Oversight, Investors and the Evolving Role of Boards

This story is based on Jonathan Foster’s appearance on the Executive Session podcast.

For Jonathan Foster, author of On Board: The Modern Playbook for Corporate Governance, the formula for long-term corporate success starts with a simple principle: boards oversee companies and CEOs run them. That clarity of roles may sound obvious, but Foster believes it is the foundation of governance done well. Without it, companies risk blurred accountability, poor decision-making and, ultimately, weakened performance.

The Board/CEO Dynamic

Boards cannot and should not attempt to run companies day-to-day, says Foster, who serves as director and audit committee at Amcor and Lear as well as a director of Five Point Holdings. Directors, after all, may spend 200 hours a year on their role, while a CEO spends 2,000 to 3,000 hours immersed in the business. The question, then, is what boards must oversee. Foster breaks it into three pillars: management, corporate strategy and capital allocation, and financial statements, which include controls, risk and compliance.

“Within each of those areas, there are many details,” says Foster. “But directors bring value by being well prepared, by asking insightful questions, and — very importantly — by having the courage not to approve decisions until they feel fully informed and comfortable.” That courage, he adds, is often the difference between boards that fulfill their fiduciary responsibilities and those that merely rubber-stamp various proposals.

The Growing Weight of Institutional Investors

If boards once operated with little external scrutiny, those days are largely gone. Today, institutional investors usually dominate equity ownership. In the 1950s, institutions held only about 5% of U.S. stocks; now often hold more than 80%, particularly at large public companies. This seismic shift has been fueled by the rise of indexing, pioneered by Vanguard’s Jack Bogle in the 1970s. What began as an $11 million experiment is now a $9 trillion enterprise, with BlackRock, State Street and Vanguard — the “big three” — exerting unprecedented influence over corporate America.

“The result,” says Foster, “is that it’s really important for boards and management to communicate with and understand the preferences of their institutional investors.” Those preferences span strategy, capital allocation, board composition and even M&A decisions. The challenge, he notes, is that different investors can have very different views. Directors must navigate a complex landscape of competing expectations while staying true to long-term value creation.

Engaging with Activists

Alongside passive index giants, activist investors have also reshaped governance. Foster urges boards not to view activists as enemies, but as shareholders with a stake in the company. “It’s important not to seize up and immediately want to fight an activist,” says Foster. “It’s also important to engage constructively with them. They are owners, after all.”

That said, Foster cautions that activists often take a more short-term and risk-prone approach than boards and management can afford. Because activists manage portfolios, they can absorb losses in one company if others perform well. Boards, by contrast, cannot take that view when the survival of their single company is at stake. The key, Foster suggests, is for directors to think as activists might — periodically stress-testing strategy with a critical lens — without necessarily acting like them. “They sometimes have good ideas,” he notes. “But boards must weigh those ideas against the objective of long-term shareholder value.”

Risk Oversight

While crises are, by definition, unexpected, risks can be identified and to some extent mitigated. Boards, he argued, must continuously evaluate exposures — from commodity prices to labor availability — and ensure management has plans in place to reduce them. In addition, every company should have a crisis plan ready: a framework that specifies who to contact, what outside advisors to engage and how to communicate effectively. “That plan should be rehearsed on a regular basis,” says Foster. “You may not eliminate risk, but you can reduce it. And when crisis strikes, you’ll be far better prepared if you have a plan.”

ESG’s Enduring Relevance

If one area of governance has sparked both enthusiasm and backlash in recent years, it is ESG. Foster traces its roots back two decades, to a 2004 United Nations report urging global financial institutions to adopt environmental, social and governance principles. Since then, ESG has become both mainstream and contested, with recent political pushback leading some companies to scale back public commitments.

Yet Foster insists ESG is not going away. “Many companies and investors remain very committed to ESG goals, even if they move away from the label,” says Foster. The key is recognizing that ESG does not require a zero-sum shift of value from shareholders to other stakeholders. To illustrate, he cited former Alcoa CEO Paul O’Neill’s safety-first agenda, which boosted morale and productivity. “It created value,” says Foster. “It didn’t redistribute it.”

While some boards may practice “green hushing” — downplaying public ESG messaging — many continue to embed environmental and social considerations into governance. “ESG can actually enhance shareholder and stakeholder value,” says Foster. “It’s important to remember that.”

In the end, Foster returns to his core point: Boards and CEOs succeed when they respect their distinct roles but share a commitment to long-term value creation. “Directors should bring experience, preparation and courage,” says Foster. “That’s how boards fulfill their oversight responsibilities, and how companies build and maintain  success.”