Report of the NACD Blue Ribbon Commission on Adaptive Governance

"The future ain't what it used to be." —Yogi Berra

Serving as stewards of long-term value creation is “job number one” for directors. A decade ago, NACD’s Key Agreed Principles to Strengthen Corporate Governance for US Publicly Traded Corporations stated, “For most companies, the priority focus of board attention and time will be [on] understanding and providing guidance on strategy and associated risk. . . . Management performance, corporate strategy, and risk management are the prime underpinnings of the corporation’s ability to create long-term value.” In his 2018 letter to CEOs, Laurence Fink, chair and CEO of BlackRock, the world’s largest asset manager, added a fourth element—purpose—to successful long-term value creation: “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. . . . Without a sense of purpose, no company, either public or private, can achieve its full potential. It will ultimately lose the license to operate from key stakeholders.”

Business leaders are faced with the confluence of an always-on global information network, extended supply chains, increasingly interconnected and ever expanding systems of business relationships, and the escalating pace of change in the way we live and work as a result of shifts in technology and demographics. It is more important than ever before for board members and executives to anticipate changes that could affect those four elements of long-term value creation—performance, strategy, risk management, and purpose—especially developments that could undermine the validity of key assumptions on which the organization’s strategy and operating model are based. Yet traditional enterprise risk management (ERM) processes may not be well enough designed to address these types of risks; by necessity, many ERM activities focus on determining the impact and the likelihood of a range of identifiable potential risks in order to help prioritize the allocation of scarce resources. And boardroom discussions often rely heavily on reports about past performance and results, which may offer limited insight into the unconventional or unexpected.

In an operating environment frequently characterized by the acronym VUCA (volatility, uncertainty, complexity, and ambiguity), boards need to help their organizations do a better job of assessing disruptive risks—those risks that, whether internally- or externally-driven, could have a significant economic, operational, and/or reputational impact—and to help them be better prepared to respond when they occur. We believe this task is not an optional undertaking for directors: it is a critical imperative for the boards of for-profit as well as nonprofit organizations, and for both private and public companies.

Because these types of risks are often ambiguous, complex, and difficult to identify, assessing and responding to these risks will require building proficiency in what we call adaptive governance. As one Commissioner put it, “Adaptive governance is a necessary response to a world where disruption is continuous.”

Board members can start by asking the following questions: Is the information we receive in the boardroom sufficient? Are we using our board’s agenda time as effectively as possible? Are we doing enough to look forward—how skilled are we at making sense of weak signals? Am I personally as prepared as I need to be to tackle the responsibilities of a director in this environment?

PART ONE of this report sets out the Commission’s view on the key characteristics of disruptive risks and the factors in the current environment that we believe are making them a top priority for boards and management teams. They include risks associated with advanced and emerging technologies, but they are not limited to the tech sector.

PART TWO outlines the Commission’s definition of adaptive governance and associated imperatives for boards in the following areas:

• Strengthening the aspects of board culture that help the organization identify and respond to disruptive risks

• Investing in the skills (in the senior management team, across the company, and in the boardroom) needed to navigate disruptive risks

• Enhancing board operating processes that contribute to better situational awareness in the boardroom

• Reviewing communications with shareholders and stakeholders

PART THREE summarizes the Commission’s recommendations, and the Toolkit provides resources to help boards implement the recommendations.

Whether adaptive governance will be an evolutionary step for a given board or company, or something more revolutionary, will depend in part upon the maturity of the board’s current governance, enterprise risk management, and risk oversight processes. It will also depend on the skills and mind-sets of those sitting around the boardroom table. In our discussions about the elements of board culture and board composition that are most critical to success in an environment of disruptive risks, the Commission referenced the findings of previous Blue Ribbon Commission initiatives, especially those on culture oversight and the board as a strategic asset. We encourage directors to draw on the recommendations and guidance from those initiatives in conjunction with this one. (See the Appendix on page 24 for additional details.)

Evidence indicates that most boards are not prepared for a VUCA world. According to recent NACD research, nearly half of directors said their boards’ tendency to focus on oversight of known risks—those that management has already identified—presents a significant barrier to understanding and overseeing disruptive, atypical risks. We believe this constitutes a failing grade, and the objective of this Blue Ribbon Commission initiative is to help directors improve that grade. Since opportunity and risk are often two sides of the same coin, enhancing adaptive governance will also enable boards to provide more valuable guidance to management on how to turn uncertainty into sustainable advantage. 

Sue Cole
Kelvin Westbrook