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Reflections on effective boards as a diverse team

2022 Netherlands Spencer Stuart Board Index

Petri Hofsté is a member of the supervisory boards of Achmea, Fugro, Rabobank and Pon Holdings and chair of the Nyenrode Foundation Board, the board of Vereniging Hendrick de Keyser and Stichting Capital Amsterdam.

The era of transition

A key word on my mind in 2022 in the (non-executive) boardroom has been ‘reflection’. Considering the era in which we are living, that is remarkable. In this decade which has only just started, we have already experienced impactful crises and unprecedented uncertainty, including a health crisis with the outbreak of Covid, geopolitical tensions and millions of refugees seeking safety, a war on the European continent in Ukraine, economic challenges with interest rate and inflationary volatility, as well as supply chain disruptions, an energy crisis and climate change challenges. My personal hopes for 2023 were more than ever inspired by wishes for peace and wellbeing. And the corporate goals for 2023 in the organizations I serve were more than ever inspired by a desire to create an impactful sustainability agenda.

Increasingly, we find ourselves in a time of major transitions — climate, safety and integrity, political, technological, economic — and these transitions demand and deserve our collective capabilities, at both the institutional level and in the boardroom.

Boards are grappling with how to address the many issues that the world is facing. Three factors have led to meetings of reflection on corporate governance, as boards or in training sessions, working groups and seminars: first, a desire to become a force for good for people and planet based on the purpose of the organization, while not having all the answers; second, the absence of true and meaningful in-person boardroom discussions during the Covid period; and third, the many complex issues on the agenda, including increasing societal expectations and regulatory requirements.

While ultimately energizing and value-adding, these meetings were at times uncomfortable, demanding insights into and reflection on (my) personal views and convictions. In the past year, for example, I have participated in a community of practice, a life research project called ‘Discomfort in the Board room’, aimed at developing good practice for deep governance.* On the basis of theory and practical experience, experiments and discussions, teams of executive and non-executive board members cooperated in a research project and at the same time developed personal insights.

Responsibility of the private sector

In the boardroom, it is becoming more and more clear that the private sector is expected to provide answers and solutions for a better world. Politicians and governmental institutions have increased their requirements of the actions and responsibilities of the private sector. However, private companies alone can never provide all the answers. There needs to be cooperation between the private and public sectors and research institutions, as well as a common view on the role and responsibility of the private sector in society.

In December 2022, the revised Dutch Corporate Governance Code was published. A stakeholder’s perspective and long-term value creation are firmly part of the Code, with an emphasis on sustainable long-term value creation. However, the discussions that led to the Code’s revision have not as yet reached a firm conclusion on the fundamental question of social responsibility and related duty of care of companies. The Code requires, as best practice, a board to pay attention to “the interests of stakeholders” and “the impact of the company and its affiliated enterprise in the field of sustainability, including the effects on people and the environment”.

What is the role of a company? Is there any other role than providing society with what it needs? What other raison d’être could companies have? In my view, these are rhetorical questions. A company only exists because of its role and responsibility in society; it can only survive in the long term when it is recognized as a force for good, understanding its responsibilities and obligations to society.

Another important question is how we define society. For millennia, society has been defined by humans; all other living beings and resources on this planet could be owned and used by people, serving the prosperity of humankind. Only relatively recently have we become fully aware of just how dependent our society is on the planet’s resources: we have to take into account the interest of the planet on which we live and depend. This goes beyond financial and even societal goals as we have historically defined them.

Defining the duty of care and responsibility of companies is becoming more and more complicated in a world where the differences between people are emphasized and form the basis of conflict, rather than prompting a healthy debate leading to better insights, conclusions and outcomes.

How do these issues relate to the composition and workings of the board? A company’s social responsibility and duty of care require thorough exploration in the boardroom, whether as part of the discussion on the company’s purpose, strategy and changing business or as part of a discussion on the emerging risks facing the company and its communication with stakeholders. These are not easy discussions that can be resolved in the same way as other — more standard — items on the supervisory board’s agenda, such as the approval of accounts or a debate about a performance report. Whether and how such discussions take place depends largely on the individuals who sit on the board, how they cooperate, and the culture and historical context in which they operate.

Diversity and inclusion

Diversity improves the quality of board discussion and decision-making and goes beyond gender for which we now have legal requirements, in addition to best practices. Although after much consideration I welcome the quotas and legal enforcement of them, I believe that the true value of diversity doesn’t just depend on personal characteristics such as gender, nationality, cultural background and sexual orientation (many of which are still insufficiently present in companies, including the boardroom), but lies in the variety of knowledge, views, experiences, insights and perspectives a diverse board can bring to the table and to the quality of decision-making.

However, there are also risks to be considered. A board needs to be more than a representation of all relevant stakeholders. We will need to be aware of the risk of politicizing the board room and creating a group of individuals, whereas what is needed is a diverse team fit to carry out the board’s role and responsibilities. Applying a narrow, representational view of diversity could mean having lengthy discussions for the sake of the argument, without adding value to the company and its purpose. As well as adding to board’s diversity, directors should also embrace the company’s purpose, have the capabilities to add value to the company and its board, and be committed to participating in a team that is inclusive and welcomes open and thorough discussion.

When seeking new board members, it is critical to define the qualities, potential and skills that will support a diverse board and to conduct a selection process in which everyone understands a person’s fit and the value they can add to the team and to the company.

Team cooperation and culture

As much as diversity can add value to a company and to a board, true value can only be realized within an open culture that welcomes different views and perspectives and where it is safe to speak up. In the past year, after working remotely for quite some time, I have experienced even more how important in-person meetings are, in particular when addressing complex issues, the so-called ‘wicked problems’ of our time. A safe environment and trust in a team requires being able to meet in person.

A further insight reinforced by the recent period of virtual meetings is that it is critical for non-executive boards to become a team, spending time getting to know each other’s views and relevant experiences. On more than one occasion in the past year, an intensive board evaluation process proved to be valuable in resetting the way the board worked. It added to the team spirit, the mutual understanding of strengths and weaknesses, the agenda and meeting dynamics, as well as enhancing commitment and work pleasure. Unless you are a team, addressing wicked problems is not possible and the effectiveness of a board during a crisis may be seriously hampered.

We need to come to a common understanding of the societal role and responsibility of the private sector. The answer cannot be that companies can get away with to considering societal issues ‘on the side’, while continuing to strive for financial value creation in the shorter and the longer term; this approach risks harming or delaying reaching societal goals and the company’s true purpose. Evaluating integrated and sustainable performance can only be done by finding ways to measure and balance people, planet and financial value in a meaningful way and using that as the basis for board decision-making. This requires courageous boards that are willing and motivated to enter discussions on societal value creation and to take bold steps. Those boards need to be diverse and inclusive, places for reflection and meaningful exchanges of views and ideas. On my own, I do not have the answers to the wicked problems. However, I trust that in a capable and diverse team, where reflection and discussion take place in a safe environment, we can find better answers and can achieve what is necessary for our corporate responsibility in these times of transition to a more sustainable world.

Petri Hofsté is a member of the supervisory boards of Achmea, Fugro, Rabobank and Pon Holdings and chair of the Nyenrode Foundation Board, the board of Vereniging Hendrick de Keyser and Stichting Capital Amsterdam.