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6 February 2014
The Manufacturing Institute
Washington DC
Women in
Manufacturing
Series overview 2015 - 2016
Mumbai, Hong Kong, Singapore, Shanghai, Paris, London
DISRUPTION IN THE
BOARDROOM
How successful boards are handling new challenges,
mitigating risks, and helping create competitive advantage
1
BACKGROUND
Building on years of collaboration in the US, the EY Center for Board Matters was
the exclusive global sponsor of the recent Financial Times Outstanding Directors
Exchange (ODX) International Roundtable series, spanning six global markets:
Mumbai, Hong Kong, Singapore, Shanghai, Paris and London.The theme – Disruption
in the Boardroom – formed the basis of each meeting.The facilitated peer exchange
covered macro-level business challenges along with region-specific governance issues
at every gathering. Our objective was to understand where boards around the world are
focusing their attention and how we can help them.The discussions were off the record
but many key insights have been captured from the candid exchanges.
SUMMARY REPORT
2
DISRUPTION IN THE BOARDROOM
KEY FINDINGS ACROSS ALL REGIONS
+ The pressure on corporate boards and their individual members has intensified
It is clear from all of our interactions that corporate directors have experienced a
major increase in the demands of the job in recent years.The financial crisis exposed
the frailties of many companies’business models and balance sheets. Governments
everywhere have responded with new regulations and investors with increased
scrutiny.At the same time, globalization and technology-enabled disruption require
vigilant oversight of corporate strategy and enterprise risk. One veteran director in
India said,“The old familiar boxing ring suddenly feels like a heavyweight prize fight I’ve
been thrown into with no gloves.”
Stakeholders everywhere are taking a more direct interest in the board’s role,
composition and performance.Although hedge fund activists are mostly focusing on
US-based companies at this time, minority shareholders in most global markets are
enjoying new rights and putting new demands on boards and, in some cases, individual
directors.The group in Hong Kong said it was not unusual for shareholders to grill
independent directors about their fitness for the role at Annual Stockholders Meetings.
The most extreme example cited was in the UK, where directors in several regulated
industries must appear alone before a team of regulators and demonstrate a deep level
of knowledge and competence to get and keep the job.
+ All regions are experiencing high levels of change to the legal and regulatory
environments in which boards operate
Similar to what US directors are experiencing, compliance matters are absorbing large
amounts of board time at and between board meetings in international markets.With
the steep challenges that most companies face to fuel growth and survive, directors
feel some of the new requirements are actually counter-productive to shareholder
interests.There is a general sense that change was warranted but the“pendulum has
swung too far”in an effort by governmental bodies to improve corporate oversight.
One participant in Mumbai told us that compliance challenges are compounded by a
number of mandates that actually contradict one another in the new regulations that
are being simultaneously enacted.
3
SUMMARY REPORT
+ Digitization is presenting companies with exciting business opportunities and
efficiencies but also new risks
Board members in every region and industry sector are thinking about their own
companies’digital transformation.At the same time, they are keenly aware of the
changing competitive landscape, where new market entrants can“pop up overnight,”
blindsiding traditional competitors.There is strong appetite everywhere for adding
tech-savvy directors to established company boards. Individuals with the expertise
to guide cyber strategy, major technology investments and risk mitigation are in high
demand. In many cases, these“digital directors”not only bolster the board’s skillset,
they work directly with management on discrete efforts to reinvent the company and
ensure long-term survival.A director in Paris said her board’s new digital expert“sees
the world at a whole different level.”
The board’s growing role in cyber security oversight was mentioned again and again
across the globe. Directors spoke of identifying their companies’most critical assets
and making sure management is doing everything possible to safeguard them.At the
same time, boards are preparing to respond to breaches and reduce reputational risk.
In Singapore, a director told us,“We speak about cyber risk more and differently at
every board meeting.”
+ There is appreciation for the power of board diversity, particularly the inclusion
of women on boards
Female directors are generally seen to bring a different and important point of view to
boardroom discussions and decisions.As in the US, the international directors were
mixed on whether there is a true shortage of qualified female candidates or whether it
is a perception based on legacy criteria for board service. Results are mixed in regions
where there are quotas in place. In France, where 2016 is the deadline for 40 percent
female representation, compliance is very high. In India, the law requiring at least
one female per listed-company board by April 2015 was not taken seriously by many
companies, according to our group. Despite leading the emerging markets for
number of female CEOs, only 25 percent of listed-company boards in China have
female members.
4
DISRUPTION IN THE BOARDROOM
Diversity of expertise, geography and age are also seen to contribute to board
effectiveness.Actual diversity remains lower in Asia than the US and Europe. A director
in Singapore told us“despite some window dressing, boards here are still really good
old boys clubs.”Young directors, loosely defined as under 45 years old, are“very rare”
in boardrooms in all regions. France and the UK have seen substantial increases in
non-national board members, predominantly from North America. Hong Kong and
Singaporean boards are often pan-Asian and include a smattering of expatriates.
