The CEO of Norges Bank Investment Management (NBIM), Nicolai Tangen, and Frithjof Lund, a senior partner with McKinsey, discussed the need for effective organizational resilience during the company’s Thrive Resilience Summit. They discussed how boards can go beyond responding to short-term challenges and move toward identifying opportunities for resilient growth.
The Norwegian sovereign wealth fund was established 27 years ago and now manages assets worth approximately $1.3 trillion. It is the world’s largest sovereign wealth fund with a stake in more than 9,000 companies worldwide, or about 1.3 percent of the world’s listed companies, with a unique position as a responsible owner in the global financial market. Responsible ownership involves actively engaging with companies in which NBIM invests to promote long-term value creation, sustainable practices, and good corporate governance. The following is summarized from an interview with Nicolai Tangen and has been edited for clarity.
Encouraging active and responsible ownership
Active and responsible ownership entails that decisions are coherent with the values and interests of your owners and other relevant stakeholders. In the case of NBIM, Tangen says decisions have to be “aligned with the values of the Norwegian people and the Norwegian parliament. For us, as a large fund, to do this well, we have to clearly and strictly define our expectations from various companies and how we expect their boards to behave.” For NBIM, that includes a push toward higher disclosure and transparency—including tax transparency—and also areas such as climate change and human rights. These documents are strictly followed when voting at more than 12,000 annual general meetings (AGMs) every year and reviewing more than 120,000 proposals. “And we recently started to announce five days ahead of the AGM how we intend to vote, a potentially pretty powerful tool to influence decision making,” says Tangen.
Tangen finds that the ownership work NBIM does actually pays off. “We see that when we talk to the companies about, for instance, higher disclosures and better transparency; on average, in the following years, they improve more than the companies we don’t engage with,” he says. “So it’s clear that it works. Engaging with owners, boards, and CEOs in a constructive dialogue and to advocate for better practices can influence positive change. We run more than 3,000 company meetings a year, which provides us with the opportunity to have a lot of direct exchange on the ideas and concerns these companies may have.”
Resilience as a board priority
Personal resilience has to do with the “kind of grit you show and how you come through difficult periods and experiences,” says Tangen. Being resilient should help organizations to withstand shocks and come through difficult periods in an even stronger position. Resilient companies ideally benefit from difficult periods in terms of pulling away from competition. Advantages gained during these difficult periods are often sustainable over time and allow companies to pull away from the rest. Tangen mentions a European airline as an example of an organization that demonstrated resilience during a difficult time. It managed to not lay off people, continued to have good relationships with airports, trained pilots, and invested even more in its fleet. Coming out of the pandemic, it was ready to pull further away from the competition.
Tangen states that resilient organizations generally move fast, with a flexible cost structure and the ability to make decisions faster. “We as an owner cannot alone strengthen resilience in 9,000 companies, but we can be helpful in terms of the questions we are asking at company meetings, the expectations we set for them,” he says.
On the other side, in many different ways, board directors play an important role in helping to strengthen the resilience of the entities they govern. They can do it by asking for stress testing to see how companies are set up in terms of cutting costs and how quickly they can do it. Boards can also ask for various scenario analyses, including a run-through of cost structures to better understand the implications of different events. Beyond this, different types of “what if” scenario analyses are critical, for instance, to assess the operational robustness in case of a cyberattack.
Boards should also be supportive of top management during difficult periods. Instead of just emphasizing cost-cutting, they could also pressure test and, from time to time, encourage countercyclical investments. Finally, as individual board directors or chairs, they can be a source of support for CEOs when they go through difficult times. “Being CEO is a lonely job,” says Tangen. “CEOs do need someone they can talk to, someone they can trust. You are there not only to ask the right questions but also to look for signs of stress and burnout and provide early support to CEOs in need.”
Fostering resilience through climate strategy
“Integrating climate strategy into business operations can contribute to long-term resilience by addressing risks and opportunities associated with climate change,” says Tangen. “The work we do on climate will help companies become more resilient over time—it has become a very important part of what we do.”
Integrating climate strategy into business operations can contribute to long-term resilience by addressing risks and opportunities associated with climate change.
NBIM’s climate strategy is focused on expecting all companies in their portfolio to have a plan to reach net-zero emissions by 2050. When companies in their portfolio do not follow this climate action plan, NBIM’s approach is clear. If companies are not making efforts to improve and move in the right direction, NBIM will increase pressure through dialogue and voting. If there is no improvement, as a last resort, it will divest. This serves as a strong signal to the companies that they should align with NBIM’s expectations on climate action, and NBIM is committed to taking action to ensure that their portfolio companies are addressing climate risks and opportunities.
Building resilience at the organizational level
When building resilience at the organizational level, it is important to focus on processes rather than just results. According to Tangen, “As a CEO, you also want to make sure that your colleagues and your organization are resilient on a personal level. And how do you do that? Well, by focusing on processes rather than only focusing on results. Because if the processes are right, then results will follow.”
As a result, NBIM has defined a few very clear guidelines about its expectations toward board composition and board diversity of its portfolio companies. For example, it has clearly positioned itself against dual hatting of the CEO and board chair role. If the CEO is at the same time the chair, there is no one who questions the CEO’s decisions and regularly checks in on the well-being of the CEO. Tangen believes that things are slowly trending in the direction of a split CEO–chair role, which plays an important part in ensuring organizational resilience. NBIM also recently published a position paper on board diversity with the intention of further increasing diversity across the ranks and fostering resilience across its portfolio companies. By setting expectations for diversity and inclusion at the board level, NBIM aims to create a more robust decision-making process that considers diverse inputs and perspectives.
Tangen believes that diversity leads to better outcomes, as it encourages creativity, innovation, and a wider range of viewpoints. “Progress on board diversity, in particular gender diversity, is still rather slow. Gender diversity is, of course, not the only measure of diversity, but it is the easiest to measure, so this is where we have started,” he says. “And we have started to vote against companies that do not meet the expected levels of diversity. There are no longer any reasons for bottlenecks in increasing diversity. There are plenty of qualified individuals from diverse backgrounds to choose from.”
Defining principles and guidelines without ensuring effective implementation will not be sufficient to continue building resilient organizations. The important thing is how companies vote at the AGMs. “As a long-term responsible investor,” says Tangen, “we stay invested as long as we see there is progress, and we work with companies in a very constructive way.”