Steering towards effective governance in the face of global disruptions.
Geopolitical and trade uncertainty, regulatory shifts, rapidly evolving artificial intelligence development and extreme weather disruptions are the hallmarks of the business landscape today. On top of that, companies face heightened stakeholder scrutiny and often conflicting demands from diverse groups. As companies grapple with an increasingly uncertain environment, boards face mounting challenges in performing their fiduciary duty and serving as strong partners to management.
The INSEAD Corporate Governance Centre has been collaborating with Heidrick & Struggles and BCG to examine how boards respond to an increasingly complex array of issues. For the new report on board effectiveness and sustainability in emerging markets, we conducted a global survey of 444 directors and CEOs – of which 112 were from emerging markets – as well as a series of regional roundtables. The report shows how these challenges are compounded for boards in emerging markets. This is in large part due to their companies’ unique circumstances: the realities of their operating environment, including a more nascent regulatory landscape and still-evolving governance practice.
Governance in emerging economies: Who sets the rules?
In emerging markets, it is not uncommon to see gaps in institutional frameworks and legislative and regulatory structures, along with the political realities that make it hard for the board to provide the oversight needed to maintain and grow the value of the business.
This leaves companies with little external support or pressure to improve their governance standards. Moreover, without firm regulatory oversight, companies are left to drive governance improvements on their own. This can lead to a patchwork of varied approaches, as each board sets its own internal priorities instead of moving towards an alignment with cohesive external standards.
In the case of sustainability, for instance, the lack of standards means sustainability frameworks and targets tend to be set by mature economies, which may not fully reflect local circumstances. In fact, companies that serve developed markets or are part of their supply networks face an ever-expanding and evolving set of regulations that vary across regions.
“We talk about bridging the ESG gap between emerging and developed markets as if developed markets have all the answers. We [need to] bring our own challenges to the table,” said a director from a Brazilian investment firm in one of the six roundtables with directors and senior leaders from emerging economies.
Internal struggles: Overcoming governance “traditions”
It doesn’t help that general corporate governance practices in emerging economies are typically not adapted to handle the challenges of today, and are instead, hindering companies’ ability to effectively tackle today’s challenges, as many directors commented during our roundtables in various emerging markets.
A key area where boards in emerging markets are seeking improvement is in their composition – in terms of both diversity and independence. In this regard, ownership plays a critical role, since the higher share of ownership with a controlling interest – common in family- or state-controlled entities in these markets – often compromise boardroom diversity and independence. Fortunately, board directors we spoke to recognised that these are the very qualities that make boards more effective and bolster their company’s ability to adapt and remain competitive.
A family member of a Turkish family-owned conglomerate shared, “Independent board members, especially foreign ones, really make a difference. They aren’t afraid to make difficult decisions that may affect short-term profitability but are essential for long-term value creation. They should be mandatory.”
Another key issue highlighted by roundtable participants was the entrenched culture of some boards in emerging economies, where longstanding board members are appointed based more on personal connections than interest or expertise. Such individuals tend to be more focused on preserving the status quo than driving meaningful change. As one board member at our Nairobi roundtable put it: “Boards should start dealing with people who don’t contribute, who are silent or who don’t show up to board meetings.”
Finally, we learned that poor board-management dynamics can prevent the kind of deep, candid engagement necessary for boards to perform their oversight function well and contribute value to management and the company. A participant at our Nairobi roundtable remarked: “Management is mostly asking the board for blessings; they are less interested in getting questioned.”
No lack of commitment
Like their counterparts in developed economies, boards in emerging economies recognise the need to strengthen their own oversight effectiveness and enhance the companies’ risk management and horizon-scanning capabilities to better anticipate global challenges and the risks and opportunities they bring.
This is especially true for climate change and adaptation. Board directors in emerging economies are more committed to tackling sustainability challenges than those in developed economies. This is hardly surprising, since developing nations tend to be at the receiving end of climate change – at least disproportionately more than developed countries.
They recognise that climate and sustainability is not just a “nice-to-have”. Of the survey respondents in emerging economies, 81 percent see the board as having “significant or primary responsibility” to address broader social concerns (as opposed to 75 percent in developed economies).
Ten questions on governance
The question then is: Where to start? Building on insights from our global survey and roundtables, we developed a set of questions to help boards and management assess their capabilities and set best practices to manage sustainability and a complex array of challenges.
Board effectiveness
- Does our board composition reflect the right mix of generations, skills and perspectives?
- Are we committed to ongoing education for board members?
- Are we willing to assess our own effectiveness? Are individual board members ready to step aside, if necessary, to allow the board to bring in fresh perspectives, more relevant expertise and the skills essential for driving the company forward?
- Are we open to listening to external voices that lend new perspectives?
Governance framework
- Are our governance structures up-to-date and aligned with today’s business, regulatory and societal landscape? And are they aligned with the company’s long-term strategic goals?
- Are our governance structures and intentions clear to management?
Risks and opportunity management
- Are we properly evaluating interconnected risks from complex challenges? Is our board equipped to make prompt, informed decisions?
- Are we governing effectively to turn challenges into competitive opportunities?
Board and management dynamics
- Are we fostering a collaborative relationship and safe environment with management that encourages open dialogue and effective oversight?
Policy and influence
- Are we empowering management to drive impact by engaging with industry leaders, policymakers, multilateral organisations, NGOs and other stakeholders?
By considering global experiences alongside their own, boards in emerging economies can create tailored approaches that address their specific circumstances and needs. In doing so, not only will they accelerate their own efforts, but also contribute to the broader global sustainability effort.