+ Directors understand the need to engage in strategy at the board level but
often feel underprepared and/or unqualified to do so
Strategy used to be relegated to annual board reviews but directors from many US
companies tell us they now address strategic initiatives on every meeting agenda.This
seems to be less the case internationally, particularly in India and China where several
board members said non-executive directors did not always receive the right quality
and quantity of information to be productive in strategy discussions. In France, several
directors commented that their roles with respect to strategy decisions are quite
different from one board to the next, noting that no set conventions for the board’s role
in strategy have been established.
Directors from all regions agreed that the ability to add value at a strategic level varies
greatly around their boardroom tables.They said that often boards have a number of
directors that consistently do their homework and add value and others that do not,
either because they are too busy or do not have appropriate backgrounds. One director
went so far as to quip,“Every board seems to have a position at the table that could
have just as well been filled with a flower vase.”
5
SUMMARY REPORT
KEY INSIGHTS – Mumbai
•	 Indian companies with top governance marks are starting to be rewarded by 	
the financial markets
•	 New compliance measures are proving cumbersome to implement, particularly in
the face of mounting competitive and technology challenges
•	 There is room for more board diversity and strategy input at Indian companies,
including tech experts and women
In the wake of high-profile scandals, Indian lawmakers have passed significant legal,
accounting and regulatory reforms.The objective of rooting out fraud and corruption
is well understood. Board members in particular acknowledge the importance of
reform for attracting investment and improving corporate trust. But at a practical level,
companies are finding the new compliance measures cumbersome to implement at a
time when their companies are facing myriad disruptive market forces as well.There
is also the sense that minority shareholder protections, though valid, have started to
grow out of proportion to their value to shareholders.
At the same time, the directors in our group were quick to point out that companies
with top governance marks are starting to reap the benefits in the financial markets.
Analysts are putting a premium on companies with boards they see as engaged and
effective. Payoffs are coming directly through the share prices of these well-regarded
companies.Traditional“promoter-led”companies are less well-regarded in the current
environment. Many boards have sharpened the focus on independence and a class of
competent non-executive directors is emerging. Related party transactions and codes
of conduct are under the microscope, pushing companies to appoint more outside
directors, albeit of inconsistent quality.
Despite a government imperative and fines for non-compliance, few companies have
added qualified women to their boards. Some have appointed female family members
in an attempt to comply but they rarely pass independence standards. Given low rates
of women even participating in the workforce in India, directors do not see the pool of
potential female directors growing anytime soon. It was felt that companies committed
to adding high-value women to their boards will need to look beyond the traditional
corporate track, to respected economists, social scientists, chartered accountants and
even extend their searches overseas.
6
DISRUPTION IN THE BOARDROOM
Our group agreed that “technology has changed everything”and are pushing
management to secure new markets before the competition does.The race is on
to capture the previously unbanked market in India and other developing regions.
Companies are stepping up investment in R&D, creating centers of innovation, and
seeking fresh ideas and cross-pollination from new sources. Some boards are creating
sub-committees to oversee growth efforts and evaluate new ventures. Directors hope
Indian companies can better exploit the country’s educated talent pool that often gets
poached by foreign businesses.
7
SUMMARY REPORT
KEY INSIGHTS – Hong Kong
•	 Advances in corporate governance are evident but directors are concerned 		
about regulatory over reach and director overload in an increasingly 	
challenging environment
•	 Board members are most concerned about remaining relevant in the digital era,
where disruptive business models threaten traditional revenue streams
•	 Mainland China’s economic and political landscape are closely monitored by HK
directors who are anxious to see how the mainland’s restructuring affects them
There is a strong sense in Hong Kong of being at an inflection point in corporate
governance. Certainly the long era of high growth, comfortable profits and light
regulation has come to a close.As one director said,“If you missed out on China, you
really missed out.”Companies are under pressure to perform in a more competitive
global environment, where they are constantly looking over their shoulders for the next
disruptive force. And boards are subject to greater scrutiny, although they recognize
personal liabilities have not reached the level of some developed countries, particularly
the UK.
Still, shouldering the weight of sweeping new regulations has taken its toll on boards,
particularly in heavily regulated industries like financial services and energy.As one
director put it,“Improved regulation was necessary but the level and degree has
now become intrusive.”Board and committee chairs try to manage the workload in
such a way that compliance matters do not rob time from the agenda for strategic
discussions. But directors do wonder whether they are engaging with management
sufficiently around innovation, talent management and enterprise risk.
Despite the rapidly changing business environment, the composition of Hong Kong
boards has not changed much to date. Most companies recruit directors from
within their professional circles, which has not produced a lot of diversity. Female
representation has inched up to around 11 percent but mostly owing to the efforts of
a small number of listed companies. Directors talked about the benefits of recruiting
younger members to bring the perspective of“digital natives”but no one could point to
many instances where it is actually happening.A few companies have dipped a toe in
the water by forming advisory boards to guide the main board on technology matters.
