The world is in a state of tremendous flux. The war in Ukraine rages on, with no sign of the Russian bear relinquishing its grip on the conflict. A worldwide cost of living crisis is impacting people’s lives at every level, while no country, including Canada, can say it has truly put the COVID-19 pandemic behind it even after three years.
Supply chains remain massively disrupted, with abrupt and sometimes strange shortages of goods and commodities. Underpinning all this global upheaval is climate change, a crisis that touches upon every person, community and company. Fires, floods and famines stalk many lands, as well as a looming biodiversity crisis.
“The people we look to for leadership are under tremendous pressure — in federal, provincial and municipal governments as well as in boardrooms.”
As a result, the people we look to for leadership are under tremendous pressure — in federal, provincial and municipal governments as well as in boardrooms. At Canadian boardroom tables, directors face added challenges from a pile of incoming regulations and standards that they must comply with, as well as scrutiny from their many stakeholders, including customers, employees, financial institutions, insurance providers, shareholders and suppliers.
The squeeze is on at the top and it is pushing some board directors toward the exit door. “Conscious quitting”, a new workplace trend identified by Paul Polman, author of “Net Positive: How Courageous Companies Thrive by Giving More Than They Take, is also a factor. This trend speaks primarily to Millennials and Generation Z, who want to work for organizations that make a positive impact on the world around them. On top of that, almost half of those surveyed in the Net Positive Barometer said that they would leave a company if its values did not match their own.
There is a massive opportunity for vital transformation in Canadian companies that could lead to a better short, medium and long-term future for the companies and our country at large. But are we ready to grasp it?
The Current State of Play for Canadian Leadership
According to KPMG’s most recent CEO Outlook – Canadian insights report, economic factors are the most pressing concerns for CEOs at larger organizations in this country, followed by regulatory concerns, supply chains and emerging or disruptive technologies. The CEOs surveyed are preparing for disruption, while still committed to rolling out expanded environmental, social and governance (ESG) agendas. However, CEOs are struggling to articulate the journey toward net zero and the action needed for diversity, equity and inclusion, with more than half saying they are struggling to tell a compelling ESG story.
KPMG’s Outlook paints a slightly different picture for leaders at small- and medium-sized businesses (SMBs). Economic factors are their main concern too, but that is followed by cybersecurity, talent (attraction and retention), lack of a multi-generational business strategy and reputational risk.
PwC’s 2022 Annual Corporate Directors Survey also shines a light on the North American corporate landscape. There are clear leadership weaknesses:
- Just under half of directors surveyed (48%) want to replace one or more directors on their board, with a further 19% willing to cull two or more.
- Term limits are unpopular: around 70% said their board would not adopt term limits of 12 years or less.
- Only 14% thought their board would be prepared to adopt a retirement age of 72 or younger.
The Importance of Diversity for Boardrooms of the Future
For change to happen, different voices need to be welcomed at leadership meetings. However, although Canada is a land of immigrants and comprises about 50% women, we have been slow to embrace that change.
“Women and other ethnic groups were still largely underrepresented in leadership positions.”
Statistics Canada took a long look at diversity on Canadian boards in its 2021 Diversity Among Board Directors and Officers report. At the time, It found that women and other ethnic groups were still largely underrepresented in leadership positions:
- Only one in five executives (directors or officers) was a woman
- One in five female executives was an immigrant
- One in 10 female executives belonged to a visible minority group
- One in 100 female executives was Indigenous
However, some progress is being made. Osler’s 2022 Diversity Disclosure Practices report found that more than one in every four directors (26%) at TSX-listed companies is now female, a marked change from 2015 when that figure was just 10%. Further afield, the picture is even more encouraging. Among the S&P/TSX Composite Index companies, women hold 33% of all board seats while at S&P/TSX 60 companies, that number climbs to 36%.
Sustainability Plays a Key Role
ESG risks and opportunities are a major factor for boardrooms of the future and even boardrooms today. You name it, it is there: geopolitical instability, cybersecurity, risk management, cryptocurrency and blockchains, climate disclosures, diversity, equity and inclusion (DEI), supply chain disruptions, stakeholder rights and engagement and executive compensation are just some of the weighty topics.
Canada’s accounting and audit governing bodies are in the process of creating the Canadian Sustainability Standards Board (CSSB). This new entity will address sustainability measures in this country, in particular the transparency and comparability of ESG data in companies’ reports. In doing so, the CSSB will work hand in glove with the International Sustainability Standards Board (ISSB), which will issue its inaugural global sustainability disclosure standards by the end of June.
