Over the past two decades, globalization, technology disruption, the 2008 financial crisis, activist shareholders and more recently, climate change, COVID-19 and new geopolitical risks have unleashed several earthquakes with deep and lasting effects on the business world and society. For most of the twentieth century, companies were institutions that helped create wealth, innovation and jobs, and raised the standards of living for many people. In a stable international context, firms played a key role in spreading economic growth and prosperity around the world. Unfortunately, the rising uncertainty unleashed by those trends has made the role of boards of directors in governing companies extremely complex.

In the 1990s, a new generation of boards of directors was born. Its key features were the increasing presence of external board members whose independence from the company and the CEO could provide the best advice for the firm’s long-term development. National regulators quickly adopted new governance guidelines to improve the quality of the work of boards. In addition, in the aftermath of the 2008 financial crisis, new corporate governance reforms were introduced in most OECD countries in order to make boards more accountable. Unfortunately, the effects of those reforms on corporate performance were not as deep as intended, the overall quality of boards did not improve substantially and the new rules were unable to prevent major corporate governance crises, which pushed some firms to the brink of collapse.

Well-known companies such as ABB, Bayer, Boeing, Carillion, Deutsche Bank, General Electric (GE), Intel, Nissan, Thyssen, Uber, Wells Fargo, Wirecard and WeWork, among others, are recent victims of this devastating plight, with negative impacts on their reputation, market value and jobs. Their boards of directors had to orchestrate a corporate restructuring, with the formidable challenge of restoring trust among shareholders and other stakeholders.

The recent crisis at (GE) sheds light on the complex role of boards of directors. On June 12, 2017, GE appointed John Flannery as CEO in place of Jeff Immelt, who had held this position since 2001. The roots of the GE crisis go back to 2015, when it completed its $22 billion acquisition of the Alstom power business, a merger expected to create an industry giant. The acquisition of Alstom coincided with the peak of energy prices. The GE power business had underperformed ever since. This acquisition accelerated some of GE’s strategic and financial problems and the board forced Immelt to step down in June 2017.

Shortly thereafter, Flannery announced that all GE divisions were under review and GE would write off $23 billion of its power business and reduce its workforce by 12,000 employees. In January 2018 GE also wrote off $6.2 billion in its insurance business. Flannery admitted that the board was considering the option of breaking up the company and additional divestment in light of its continuous market value decline and growing pressure from Trian, an activist hedge fund. GE’s costly write-offs of its insurance and energy divisions nearly caused its demise.

On October 1, 2018, the board of directors decided that Flannery – their CEO of choice in June 2017 – was not the right person to lead the turnaround GE needed to survive its worst-ever crisis. Larry Culp – a recently appointed GE board member – was named the new CEO. For this icon of US industrial leadership, the way these events unfolded was devastating. On November 9, 2021, Culp finally announced that GE would break up into three companies: health care, energy and aviation. This was a dramatic decision that defined the end of the GE model and the closing of an era in US business.

Since 2008, GE was facing tremendous external and internal challenges. But did GE’s board have the right capabilities to tackle them? In June 2017 the board was comprised of sixteen members plus the CEO, who also held the role of chairman. All of the members were distinguished business leaders and served GE as independent directors. They had deep business experience, many of them at international companies, but the board was not very diverse. GE also had in place all the board committees that regulation required. This crisis was not driven by corruption or greed: Board members in no way abused their position for personal gain. Overall, GE’s board of directors had many of the qualities and attributes that corporate governance regulation and the academic literature highlight as indicators of good governance, but this was not enough to save GE.

The GE crisis brings into question the role of boards of directors in times of rapid change. It serves as a powerful reminder of why boards may falter and why companies fail in tackling disruptive changes and radical transformation. A series of important shifts – including technology disruption, climate change and the rising influence of activist investors in corporate boardrooms – have all put incredible pressure on boards of directors. While the reasons behind GE’s failure are complex and not attributable to one single factor, they nonetheless underscore the critical role of the board of directors in strategy, transformation and CEO succession planning, particularly during times of disruption.