8
DISRUPTION IN THE BOARDROOM
Political and social uncertainty also looms large over the Hong Kong business
community. Board members wonder how China’s gaping income and wealth
inequalities will be corrected and how social democratic elements will affect 		
Hong Kong society. US – China relations are viewed as critical to stability and are
closely watched.
9
SUMMARY REPORT
KEY INSIGHTS – Singapore
•	 Strategic Concerns about growth and innovation dominate the boardroom
conversation in Singapore, where companies face technical disruption and 		
global competition
•	 There is a talent shortage in Singapore that spans several levels, including qualified
independent directors, cyber experts and digital leaders of the future
•	 Legal pressures on non-executive directors have caused some to question whether
board service is worth the personal liability and reputational risk
Directors in Singapore said the“land grab is over”and know the next tranche of
topline growth will come much harder. Companies worldwide are scrambling to
reach the new Asian middle class. Competition is stiff and those with technology
advantages are leading.“You can be in China without being in China,”said a director of
ecommerce possibilities for companies anywhere on the globe. Singaporean boards
are keenly aware of the developments that will make or break their futures such as
disintermediation, rapid product innovation and seamless retail-banking-telecoms
solutions. But access to capital has tightened and the appetite for lending has
decreased, making every investment choice critical. Some boards seek external input
on economic forecasts, macro trends and ways to analyse their strategic choices.
These strategic pressures combined with the regulatory compliance load on
independent directors and new worries around cyber attacks are taking a toll,
according to our group.They also mentioned increased personal liability and the threat
of criminal consequences associated with the job of director. In a region where the pool
of director candidates is already shallow, these factors are making it difficult to recruit
and retain non-executive directors and especially independent board chairs.“It’s
getting to where it isn’t realistic for what is supposed to be a very part-time role,”said
one board member.
Singapore has long prioritized strong management and governance practices. In that
spirit, listed-company boards have diligently worked to implement new governance
standards for independence, director training and risk management. Still, our
group said, the shift has been slow from founder-led“old boys networks”to diverse
independent bodies. In this“insular”environment, female representation remains
very low. Our group debated whether this is a supply or a demand issue, using the
10
DISRUPTION IN THE BOARDROOM
same arguments that have been heard in the US for several years. As in other regions,
boards that are committed to adding women will have to look below the CEO level and
focus on skills and experiences that are relevant to their industry and their corporate
strategy.
As they make their digital transformations, companies in Singapore are vying for
talent in emerging technologies. New business models that require expertise in areas
such as data analytics, mobility, cloud computing, cyber security and social media are
stretching boards of directors to oversee talent management and succession planning.
Directors told us that to remain relevant, boards are turning to specialist advisors
and even forming advisory boards in addition to recruiting full board members from
the digital domain.“This is an arms race,”said one director who believes that talent
shortages will be a major factor over the next few years.
11
SUMMARY REPORT
KEY INSIGHTS – Shanghai
•	 With the meteoric growth of the last few decades slowing, Chinese companies will
be under more pressure to innovate
•	 Chinese listed companies have implemented many reforms but few have
independent boards that challenge strategy and influence succession
•	 Directors see talent limitations as a barrier to further global growth, citing a dearth
of Chinese managers poised to succeed in overseas assignments
Though politically communist, China’s economy is very much capitalist– as much or
more so than the US and much more so than Europe according to our group of board
members. Private enterprise now makes up 70 percent of GDP and 90 percent of
employment opportunities according to an economist at the meeting. Having overbuilt
during the past 30 years, the economy is experiencing a slowdown in growth. Sector
reform and the development of social safety nets that one director called“virtually
non-existent at present,”are next on the agenda.
The directors spoke of companies in China having the reputation of being followers
– even copycats – rather than inventors and innovators.They feel this tendency to
imitate rather than originate dates back hundreds of years but it has been particularly
apparent during the last 30 years of rapid economic expansion. It was felt that this
must change in the next 10 to 20 years if China is to become a leader of the developed
world and that governance structures that include independent oversight and legal
compliance will play an important role in this transition.They also recognize that
Chinese companies have a long way to go in this regard.
Listed companies have been required to have independent directors on their boards
since 2001. Many turned to university professors, some of whom had no grounding
in the business world and contributed little to boardroom deliberations.Although the
circle of independent directors has broadened, the lack of core business knowledge
and minimal contribution persists today at many companies. One reason suggested
is the very high ownership concentrations where executives do not naturally seek
the input of outsiders.Another is that low director pay offered by many companies
does not attract top talent.There are few Chinese role models for successful non-
executive directors that others can emulate. Some directors had experienced strong
independent boards in Singapore, Hong Kong and the West but not locally. One director
said,“Most boards are only a rubber stamp, even for listed companies.”
12
DISRUPTION IN THE BOARDROOM
Talent limitations are directly linked to China’s ability to further internationalize. Board
members point to the shortage of qualified audit committee chairs, an important
component of outside investor confidence in a company’s financial results.They
are also concerned about the dearth of Chinese managers qualified to run overseas
businesses and hold their own in foreign cultures and languages. So far they are
not impressed with Chinese business students who have returned from studying
at western universities, calling them“high in IQ but completely lacking in ability to
execute.”“Jack Ma is like an alien. His talents and confidence in communication are not
at all common in present businessmen in China,”according to one director.