The Sustainable Finance Action Council (SFAC) recently published its Taxonomy Roadmap Report, which looks to classify economic activity as green or transitioning to promote the integrity of Canada’s net zero transition. Green finance projects would be those with low or zero Scope 1 and 2 emissions, and low or zero downstream Scope 3 emissions, such as green hydrogen production. Transition finance projects would be those that decarbonize historically high-scope 1 and 2 emissions sectors such as aluminum, cement, chemicals, and iron and steel.
At Competent Boards, we launched The Future BoardroomTM initiative to bring together the business leaders of today and tomorrow to design the roadmap that will shape the boardrooms of the future. One of the first areas of enquiry was sustainability. In February 2023, we asked board directors and senior business executives for their views on topics such as the importance of sustainability knowledge for present and next-generation directors, the drivers of sustainable change at a leadership level and where current board directors get their ESG knowledge.
“Sustainability plays an important or very important role in shaping successful future boardrooms.”
The results showed that the overwhelming majority (95%) believe that sustainability plays an important or very important role in shaping successful future boardrooms. Two-thirds (66%) of poll respondents also picked investor demand as the key driver of sustainable change in boardrooms, with regulations, customer, employee and stakeholder demands, as well as board members’ fiduciary duties, all having parts to play.
This was very much in keeping with some of the findings in The Sustainability Board Report 2022. Here, TSBR examined the 100 largest publicly listed companies according to the Forbes Global 2000 list. Although the report found that the majority (80%) of those companies had a relevant ESG committee, less than half (45%) of the directors on relevant committees were ESG-engaged.
TSBR, in its joint sister report Boards: Stepping Up as Stewards of Sustainability with Egon Zehnder, had four key recommendations for companies looking to better embed sustainability into leadership:
- Move ESG to the core of board activities.
- Develop board members through education and exposure.
- Challenge mindsets through a diversity of age and gender.
- Shake up board dynamics and culture.
Supply Chains and Regulations: Questions for Boardrooms of the Future
There is a growing stack of regulations for Canadian companies to comply with, not least around supply chains. Since the disruptions caused by first the COVID-19 pandemic and then the war in Ukraine, supply chains have risen up board agendas. There are also more complex and no less important factors to consider with new regulations that address human rights and modern slavery.
Here are some key considerations for Canadian board directors today and in the future:
- Is there sufficient oversight of your company’s supply chain labour practices after the 2020 amendment of the Customs Tariff that prohibits the import of goods mined, manufactured or produced wholly or in part by forced labour?
- What impact will the recent Uyghur Forced Labor Prevention Act (UFLPA) in the US have on your company? That act contains a “rebuttable presumption” that any goods mined, produced or manufactured wholly or in part in China’s Xinjiang Uyghur Autonomous Region violate Section 307 of the Tariff Act of 1930. This could mean forced labour-made goods get diverted into Canada at the US border instead.
- Canada’s parliament is now at the third reading of an act to address modern slavery (Bill S-211: Fighting Against Forced Labour and Child Labour in Supply Chains Act and to amend the Customs Tariff). If passed, the new law will require companies to file and publish annual reports detailing what they are doing to prevent and reduce the risk that forced labour or child labour is used in their supply chains. That annual report must be approved by the board of directors.
- Over in the European Union, the Carbon Border Adjustment Mechanism took effect in January. This border tariff addresses imports of carbon-intensive products such as iron and steel, cement, fertilizers, aluminum and electricity generation into the Eurozone. A proposed European Supply Chain Act could also require European companies to manage social and environmental impacts across the whole of their supply chains, including Canadian direct and indirect suppliers.
Begin your Transformation towards a Boardroom of the Future
Boardroom transformation, and thereby company transformation, is not something to be taken lightly or with undue haste. However, there are some areas that Canadian leaders can tackle today to help shape their company’s future:
1. Consider the role of the board. Look past the traditional strengths of corporate strategy, establishing purpose and vision, and setting governance standards. How does the board, and therefore your company, integrate with society as a whole?
2. Who do you want around your future boardroom table, and why? What knowledge do they need to have? Does AI have a part to play? Canadian companies must embrace a diversity of gender, ethnicity, age and thought to harness the full potential of this change at the top.
3. Look at your board skills matrix. Do you have climate change, biodiversity, cybersecurity, diversity, equity and inclusion, human rights, geopolitical literacy and supply chain expertise there? If not, why not? Traditional strengths such as financial and accounting literacy or human resources are highly needed but no longer sufficient.
4. Board directors must lead by example in terms of stakeholder engagement. Activists, communities, customers, employees, shareholders and suppliers all carry weight. Integrate their needs and perspectives into your strategic decision-making and watch your company’s performance improve.
Now is the time to plan for the boardrooms of the future. Canada and Canadians do not deserve a future economy shaped by chance.
Are you ready to play your part?