I.1 The Evolving Role of Boards of Directors in a Time of Accelerated Change

Corporate governance crises are an intriguing phenomenon. Most of the afflicted companies are listed firms, and as such, operate under the close supervision of national regulators. They have strong disclosure requirements. Following the 2008 financial crisis, capital markets regulation substantially increased, with stricter transparency rules and additional shareholder rights to vote on executive compensation and other relevant decisions. In parallel, institutional investors’ monitoring and engagement also grew. Activist investors became more prominent around the world. All the key actors – regulators, investors and capital markets institutions – took steps to improve the quality of corporate governance.

Unfortunately, these efforts have not been enough to boost boards of directors’ capacity to govern firms for the long term and develop strategies that create sustainable value. Most of those reforms were based on the notion that the role of the board is to monitor the management team, and design the incentives so that management makes good decisions that maximize shareholder value. With this paradigm, it is not a surprise to observe that many boards face a major challenge when their companies need to tackle huge problems that put their survival at risk. For a board, monitoring management is not enough in times of big disruptions. The board should get deeply involved in understanding the firms’ challenges and work with the CEO to tackle them. While some corporate crises stem from unpredictable external factors, many of them originate in strategic decisions made by boards of directors themselves. A reasonable question emerges from these observations: Could these boards of directors been more effective in preventing a crisis?

The inability of boards to govern companies effectively has led to a widespread view among investors and scholars that the current board-of-director model is not working well. This model emerged in the 1990s in the EU, and was gradually adopted in many other OECD countries. Characterized by a majority of external, independent directors and a strong focus on compliance, this model is failing to deliver good governance.

Scholars, investors and regulators have recently suggested potential solutions for bolstering board effectiveness. Some investors and scholars would like to expand shareholders’ voting power to decisions traditionally reserved for boards, such as strategic decisions. Some scholars suggest that boards of directors should adopt new governance practices, such as those used by private equity firms for their investees. Other experts say the answer lies in highly committed professional directors, hired and compensated as full-time employees. Most asset managers are placing a stronger emphasis on ESG factors as boosters of better governance. Finally, national regulators intend to strengthen the current model by increasing the number of external directors and enhancing accountability rules.

While most of these proposals offer useful insights – from steps to boost governance to how the boards’ roles and functions should evolve to promote long-term success – many fail to clearly diagnose why the current model is falling short and offer a more holistic alternative. Moreover, most of these proposals make the assumption that boards should essentially monitor senior managers and protect shareholders’ rights, as many corporate law systems define. Boards should do so, but legal duties fall short of what effective boards should do to govern the company.

Over the past two decades, scholars from diverse fields (finance, organizational economics, corporate law and strategic management) have assessed the quality of boards of directors by identifying key structural attributes and measuring their effects on corporate performance. The majority of empirical studies on boards of directors use some theoretical models of boards’ structure and behavior, select large sets of data, establish some hypothesis on the relationships between structural factors of boards’ and companies’ performance and verify whether there is a relationship of causality between board structural dimensions and the firm’s performance. In these studies, the most widely considered explanatory variables of the board structure include the number of external directors, board diversity, separation of chairperson and CEO roles and the organization and composition of board committees, among others. These are boards’ structural attributes and they may be useful in improving the quality of board monitoring. Empirical evidence shows many of these factors as relevant qualities of effective boards, and national regulators use them to define the ideal board structure and composition. But, as I will discuss in this book, the real world of boards of directors offers a much wider perspective for effective board governance.

As in the case of GE, many companies that experienced a corporate crisis had boards with these attributes yet failed nonetheless. There is evidence suggesting that other important factors – beyond the board’s structural attributes – may explain the quality of the board’s governance. In particular, the effectiveness of boards in tackling firms’ strategic challenges is one of them. This task requires specific competencies that the board as a whole should possess. These competencies include, among others, how the board discusses strategic issues, fosters a positive board culture, works with the CEO and functions as an effective team. These capabilities are different from the board’s structural features used in most empirical studies.