13
SUMMARY REPORT
KEY INSIGHTS – Paris
•	 French boards are still defining their role in strategy.With more diverse skills and
experience around the board table, the time is ripe for substantive contributions
•	 Technology-enabled business models are disrupting French companies in all
sectors and have put boards on high alert about the competitive landscape
•	 Directors hope that long-standing concern for a broad range of stakeholders will
give French companies less to fear from investor activism than in other regions
French companies have made big strides in governance, certainly from a regulatory
compliance standpoint, but equally by expanding the pool of non-executive directors
to include skilled, experienced and diverse contributors to corporate boardrooms.
Prompted by the fallout from the 2008 financial crisis and now embraced by the
business community, French corporate boards are far more independent, diverse and
accountable. Our group in Paris was certainly representative of this new era in French
corporate governance.
The next frontier is to more clearly define the board’s role in strategy, according to our
board members. Global competition, digitalization and challenging macro economic
conditions have put corporate strategy under the microscope in France and around the
world. Directors are ready and willing to share their domain knowledge and relevant
experience but not all board cultures encourage it and not all CEOs welcome it. In
many companies, there remains a sense that strategy is“owned”by management
and the board’s role is to periodically review and endorse it.A more powerful model
develops when the chairman is able to leverage the board for competitive advantage
and cultivates an environment of healthy questioning and management mentoring.
One director spoke of recognizing that management needed help with strategy
development and the change management required to execute but not finding the
right points of entry to fully engage.
Strategic challenges are further compounded by today’s technology revolution.
Companies are scrambling to come to grips with new technology-enabled business
models and“disrupt before they are disrupted.”Directors told us that some of their
boards are having candid conversations about long-term sustainability, articulating key
challenges like speed of innovation, talent shortages, cyber security and leadership of
the future.“We may not have all the answers but at least we recognize the frailties in
our systems,”said one French director.
14
DISRUPTION IN THE BOARDROOM
Although investor dissatisfaction and even some shareholder activism are concerns
for French boards, it was noted during our discussion that French companies may have
less distance to cover than their counterparts in other developed markets with respect
to corporate social responsibility.While corporate America in particular has been
fixated on maximizing stockholder returns, the business community in France has long
been sensitive to the needs of a broader set of stakeholders.“The corporate social
responsibility movement is not a big shift for us in France,”said one board member.
15
SUMMARY REPORT
KEY INSIGHTS – London
•	 The UK is at an economic and political crossroads and British companies face
difficult capital allocation decisions amidst the uncertainty
•	 Regulatory reforms have required UK boards to absorb a lot of change resulting in
diverse boards, regular succession and increased accountability
•	 The digital revolution, cyber security and climate change dominate the strategy
With the debate raging and vote looming on“Brexit,”Britain’s possible exit from the
European Union, the UK is at an important crossroads.We were fortunate to have
FT’s chief economics commentator Martin Wolf make introductory remarks at the
London event.This naturally tipped the conversation toward economic forces at play
in the global and local economy and the seminal issues that boards are grappling with
as a result. Mr Wolf outlined some steep fiscal and monetary hurdles we face, calling
them disruptive but ultimately solvable.“This is not the 1930s.”On the other hand,
he believes we are on much less familiar ground with respect to the current political
climate.Terrorism, rogue states, immigration, income inequality and the resultant
disenfranchisement are all of great concern.
Because growth is slowing virtually everywhere, both on the supply-side and with
respect to productivity, boards are looking more critically - and more frequently - at
capital allocation and return on invested capital. Investor enthusiasm for dividends and
stock repurchases has to be weighed against future-facing investments in strategic
and organic avenues for growth. Directors are concerned about under-investing in
digital technology, product innovation and environmental impact reduction in light of
current regulatory and shareholder pressures.“It is difficult to know if you are investing
appropriately for the long haul.There are so many short-term demands on capital,”
said one director.
Other economic observations that were important to our group included expectations
of a low-to-zero percent interest rate environment for the foreseeable future; steep
corrections and on-going volatility in financial markets that had been fully valued for
some time; emerging market fallout from the commodities bust and capital outflows;
and massive restructuring for countries that can no longer outgrow their debt.
16
DISRUPTION IN THE BOARDROOM
UK boards continue to absorb regulatory reforms related to board composition,
capital and operational resilience, risk management and social and environmental
concerns.While time consuming, particularly in the financial services sector, directors
have begun to accept today’s compliance requirements as the new normal and have
become adept at“comply or explain”disclosure.What our group believes is more
challenging for boards right now is cultivating a culture that is ripe for innovation,
encouraging entrepreneurs to flourish within the corporate environment and executing
with speed and agility.“We are constantly striving to be digital disruptors, but it takes a
monumental change in approach right up to the board level,”shared one UK director.
