Zambian economist and bestselling author Dambisa Moyo, in her latest book, “How Boards Work”, lays out a concise ‘manifesto’ for an expedient and optimal discharge of responsibilities by Corporate Boards in an age characterised by tumultuous change and turbulent uncertainties. Unfettered movement of capital, and seamless globalization require Boards to make ‘win-lose’ strategic decisions, effectively and swiftly. The environment amidst which such decisions are required to be made is characterised by limited knowledge and significant unpredictability. This framework within which Boards execute their functions is called Knightian uncertainty after the University of Chicago economist Frank Knight. While risks may be measured and managed, uncertainty is unquantifiable and thus much harder to mitigate.
Every Board, says Moyo, is bound by the duties of care and loyalty. At the nub of the principle of duty of care lies the concept that “directors must be sufficiently informed before making a decision and that board members may reasonably rely on information, opinions, and reports provided by officers of the company or outside experts.” The companion to the duty of care is the notion of the duty of loyalty. The latter “requires board members to act in good faith and in a manner that they reasonably believe is in the best interest of the company and its stockholders.”
However, the contemporaneous global situation is fraught with risks that pose significant challenges to the Board in complying with their beholden duties. Moyo identifies five such key risks that need to be factored in by every Board within their parameters of decision making: “the risk of a more siloed and protectionist world, massive changes in the investment landscape, new technological developments, the global war for talent, and, ultimately, short-termism itself.” To highlight the risk of operating in a protectionist or a ‘de-globalised’ planet, Moyo gives a very innovative example of a phenomenon called “splinternet”. A veritable threat to the currently sprawling and inextricably linked global supply chains, splinternet refers to an exacerbated fragmentation of the internet having competing platforms that are both China and US led. This technological disintegration possesses the unenviable potential to “dramatically disrupt global supply chains by eliminating centralized procurement and thereby raising costs and reducing the efficiency gained from shared global services. Furthermore, a balkanized internet promises to increase the complexity of companies’ operations and erode their ability to respond quickly to market forces. In such a world, companies will need to choose between the US and China camps or bear the costs of operating in two adversarial technological worlds, each with its own regulatory and operating standards.”
Moyo also argues for more diversity in terms of recruitment, gender equity and cultural diversity in the composition of a Board. The pressure exerted by key stakeholders such as institutional and passive investors as well as activist investors have led to companies lending more focus on societal interests such as Environment, Social and Corporate Governance. For example, in the year 2018 investing behemoth BlackRock, in tandem with other asset managers like Vanguard and Schroders, called on companies to commit themselves to a harmonised set of metrics for resolving societal and workforce issues. “The signatories to this agreement, which became known as the Embankment Project for Inclusive Capitalism, together control more than $30 trillion. Collectively, they agreed to push companies to disclose hard-to-quantify measures such as staffing, governance, and innovation, as well as societal and environmental impacts.”
Another area of contention which Moyo addresses head on relates to executive compensation. The gulf between employee/worker and executive compensation has been insidiously widening, and on a sustained basis. Inflation-adjusted CEO pay has grown 940 percent since 1978, while typical worker compensation has risen only 12 percent. According to the Economic Policy Institute, the ratio of CEO pay to average worker pay rose from 33 to 1 in 1980, to a peak of 376 in 2000, before lowering slightly to 276 in 2015. Moyo argues for “malus and claw back” clauses to be incorporated in executive pay contracts that would enable Boards to reclaim a portion of executive compensation in the event a company suffers on account of gross negligence or unscrupulous behaviour of any of its executives. The Chief executive of the UK housebuilder Persimmon, Jeff Fairburn faced flak in November 2018, for having pocketed a £110 million bonus. Even though the perquisite was whittled down subsequently, the public outcry persisted, and the media also castigated the company for granting such obscene bonuses.
The presence (or the lack of it) of women on corporate boards is also addressed in an insightful manner by Moyo. She reveals her own singularly unique and undesirable experience in this matter. During a shareholder’s meeting a vociferous person pointing at Moyo queried as to what exactly she was doing on the Board and what were her credentials. Incidentally, she happened to be the only woman on the Board. To his credit, the Chairman referred the questioner to the relevant extracts from the Annual Report of the company that had a complete and extensive profile of Moyo and her professional and academic achievements. As Moyo informs her readers, studies have revealed that a gender-diverse board enhances not just the quantity of earnings, but also the quality. “In a 2016 study, Putting Gender Diversity to Work: Better Fundamentals, Less Volatility, investment-banking firm Morgan Stanley found that companies with high gender diversity display lower ROE volatility—and thus higher long-term earnings quality—over a three-year time period, relative to companies with low gender diversity.”
However, for me personally the most relevant takeaway from the book relates to the challenges a Board faces in addressing issues of social importance such as obesity, general health, and wellbeing. In fact a public private partnership to combat pernicious health issues have taken shape across geographies. For instance, several cities in the US such as Boulder, Oakland, Philadelphia, San Francisco, and Seattle, have imposed a sugar or soda tax for combating obesity. From a corporation perspective, Coca-Cola has broadened its portfolio offering to include less sugary drinks. Where public policy has lagged behind, such as in addressing climate change concerns about meat production, corporates have taken the initiative to create vegan, nonmeat, and plant-based options. “Even where governments may be lagging on broad-based environmental policies, companies are imposing green initiatives to address climate concerns in their business models. Getting rid of single-use plastics, such as straws in fast-food chains, is one very targeted intervention in this drive.”
Moyo herself is on the Board of many large and reputed blue chip companies and that experience is writ large in the tenets found in her book. She was on the Board of SABMiller when the iconic beer manufacturer was taken over by Anheuser-Busch InBev in one of the largest mergers in the beer industry (the deal was valued at $100 billion). Similarly she was also responsible in steering Barrick Gold Corporation, a mining company that produces gold and copper with 16 operating sites in 13 countries, through some tough times when gold prices plunged precariously. Moyo is also a non-executive director of the oil major Chevron.
“How Boards Work” is a very useful and engaging read for all those who are interested in understanding how corporates tide over the seemingly insurmountable hurdles birthed by a VUCA world.