The purpose of this book is to reflect on the challenges of boards of directors in highly disruptive contexts and how they should evolve to help firms more effectively create sustainable value. National corporate law systems highlight that the board should monitor financial performance, oversee the top management team and comply with all legal duties. Boards should do so. But these functions are not enough for boards to be effective, in particular, in times of deep change. I suggest that boards’ work should consider structure and compliance issues, but should work on key tasks and develop the competencies necessary to address the firm’s strategic challenges. This approach will help the board govern the firm effectively. Companies today face unprecedented challenges. Boards should adapt quicker in times of significant disruption. Compliance is extremely important, but boards mainly focused on compliance may not be doing enough to think in the firm’s long-term development and meet their fiduciary duties. The additional pressures and uncertainty stemming from COVID-19 and its impact on firms only reinforces this sense of urgency.

I.2 Toward a Holistic Model of Boards of Directors

The model of boards of directors presented in this book is based upon the notion of the board as the firm’s steward. It is structured upon six central functions that define the board’s governance core functions and the requisite competencies to help develop the company for the long term. Effective boards should develop key competencies to govern the firm, help top management tackle disruption and guide the firm’s long-term development.

This perspective of boards is based upon clinical studies of international companies, developed through structured interviews with their chairpersons, CEOs, board members and senior managers. Companies’ clinical studies provide a better understanding of the internal dynamics and evolution of an organization over a long period of time. Clinical studies offer a more holistic perspective of a company, by including the different views of the firm’s senior managers and board directors. A call for prudence is indispensable: Conclusions from clinical studies should be taken with special care, avoiding the tendency to extrapolate and generalize. The data stemming from the clinical studies and key concepts from the strategic management and corporate governance academic fields are the foundations of the model of boards as the firm’s stewards. This framework has the limits that emerge from the unique features of the companies considered in this book, but also provides some insights to reflect on the areas where boards of directors can improve their effectiveness.

The board as the firm’s steward model requires some competencies that boards should develop to help govern companies in a highly uncertain context. These are competencies that the board as a group should have. The business evidence presented in this book highlights some of the most pressing strategic challenges companies are facing, the functions that boards should perform and the competences and capabilities boards should develop in order to effectively confront them. These challenges essentially question the firm’s current strategy and business model, and force the board to rethink how the firm should evolve to survive and compete for the future.

Most of these board competencies have not been considered in recent research and integrated into board agendas, yet as the clinical studies show, boards can govern more effectively by developing them. These competences include, among others: an in-depth knowledge of the company’s strategic issues and its global context; an understanding of the firm’s corporate purpose; the alignment of expectations among shareholders, the board of directors and senior management team; the ability to interact and work with the CEO to define corporate strategy; the expertise in sustainability and digital change to support the CEO in corporate transformation; the integration of critical stakeholders’ views; the dynamics of the board as a team; the management of boardroom diversity; or the capability to work on CEO succession plans and leadership development. Boards should identify and develop these competencies in order to successfully perform the functions that shareholders and other key stakeholders expect. These competencies are indispensable for boards to work effectively on six central functions and tasks that define this holistic model of boards.

The first board function is to define or review the firm’s purpose, and make sure shareholders and major stakeholders are in alignment with it. A clear sense of why the company exists and is in business can help shareholders and core stakeholders to cooperate in achieving its purpose. Placing purpose at the heart of governance helps align different stakeholders better and gives a company a sense of orientation. Moreover, purpose can inspire and engage employees, and boost the company’s customer appeal. The firm’s purpose can help define a more specific mission for the board of directors itself beyond monitoring performance. Nevertheless, purpose should be integrated effectively into strategy and business model to truly help improve the firm’s governance.

The second board function is to debate and approve the firm’s strategy, by working in cooperation with the CEO. The board should have a firm grasp of the firm’s challenges and provide a sense of strategic direction for the organization, employees, shareholders and all stakeholders. Companies are not static institutions; their environment changes – sometimes very rapidly – so they must also be able to adapt and evolve. Corporate transformation is an indisputable challenge in today’s disruptive world. The CEO and senior management team should work on it, but the board should be engaged and discuss and support management in this complex process. Strategy is a function of the CEO and senior management team, but boards should govern it since it has a profound impact on the firm’s long-term evolution.