Financial Times Live
One Southwark Bridge
London SE1 9HL
UK
T: +44 (0) 20 7775 6653
E: ftlive@ft.com
live.ft.com
EY Center for Board Matters
For more perspectives from
the EY Center for Board 		
Matters, visit:
ey.com/boardmatters

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Disruption in the Boardroom

  • 1. 6 February 2014 The Manufacturing Institute Washington DC Women in Manufacturing Series overview 2015 - 2016 Mumbai, Hong Kong, Singapore, Shanghai, Paris, London DISRUPTION IN THE BOARDROOM How successful boards are handling new challenges, mitigating risks, and helping create competitive advantage
  • 2. 1 BACKGROUND Building on years of collaboration in the US, the EY Center for Board Matters was the exclusive global sponsor of the recent Financial Times Outstanding Directors Exchange (ODX) International Roundtable series, spanning six global markets: Mumbai, Hong Kong, Singapore, Shanghai, Paris and London.The theme – Disruption in the Boardroom – formed the basis of each meeting.The facilitated peer exchange covered macro-level business challenges along with region-specific governance issues at every gathering. Our objective was to understand where boards around the world are focusing their attention and how we can help them.The discussions were off the record but many key insights have been captured from the candid exchanges. SUMMARY REPORT
  • 3. 2 DISRUPTION IN THE BOARDROOM KEY FINDINGS ACROSS ALL REGIONS + The pressure on corporate boards and their individual members has intensified It is clear from all of our interactions that corporate directors have experienced a major increase in the demands of the job in recent years.The financial crisis exposed the frailties of many companies’business models and balance sheets. Governments everywhere have responded with new regulations and investors with increased scrutiny.At the same time, globalization and technology-enabled disruption require vigilant oversight of corporate strategy and enterprise risk. One veteran director in India said,“The old familiar boxing ring suddenly feels like a heavyweight prize fight I’ve been thrown into with no gloves.” Stakeholders everywhere are taking a more direct interest in the board’s role, composition and performance.Although hedge fund activists are mostly focusing on US-based companies at this time, minority shareholders in most global markets are enjoying new rights and putting new demands on boards and, in some cases, individual directors.The group in Hong Kong said it was not unusual for shareholders to grill independent directors about their fitness for the role at Annual Stockholders Meetings. The most extreme example cited was in the UK, where directors in several regulated industries must appear alone before a team of regulators and demonstrate a deep level of knowledge and competence to get and keep the job. + All regions are experiencing high levels of change to the legal and regulatory environments in which boards operate Similar to what US directors are experiencing, compliance matters are absorbing large amounts of board time at and between board meetings in international markets.With the steep challenges that most companies face to fuel growth and survive, directors feel some of the new requirements are actually counter-productive to shareholder interests.There is a general sense that change was warranted but the“pendulum has swung too far”in an effort by governmental bodies to improve corporate oversight. One participant in Mumbai told us that compliance challenges are compounded by a number of mandates that actually contradict one another in the new regulations that are being simultaneously enacted.
  • 4. 3 SUMMARY REPORT + Digitization is presenting companies with exciting business opportunities and efficiencies but also new risks Board members in every region and industry sector are thinking about their own companies’digital transformation.At the same time, they are keenly aware of the changing competitive landscape, where new market entrants can“pop up overnight,” blindsiding traditional competitors.There is strong appetite everywhere for adding tech-savvy directors to established company boards. Individuals with the expertise to guide cyber strategy, major technology investments and risk mitigation are in high demand. In many cases, these“digital directors”not only bolster the board’s skillset, they work directly with management on discrete efforts to reinvent the company and ensure long-term survival.A director in Paris said her board’s new digital expert“sees the world at a whole different level.” The board’s growing role in cyber security oversight was mentioned again and again across the globe. Directors spoke of identifying their companies’most critical assets and making sure management is doing everything possible to safeguard them.At the same time, boards are preparing to respond to breaches and reduce reputational risk. In Singapore, a director told us,“We speak about cyber risk more and differently at every board meeting.” + There is appreciation for the power of board diversity, particularly the inclusion of women on boards Female directors are generally seen to bring a different and important point of view to boardroom discussions and decisions.As in the US, the international directors were mixed on whether there is a true shortage of qualified female candidates or whether it is a perception based on legacy criteria for board service. Results are mixed in regions where there are quotas in place. In France, where 2016 is the deadline for 40 percent female representation, compliance is very high. In India, the law requiring at least one female per listed-company board by April 2015 was not taken seriously by many companies, according to our group. Despite leading the emerging markets for number of female CEOs, only 25 percent of listed-company boards in China have female members.
