The Director’s Mindset is the Most Powerful Lever for Change
Systems thinker Donella Meadows famously identified the levers for change in a complex system, ranking each by its potential for impact. The mindset out of which the system arises was top of Donella’s list as being the most impactful. Given the board of directors heavily influences how ‘the system’ works, overseeing strategy implementation, appointing, and removing the CEO, and with responsibility for ensuring climate-related risks are considered, the mindset of individual board directors, and the collective board, is the most crucially important powerful lever for change.
The University of Cambridge identifies that an ‘active mindset’ regarding climate response is what differentiates pioneering UK banks from others.
An Active Mindset Leads to Pioneering Behaviours
Some of the behaviours associated with active mindset at a firm level include:
- Engaging in long-term, forward-thinking
- Having a collaborative approach – working with regulators, policy makers and others
- Publicly taking responsibility for addressing the climate
- Having thorough risk awareness (Taskforce on Climate-related Financial Disclosures etc.,)
- Proactively seeking to fund the transition to low carbon economy
- Embedding climate response within the firm
- Being innovative
- Actively seeking information and knowledge
- And ensuring their customers are capable of transitioning.
But what is this active mindset underlying these behaviours? How can we develop active mindset as individuals, and ensure it is nurtured in the board context to achieve pioneering, outperforming results?
Board Directors have Hard-to-imitate Dynamic Capabilities that Lead to Outperformance
My research indicates that board directors have dynamic capabilities that can enable the firm on whose board they sit to outperform peers during times of great uncertainty such as exists during the transition to a low carbon economy. Originally described by Professor David Teece at Berkeley, these dynamic capabilities can be thought of as:
- How the director detects signals, using many different sources
- How they use these signals to inform their plans
- How these plans transform capabilities or assets
- And finally, how the director reflects on this process of signal detection, planning and transformation.
The theory is that directors and boards which have well developed dynamic capabilities lead to firm outperformance during times of volatility. I used these dynamic capabilities as a proxy for ‘active mindset’ which is not a term that has been defined in academic literature. (A brief note here that active mindset differs from growth mindset, as discussed by Professor Carol Dweck, which focuses on motivation – I am speaking of active mindset around climate response being the underlying capabilities that cause us to proactively invest in the transition to a low carbon economy as well as appropriately consider the risks stemming from climate).
But how can we develop these dynamic capabilities or active mindset? Can we identify areas for improvement to enhance our personal and collective capabilities?
These Capabilities are being Developed by Pioneering Directors
The research suggests that there are four factors which we can enhance to develop our dynamic capabilities or active mindset:
- Our human capital – our experience and knowledge
- Our social capital – our public and private networks, including other boards on which we sit
- Our cognition – our understanding of climate-related issues
- And our emotional capital – including our conviction narrative and how open we are to receiving new or conflicting information; how able we feel we are to effect change (perceived self-efficacy); and how capable we are at reflecting in the moment during decision-making.
An Active Mindset Helps Directors Overcome Firm-related Constraints
In my research, one of the most frequently cited reasons given by chairs and non-executive directors for a less than stellar climate response was the perceived constraints of the type of firm they serve. Some directors in the banking sector described feeling unable to be innovative around product, for example, due to various recent financial crises and scandals. However, importantly, other bank directors spoke of bold climate-related initiatives they are undertaking.
How do we overcome the constraints of context and what differentiated these directors from those that felt constrained?
The directors who were innovating around climate appeared to have well-developed active mindsets, they were making the most of their human and social capital, their curiosity and eagerness to learn new things meant their cognition was strong. Importantly, they were open to receiving new and contradictory information that challenged their own views and they felt empowered to be innovative in their climate response. So, by developing their human and social capital, cognition and emotional capital, these directors are developing an active mindset in their climate response, accelerating and amplifying their impact.
Simple Techniques to Develop Active Mindset for Climate Response
Some of the techniques these directors are using include:
- Human capital – increasing knowledge and experience through learning, both formally and informally through engaging with other sectors. One bank board director described joining the board of an energy company to really understand energy issues. Another technique is through engaging as often as possible with employees – both formally and informally and from all parts of the firm, not only those ‘highflyer’ employees cherry-picked by management to meet with the board.
- Social capital – using existing social networks and joining new ones in different geographies or with different sectors.
- Cognition – engaging with experts, again, both formally and informally, to better understand and extending one’s understanding.
- The greatest opportunity for development of the active mindset tends to be one’s emotional capital. Although we are often aware of our biases, we don’t seem to attempt to try and address these biases. The first step of self-awareness is to observe one’s conviction narrative or beliefs and whether new information is something we are attracted to or feel uncomfortable with.
- Finally, reflection-in-action is a useful tool to use during decision-making, especially when modelled by an experienced chair. By reflecting on one’s decision-making process in the moment one opens oneself up to new information, becomes aware of biases and potential ways to address them, includes more perspectives from others in the room and role-models decision-making to less experienced directors.
Developing our active mindset around climate response in these ways can lead to pioneering, outperforming outcomes.
References:
Meadows, D. (1997). Places to intervene in a system. Whole Earth, (91), 78–84.
PRA. (2018). Transition in thinking: the impact of climate change on the UK banking sector.
Teece, D. (2007). Explicating dynamic capabilities: the nature and microfoundations of (sustainable) enterprise performance. Strategic Management Journal.
The University of Cambridge Institute for Sustainability Leadership (CISL). (2020). Bank 2030: accelerating the transition to a low carbon economy.