The third board function is CEO and senior leadership development: to appoint, develop and assess the CEO and key members of the senior management team, and prepare their succession plans. Appointing a new CEO is one of the board’s most consequential and complex decisions and is a critical part of the leadership development function. It requires board members to know senior managers well. Moreover, the decision on a CEO’s exit – with a credible succession plan – is a delicate inflection point in the life of a company and a challenge for any board of directors.

The fourth function is to make the board an effective team of individuals who can work well together. A board of directors is a human group. A competent board should stay attuned to the human dimensions of the firm and care about board dynamics. Moreover, a solid understanding of what makes a board of directors an effective team and what defines the board’s culture is critical for good governance. The style of work of the board of directors has a direct and indirect impact on the firm’s culture. The board’s capacity to shape the culture of both the firm and the board is a key capability, since they have a crucial impact on corporate performance.

The fifth board function is to engage proactively with shareholders and other key stakeholders. The board should work with the CEO on the main guidelines for shareholder engagement and some board members may even take part in it. In a complex and turbulent world, with the threat from activist investors circling many companies, the board should engage shareholders to understand their concerns and suggestions. In particular, most shareholders care about the quality of the firm’s governance, and the board should be at the forefront of improving it. It is also important that the board makes sure that the company is engaging key stakeholders in an open way, cooperating with them in creating value and learning from them. The importance of having an overall view of the stakeholders in the firm’s global value chain – from sourcing to the final customers – is highlighted in a special way in the recent major disruptions in global logistics created by current international political tensions and supply shortages. The board should engage shareholders and other critical stakeholders to govern the firm for the long term.

The sixth board function is to regularly assess the firm’s financial performance and its overall impact in a holistic way. This involves the consideration of all footprints – positive and negative – that the company leaves through its activities, not only its financial performance. A competent board should be able to highlight the critical factors that shape the firm’s overall performance and their internal connections, govern the company in coherence with them – not only by considering the share price, revenue or profit growth – and report accordingly. In assessing corporate performance and impact, the board should be able to clearly report the firm’s contributions to and impact on its different stakeholders, including planet and local communities.

This model of boards of directors presents several attributes that can make boards more functional in addressing corporate challenges in times of rapid change. The first is that it focuses board members’ work on governing the firm for its long-term development and serving as stewards of shareholders and other key stakeholders, as well as of the company itself. The board should understand how the firm can create economic value sustainably and work with the CEO to make it effective. This model is consistent with the expectations of large investors and national corporate law systems, yet broadens the board’s scope of functions by including specific competencies for effective governance and value creation.

The second attribute is an emphasis on the board’s ability to think strategically and encourage senior managers to adopt an entrepreneurial mindset in order to discover opportunities and promote the firm’s long-term success. The board should not manage the company: This is the responsibility of the CEO. The board’s function is governance and the CEO’s function is management. At the same time, the board should learn how to collaborate with the CEO in order to effectively govern the firm and create value sustainably. This is a key competence for high-performance boards.

The third attribute of this model is its assumption that boards serve as the central actor in corporate governance, steering the firm’s long-term direction, governing its main policies, mediating between different shareholders and stakeholders and engaging them. To this end, the board should ensure the firm has a corporate purpose beyond profits that serves as a beacon to its diverse stakeholders, and a strategy and business model consistent with that purpose that is capable of sustainably generating value. Since purpose and profits are both necessary, boards need to work closely with CEOs to create business models that guarantee their compatibility.

The fourth attribute of this model is the human dimension of the board of directors as a group. A board is made up of individuals who should work collegially together, even if their dedication to the company is limited. They should help create and monitor the firm’s culture, based on professionalism, respect, accountability and trust. The company’s culture is influenced by the board’s culture. The board should also be aware of the firm’s human dimensions, in particular with regard to leadership development, executive succession planning and corporate change. Board directors should learn how to promote a positive culture and work effectively as a team to help the organization excel.

I.3 Book Structure and Content

This book discusses how boards can become more effective in governing their firms in times of rapid change and in tackling critical challenges, among them, corporate purpose, sustainability, technology disruption and transformation, leadership development, diversity, board culture and the governance of the multi-stakeholder firm. It combines theory and clinical evidence from in-depth organizational studies of international companies, whose profiles are presented in Chapter 1. The book adopts an interdisciplinary approach. It is based on the strategic management perspective, and also borrows from the corporate finance and economics of organizations fields.