  • 5. 4 DISRUPTION IN THE BOARDROOM Diversity of expertise, geography and age are also seen to contribute to board effectiveness.Actual diversity remains lower in Asia than the US and Europe. A director in Singapore told us“despite some window dressing, boards here are still really good old boys clubs.”Young directors, loosely defined as under 45 years old, are“very rare” in boardrooms in all regions. France and the UK have seen substantial increases in non-national board members, predominantly from North America. Hong Kong and Singaporean boards are often pan-Asian and include a smattering of expatriates. + Directors understand the need to engage in strategy at the board level but often feel underprepared and/or unqualified to do so Strategy used to be relegated to annual board reviews but directors from many US companies tell us they now address strategic initiatives on every meeting agenda.This seems to be less the case internationally, particularly in India and China where several board members said non-executive directors did not always receive the right quality and quantity of information to be productive in strategy discussions. In France, several directors commented that their roles with respect to strategy decisions are quite different from one board to the next, noting that no set conventions for the board’s role in strategy have been established. Directors from all regions agreed that the ability to add value at a strategic level varies greatly around their boardroom tables.They said that often boards have a number of directors that consistently do their homework and add value and others that do not, either because they are too busy or do not have appropriate backgrounds. One director went so far as to quip,“Every board seems to have a position at the table that could have just as well been filled with a flower vase.”
  • 6. 5 SUMMARY REPORT KEY INSIGHTS – Mumbai • Indian companies with top governance marks are starting to be rewarded by the financial markets • New compliance measures are proving cumbersome to implement, particularly in the face of mounting competitive and technology challenges • There is room for more board diversity and strategy input at Indian companies, including tech experts and women In the wake of high-profile scandals, Indian lawmakers have passed significant legal, accounting and regulatory reforms.The objective of rooting out fraud and corruption is well understood. Board members in particular acknowledge the importance of reform for attracting investment and improving corporate trust. But at a practical level, companies are finding the new compliance measures cumbersome to implement at a time when their companies are facing myriad disruptive market forces as well.There is also the sense that minority shareholder protections, though valid, have started to grow out of proportion to their value to shareholders. At the same time, the directors in our group were quick to point out that companies with top governance marks are starting to reap the benefits in the financial markets. Analysts are putting a premium on companies with boards they see as engaged and effective. Payoffs are coming directly through the share prices of these well-regarded companies.Traditional“promoter-led”companies are less well-regarded in the current environment. Many boards have sharpened the focus on independence and a class of competent non-executive directors is emerging. Related party transactions and codes of conduct are under the microscope, pushing companies to appoint more outside directors, albeit of inconsistent quality. Despite a government imperative and fines for non-compliance, few companies have added qualified women to their boards. Some have appointed female family members in an attempt to comply but they rarely pass independence standards. Given low rates of women even participating in the workforce in India, directors do not see the pool of potential female directors growing anytime soon. It was felt that companies committed to adding high-value women to their boards will need to look beyond the traditional corporate track, to respected economists, social scientists, chartered accountants and even extend their searches overseas.
  • 7. 6 DISRUPTION IN THE BOARDROOM Our group agreed that “technology has changed everything”and are pushing management to secure new markets before the competition does.The race is on to capture the previously unbanked market in India and other developing regions. Companies are stepping up investment in R&D, creating centers of innovation, and seeking fresh ideas and cross-pollination from new sources. Some boards are creating sub-committees to oversee growth efforts and evaluate new ventures. Directors hope Indian companies can better exploit the country’s educated talent pool that often gets poached by foreign businesses.
  • 8. 7 SUMMARY REPORT KEY INSIGHTS – Hong Kong • Advances in corporate governance are evident but directors are concerned about regulatory over reach and director overload in an increasingly challenging environment • Board members are most concerned about remaining relevant in the digital era, where disruptive business models threaten traditional revenue streams • Mainland China’s economic and political landscape are closely monitored by HK directors who are anxious to see how the mainland’s restructuring affects them There is a strong sense in Hong Kong of being at an inflection point in corporate governance. Certainly the long era of high growth, comfortable profits and light regulation has come to a close.As one director said,“If you missed out on China, you really missed out.”Companies are under pressure to perform in a more competitive global environment, where they are constantly looking over their shoulders for the next disruptive force. And boards are subject to greater scrutiny, although they recognize personal liabilities have not reached the level of some developed countries, particularly the UK. Still, shouldering the weight of sweeping new regulations has taken its toll on boards, particularly in heavily regulated industries like financial services and energy.As one director put it,“Improved regulation was necessary but the level and degree has now become intrusive.”Board and committee chairs try to manage the workload in such a way that compliance matters do not rob time from the agenda for strategic discussions. But directors do wonder whether they are engaging with management sufficiently around innovation, talent management and enterprise risk. Despite the rapidly changing business environment, the composition of Hong Kong boards has not changed much to date. Most companies recruit directors from within their professional circles, which has not produced a lot of diversity. Female representation has inched up to around 11 percent but mostly owing to the efforts of a small number of listed companies. Directors talked about the benefits of recruiting younger members to bring the perspective of“digital natives”but no one could point to many instances where it is actually happening.A few companies have dipped a toe in the water by forming advisory boards to guide the main board on technology matters.
