage their data lakes to drive insights and faster run times to tasks are companies that will thrive and grow.
Here’s an example of how a traditional legacy business applied its data to the challenging problem of vaccinating its frontline $16 per hour employees.
This food packing company was adamant on immunization of only 37% of the frontline works. He offered a one-time bonus of one thousand dollars to the workers. This increased the vaccination rate by 30% but they were still stuck at the 67% vaccination rate. The company then used traditional AI/ML algorithms to crawl the web, using meta data about its employee’s general behavior patterns to find insights. He recognized that his frontline workers stopped for coffee and a donut on his way to work, and also bought a lotto ticket. By offering a $10k company sponsored lotto and giving tickets to vaccinated employees, they increased the vaccination rate to over 90%.
Consumer companies around the world know how to analyze their customers’ personalities and hit the right “hot buttons” to engage their interests. Now businesses have an equal opportunity to treat employees as equal to their customers by applying this same technology to have a better insight into all the functions of the company – HR, Marketing, Manufacturing, Supply Chain etc. Enabling this technology will create a competitive differentiator having accurate data for decision making.
Using technology to connect with your employees, many of whom are in hybrid work models, can help build loyalty and intimacy if you curate innovative tailored career paths to build engagement. That is, companies can make their own Netflix
In this current era of Corporate Governance 4.0 it is all about future proofing your company. The velocity of change can be measured in the sharp decline in the life cycle of a corporation. Today 50% of companies are not independent after ten years. The duration of the S&P 500 has been reduced to less than 7 years. The tenure of CEO is around 4.5 years. The reason companies disappear is because of the exponential rate of change. Companies are not redesigning their business models, creating go-to-market strategies, or embedding AI/ML and technology in every functional area. Companies thought that digital transformation meant having a website that worked a little better and maybe automating part of the back office. that is not the case. Companies need to step up investments to grow and grow their workforce. Companies need to understand how to optimize and embed all types of hyper automation in both front and back office, customer journey, customer experience, through shipping. Most importantly, companies must cut all their data and make it actionable.
Unless companies are technically competent in every aspect of their business, companies’ competitive relevance quickly fades away. Boards are responding by revamping the nominated governance committee to include ESGs as well. Companies are also forming new ESG/Technical Committees.
The role of the board has shifted from Governance 1.0, which was a remote oversight board, to Governance 2.0, which brought compliance and reforms to the boardroom post Enron, to Governance 3.0 which is marked by a shift from shareholder to stakeholder capitalism and an ESG-focused mindset. . , to today’s Governance 4.0 where companies long term competitiveness is fully integrated with the technology that enables every business function.
The role of the Board is to future proof the company as a facilitator for all stakeholders. Boards should check whether management is properly assessing the risk of velocity of change. Does leadership see new negotiators who may be blind to their established business models?
When we look back 5 years from now, Governance 4.0, the era of future proofing, would seem obvious, which we should have embraced sooner!