In each chapter, I discuss the challenges for specific companies and the dilemmas their boards faced in addressing them, and connect them with available theory and empirical evidence to present some governance guidelines.

Chapter 1 offers an overview of recent corporate crises and their relationship with the dominant model of boards of directors. I present a brief historical review of boards of directors and explore why the current generation of boards that was born in the 1990s has fallen short of its expectations. Understanding why this model has not been effective is relevant. In parallel, a close-up view of the inner workings of some boards sheds additional light on a conundrum overlooked by large–sample statistical studies. A board should understand their company’s business and the industry in which it operates, make sure the company’s long-term orientation is sound and expand its purpose beyond simple shareholder value maximization.

In this chapter, I introduce a basic proposition: Boards of directors and shareholders should assume that companies are not only efficient economic organizations, but also relevant and fragile social institutions whose long-term success and survival require good governance and effective boards. A dynamic society needs future-forward firms that innovate, invest and develop their talent pool, governed by boards of directors that provide strategic orientation beyond mere compliance. Boards should help address the firm’s strategic challenges, define its priorities and make strategic decisions to promote its long-term success. In this way, boards can truly be the firm’s stewards.

In Chapter 2 I discuss how boards can work on the company’s purpose and shift their attention from profit maximization alone to become a purpose-driven organization. A corporate purpose offers a concise explanation of why a company exists and what it intends to do for customers, employees and society in a sustainable way. It provides a frame for shareholder and stakeholder expectations. With the growing emphasis on sustainability and ESG dimensions, firms need to develop an overall purpose-driven framework to ensure these pieces fit together and are well integrated into the firm’s strategy.

Purpose is not an excuse for financial underperformance. Companies with purpose can better articulate goals and expectations and deliver good economic performance and shareholder returns. Purpose serves as a strong anchor for corporate goals, and enhances communication with shareholders and other stakeholders. Defining the right priority among different stakeholders is also a key task of the board. The board’s function will evolve from merely overseeing and monitoring the CEO’s efforts to serving as a steward of the firm’s purpose and development. Boards should learn how to work with the firm’s purpose, make it consistent with the firm’s strategy and understand how their work can reinforce or erode corporate purpose.

In Chapters 3 and 4, I examine the role of the board in defining corporate strategy and working on corporate transformation. In Chapter 3, I argue that boards of directors should develop their own perspective on the future of the firm in collaboration with the CEO, and design the firm’s strategy road map. In most industries, companies are experiencing disruptions as a result of technology, protectionism, climate change, geopolitical risks and new consumer preferences. The strategy road map should include various dimensions: what makes the firm unique, its value proposition for customers, the required capabilities and resources to compete, specific strategic choices to sustainably create economic value and the type of firm the board would like to develop in the long term.

The board of directors should provide a context where members can effectively reflect, discuss and approve the company’s strategy. The board should not only approve the firm’s strategy: It should offer an effective context for discussion and reflection on the strategy, business model and key decisions. Collaboration between the board and the CEO in this area is critical and can yield very positive effects on the firm’s performance. The clinical studies presented also underline the importance of appointing board directors whose professional experience, strategic insights, diversity and personal commitment are able to facilitate board–CEO cooperation.

Against the backdrop of an increasingly complex business landscape, boards need to consider not only strategy, but also how to help companies adapt and transform. This is the theme addressed in Chapter 4. In the face of disruptive challenges, companies need to change. This chapter explores the board’s role in the corporate transformation process when the pressure to change is intense, with particular emphasis on sustainability and digital transformation as two important drivers of major disruption.

In many industries, climate change, the global pandemic and other potential natural disasters and growing geopolitical tensions add to this pressure to adapt and compel CEOs and senior managers to rethink their company’s strategy. Using the recent evidence of corporate transformations, I illustrate the unique role boards play in helping firms navigate this process, in collaboration with the CEO.