  • 9. 8 DISRUPTION IN THE BOARDROOM Political and social uncertainty also looms large over the Hong Kong business community. Board members wonder how China’s gaping income and wealth inequalities will be corrected and how social democratic elements will affect Hong Kong society. US – China relations are viewed as critical to stability and are closely watched.
  • 10. 9 SUMMARY REPORT KEY INSIGHTS – Singapore • Strategic Concerns about growth and innovation dominate the boardroom conversation in Singapore, where companies face technical disruption and global competition • There is a talent shortage in Singapore that spans several levels, including qualified independent directors, cyber experts and digital leaders of the future • Legal pressures on non-executive directors have caused some to question whether board service is worth the personal liability and reputational risk Directors in Singapore said the“land grab is over”and know the next tranche of topline growth will come much harder. Companies worldwide are scrambling to reach the new Asian middle class. Competition is stiff and those with technology advantages are leading.“You can be in China without being in China,”said a director of ecommerce possibilities for companies anywhere on the globe. Singaporean boards are keenly aware of the developments that will make or break their futures such as disintermediation, rapid product innovation and seamless retail-banking-telecoms solutions. But access to capital has tightened and the appetite for lending has decreased, making every investment choice critical. Some boards seek external input on economic forecasts, macro trends and ways to analyse their strategic choices. These strategic pressures combined with the regulatory compliance load on independent directors and new worries around cyber attacks are taking a toll, according to our group.They also mentioned increased personal liability and the threat of criminal consequences associated with the job of director. In a region where the pool of director candidates is already shallow, these factors are making it difficult to recruit and retain non-executive directors and especially independent board chairs.“It’s getting to where it isn’t realistic for what is supposed to be a very part-time role,”said one board member. Singapore has long prioritized strong management and governance practices. In that spirit, listed-company boards have diligently worked to implement new governance standards for independence, director training and risk management. Still, our group said, the shift has been slow from founder-led“old boys networks”to diverse independent bodies. In this“insular”environment, female representation remains very low. Our group debated whether this is a supply or a demand issue, using the
  • 11. 10 DISRUPTION IN THE BOARDROOM same arguments that have been heard in the US for several years. As in other regions, boards that are committed to adding women will have to look below the CEO level and focus on skills and experiences that are relevant to their industry and their corporate strategy. As they make their digital transformations, companies in Singapore are vying for talent in emerging technologies. New business models that require expertise in areas such as data analytics, mobility, cloud computing, cyber security and social media are stretching boards of directors to oversee talent management and succession planning. Directors told us that to remain relevant, boards are turning to specialist advisors and even forming advisory boards in addition to recruiting full board members from the digital domain.“This is an arms race,”said one director who believes that talent shortages will be a major factor over the next few years.
  • 12. 11 SUMMARY REPORT KEY INSIGHTS – Shanghai • With the meteoric growth of the last few decades slowing, Chinese companies will be under more pressure to innovate • Chinese listed companies have implemented many reforms but few have independent boards that challenge strategy and influence succession • Directors see talent limitations as a barrier to further global growth, citing a dearth of Chinese managers poised to succeed in overseas assignments Though politically communist, China’s economy is very much capitalist– as much or more so than the US and much more so than Europe according to our group of board members. Private enterprise now makes up 70 percent of GDP and 90 percent of employment opportunities according to an economist at the meeting. Having overbuilt during the past 30 years, the economy is experiencing a slowdown in growth. Sector reform and the development of social safety nets that one director called“virtually non-existent at present,”are next on the agenda. The directors spoke of companies in China having the reputation of being followers – even copycats – rather than inventors and innovators.They feel this tendency to imitate rather than originate dates back hundreds of years but it has been particularly apparent during the last 30 years of rapid economic expansion. It was felt that this must change in the next 10 to 20 years if China is to become a leader of the developed world and that governance structures that include independent oversight and legal compliance will play an important role in this transition.They also recognize that Chinese companies have a long way to go in this regard. Listed companies have been required to have independent directors on their boards since 2001. Many turned to university professors, some of whom had no grounding in the business world and contributed little to boardroom deliberations.Although the circle of independent directors has broadened, the lack of core business knowledge and minimal contribution persists today at many companies. One reason suggested is the very high ownership concentrations where executives do not naturally seek the input of outsiders.Another is that low director pay offered by many companies does not attract top talent.There are few Chinese role models for successful non- executive directors that others can emulate. Some directors had experienced strong independent boards in Singapore, Hong Kong and the West but not locally. One director said,“Most boards are only a rubber stamp, even for listed companies.”
  • 13. 12 DISRUPTION IN THE BOARDROOM Talent limitations are directly linked to China’s ability to further internationalize. Board members point to the shortage of qualified audit committee chairs, an important component of outside investor confidence in a company’s financial results.They are also concerned about the dearth of Chinese managers qualified to run overseas businesses and hold their own in foreign cultures and languages. So far they are not impressed with Chinese business students who have returned from studying at western universities, calling them“high in IQ but completely lacking in ability to execute.”“Jack Ma is like an alien. His talents and confidence in communication are not at all common in present businessmen in China,”according to one director.