Chapter 5 examines the critical challenge of the CEO’s appointment, development and succession plan. It also analyzes the role of the board in leadership development. Many corporate crises stem from a poorly managed CEO transition process. Boards that aspire to promote respected companies should focus on leadership development, talent management and succession plans. The ability to attract and develop stellar talent is a cornerstone of good governance and a driver of superior performance. This is a vital responsibility for board members and one that requires professionalism, dedication and deep knowledge of the firm and its people.

The board as a team and its interpersonal dynamics are the touchstones of effective boards of directors. In Chapter 6, I argue that the new generation of boards needs to go beyond monitoring senior managers to work harmoniously as a team capable of addressing the firm’s challenges. The process of turning individual board directors into a high-performance team is complex. This chapter explores how the collegial dimension of the board’s efforts can translate into effective teamwork and team development.

Moreover, the very nature of the boards of directors’ role – limited dedication, diverse backgrounds and sporadic meetings – requires boards to work collaboratively with the CEO and the top management team. The board of directors appoints the CEO and, depending on the firm’s statutes, confirms the key executive appointments the CEO wants to make. This decision should be founded on professionalism and trust. A constructive and highly professional relationship between the board of directors and the CEO is essential. Companies need to ensure that both the board of directors and senior management team are fully committed to making the company successful for the long term.

Effective boards should evolve from their emphasis on compliance and box-ticking to promoting a healthy corporate culture that underpins individual and corporate behavior. This is the theme examined in Chapter 7. Corporate culture can serve as a driver of employee engagement, inspiration and creativity and competitive advantage. This is a delicate issue: The board does not define corporate culture, yet can still enhance and protect it, and ensure that the company possesses a culture that fosters collaboration, customer orientation, initiative, accountability, transparency, diversity, inclusiveness and integrity, all of them qualities that helps develop the organization for the long term.

In Chapter 8, the spotlight is shareholder and stakeholder engagement. Boards that govern for the long term should actively engage shareholders – or oversee the interaction with them – learn from their suggestions and assure that the company has an adequate shareholder structure to carry out its activities and purpose. Boards should also understand how key stakeholders interact and create joint-value with the company, and how it can learn from them. In Chapter 8, I discuss the types of positive relationships the board of directors should establish with shareholders and relevant stakeholders to develop the company for the long term.

Among the board’s responsibilities is to ensure the company has the right type of shareholders to pursue its purpose. A major assumption in many corporate governance studies is that shareholders are homogeneous and have the same preferences. The evidence indicates the contrary: Shareholders are heterogeneous. There is a wide variety of shareholders: family offices, pension funds, passive investors, private equity firm, hedge funds or governments, among others. Each shareholder is unique, with distinct time horizons and motivations. The board of directors needs to consider this diversity. It also should choose the best shareholders for the firm, in terms of commitment, time horizons and stewardship. Boards of directors should engage and work with shareholders in a collaborative way, by offering them a clear and complete overview of the firm’s performance, challenges and foreseeable evolution.

Effective boards should assess the overall economic and social impact of their companies. In Chapter 9, I discuss how boards can set goals and policies and regularly disclose information about the firm’s financial and nonfinancial performance. In particular, boards should make sure that corporate purpose, as well as environmental and social dimensions, are well defined and coherently integrated into the firm’s strategy, business model, culture and people development policies.

Financial and nonfinancial information should be disclosed and presented in a holistic and connected framework. In this way, shareholders and stakeholders will have deeper appreciation of the firm’s progress toward fulfilling its goals and purpose. At present, there is a heated debate about how to define standards for nonfinancial information and environmental, social and governance (ESG) factors. Effective boards should take regulation into account, while making efforts to establish their own ESG objectives that are consistent with their strategy and business model, and disclose them in a clear manner.

Chapter 10 presents a summary of the reflections and learnings stemming from the clinical studies and their implications on how to develop the boards of directors of the future and the functions that they should embrace to govern companies effectively.

Companies are confronted with unprecedented challenges that threaten their survival. The quality of good corporate governance and the work of boards of directors are more relevant than ever. Societies need dynamic and successful companies that can have an overall positive impact. Boards of directors can effectively help firms achieve their purpose and explicit goals. By supporting a firm’s success in creating and spreading prosperity, boards will contribute to make companies more respected institutions in society.