  • 14. 13 SUMMARY REPORT KEY INSIGHTS – Paris • French boards are still defining their role in strategy.With more diverse skills and experience around the board table, the time is ripe for substantive contributions • Technology-enabled business models are disrupting French companies in all sectors and have put boards on high alert about the competitive landscape • Directors hope that long-standing concern for a broad range of stakeholders will give French companies less to fear from investor activism than in other regions French companies have made big strides in governance, certainly from a regulatory compliance standpoint, but equally by expanding the pool of non-executive directors to include skilled, experienced and diverse contributors to corporate boardrooms. Prompted by the fallout from the 2008 financial crisis and now embraced by the business community, French corporate boards are far more independent, diverse and accountable. Our group in Paris was certainly representative of this new era in French corporate governance. The next frontier is to more clearly define the board’s role in strategy, according to our board members. Global competition, digitalization and challenging macro economic conditions have put corporate strategy under the microscope in France and around the world. Directors are ready and willing to share their domain knowledge and relevant experience but not all board cultures encourage it and not all CEOs welcome it. In many companies, there remains a sense that strategy is“owned”by management and the board’s role is to periodically review and endorse it.A more powerful model develops when the chairman is able to leverage the board for competitive advantage and cultivates an environment of healthy questioning and management mentoring. One director spoke of recognizing that management needed help with strategy development and the change management required to execute but not finding the right points of entry to fully engage. Strategic challenges are further compounded by today’s technology revolution. Companies are scrambling to come to grips with new technology-enabled business models and“disrupt before they are disrupted.”Directors told us that some of their boards are having candid conversations about long-term sustainability, articulating key challenges like speed of innovation, talent shortages, cyber security and leadership of the future.“We may not have all the answers but at least we recognize the frailties in our systems,”said one French director.
  • 15. 14 DISRUPTION IN THE BOARDROOM Although investor dissatisfaction and even some shareholder activism are concerns for French boards, it was noted during our discussion that French companies may have less distance to cover than their counterparts in other developed markets with respect to corporate social responsibility.While corporate America in particular has been fixated on maximizing stockholder returns, the business community in France has long been sensitive to the needs of a broader set of stakeholders.“The corporate social responsibility movement is not a big shift for us in France,”said one board member.
  • 16. 15 SUMMARY REPORT KEY INSIGHTS – London • The UK is at an economic and political crossroads and British companies face difficult capital allocation decisions amidst the uncertainty • Regulatory reforms have required UK boards to absorb a lot of change resulting in diverse boards, regular succession and increased accountability • The digital revolution, cyber security and climate change dominate the strategy With the debate raging and vote looming on“Brexit,”Britain’s possible exit from the European Union, the UK is at an important crossroads.We were fortunate to have FT’s chief economics commentator Martin Wolf make introductory remarks at the London event.This naturally tipped the conversation toward economic forces at play in the global and local economy and the seminal issues that boards are grappling with as a result. Mr Wolf outlined some steep fiscal and monetary hurdles we face, calling them disruptive but ultimately solvable.“This is not the 1930s.”On the other hand, he believes we are on much less familiar ground with respect to the current political climate.Terrorism, rogue states, immigration, income inequality and the resultant disenfranchisement are all of great concern. Because growth is slowing virtually everywhere, both on the supply-side and with respect to productivity, boards are looking more critically - and more frequently - at capital allocation and return on invested capital. Investor enthusiasm for dividends and stock repurchases has to be weighed against future-facing investments in strategic and organic avenues for growth. Directors are concerned about under-investing in digital technology, product innovation and environmental impact reduction in light of current regulatory and shareholder pressures.“It is difficult to know if you are investing appropriately for the long haul.There are so many short-term demands on capital,” said one director. Other economic observations that were important to our group included expectations of a low-to-zero percent interest rate environment for the foreseeable future; steep corrections and on-going volatility in financial markets that had been fully valued for some time; emerging market fallout from the commodities bust and capital outflows; and massive restructuring for countries that can no longer outgrow their debt.
  • 17. 16 DISRUPTION IN THE BOARDROOM UK boards continue to absorb regulatory reforms related to board composition, capital and operational resilience, risk management and social and environmental concerns.While time consuming, particularly in the financial services sector, directors have begun to accept today’s compliance requirements as the new normal and have become adept at“comply or explain”disclosure.What our group believes is more challenging for boards right now is cultivating a culture that is ripe for innovation, encouraging entrepreneurs to flourish within the corporate environment and executing with speed and agility.“We are constantly striving to be digital disruptors, but it takes a monumental change in approach right up to the board level,”shared one UK director.
  • 18. Financial Times Live One Southwark Bridge London SE1 9HL UK T: +44 (0) 20 7775 6653 E: ftlive@ft.com live.ft.com EY Center for Board Matters For more perspectives from the EY Center for Board Matters, visit: ey.com/boardmatters