Powering up the boardroom: defining and delivering an effective board

May 2022  |  FEATURE | BOARDROOM INTELLIGENCE

Financier Worldwide Magazine

May 2022 Issue

As the old Chinese proverb goes, ‘the fish rots from the head’ – a phrase particularly applicable to the corporate world, where the buck starts and stops in the boardroom.

Boiled down, in order to achieve success, companies need their boards to function effectively. At their most effective, boards offer perspective and direction drawn from their extensive experience, with the most able boards ready to meet regulatory requirements, keeping their companies compliant and accountable.

“A board that truly adds value is not just a group of high performing individuals,” states the Institute of Directors (IMD). “A good board is a balanced team with complementary skillsets and a culture that allows them to work together to make the most effective decisions for a company. While the leadership from the chair is crucial, it is the full participation of every board member that contributes the most to the effectiveness of a board.”

On the flip side, in the view of Bridgehouse, if a board is ineffective, then it offers “the worst of all worlds”– not only failing to deliver the necessary guidance and direction to a company, but also the support it needs to achieve its overall business objectives.

Bridgehouse identifies five key problems an ineffective board brings. First, a lack of skills. Either across the board or specific to an individual, skillsets may not be broad enough. Second, a lack of confidentiality or trust. Leaking information outside the boardroom is problematic, especially when reputational damage is a key risk. Third, conflicting agendas. Boards with individuals without the best interests of the company at heart are likely to incite conflict. Fourth, a lack of order and respect. Unaddressed, disrespect can generate unproductive interactions between board members. Finally, a hostile environment. An antagonistic atmosphere will not enable a board to thrive and drive the company in the right direction.

In their ‘2021 Board effectiveness: A survey of the C-suite’ report, PwC and The Conference Board characterise boards’ readiness to tackle some of the biggest challenges facing companies today as “falling short of the mark”.

Drawing on a survey of more than 550 public company C-suite executives, the report reveals that: (i) only 29 percent rate their board’s overall performance as excellent or good; (ii) 89 percent said one or more directors should be replaced; and (iii) 60 percent suggested that a reluctance among board members to retire is hampering diversity efforts.

Survey respondents also stated that while they recognise that boards have overcome huge obstacles over the past couple of years, when asked to evaluate their overall effectiveness amid a still-unsettled environment, 55 percent felt their board was doing a “fair job”. Only 10 percent graded them as “excellent”, while 19 percent said their performance was “good”.

For many executives, “board refreshment” is desirable, with 89 percent stating that at least one board member should be replaced. When board members themselves were posed the same question, the majority response was to largely reject any notion of being replaced, with 53 percent believing that no changes to personnel were necessary at all in the boardroom.

Thus, with the board an important cog in the machine, it is hardly surprising that raising the bar on boardroom effectiveness is fast becoming the norm for many companies, with investors, shareholders, regulators and fellow stakeholders alike demanding it.

“It is frankly a matter of survival,” contends Sabine Dembkowski, managing partner at Better Boards. “Only effective boards can deal with enormous challenges, such as digital transformation, environmental, social and governance (ESG) concerns, climate change, geopolitical risks and the battle to attract and retain talent, among many other pressing issues.”

Core characteristics

So, drilling down, what are the core characteristics of an effective board? Moreover, how can these best be amalgamated so that the expertise therein can be harnessed and exploited to become a company’s true strategic asset?

In the view of Dr Dembkowski, the following actions are fundamentally important to ensuring boardroom responsibilities are well-defined and strategically positioned to make an effective and efficient contribution.

First, composing the board. It is crucial to understand how different areas of expertise, preferred roles in a group setting and personality styles complement each other and fit into the development cycle of the company and its value creation plan.

Second, utilising the strength of board members. It is important that the individual members of the board understand their own strengths, how they are perceived, the collective strengths of the group and how all can be leveraged to implement and execute a value creation plan.

Third, clarifying roles and responsibilities. Ill-defined roles and grey areas of responsibilities are the norm rather than the exception in many instances. Thus, clarity and transparency of roles and responsibilities need to be in place.

Fourth, sharing a joint vision. A clear and common vision and orientation is pivotal, with transparency from the outset a vital component of boardroom effectiveness.

Fifth, implementing conflict resolution mechanisms. The ability to resolve potential conflicts between the board and management is crucial. Effective boards and their members understand how to resolve conflicts between the board and the next management level.

Sixth, structuring and organising the boardroom. The structure and organisation of the board’s work depends critically on boardroom secretaries and the interplay between the chairman and the chief executive. Effective boards understand how to organise and structure their work.

Finally, regular reviews and reflections. Regular time-outs, where board members can connect, leave the daily work behind and reflect on their work are crucial to a boards’ work and success.

Additionally, Dr Dembkowski suggests that boards select an approach that goes beyond ticking boxes and which helps them to understand what they can do to become more effective and ultimately increase their overall performance.

Measuring effectiveness

Strangely perhaps, evaluating the effectiveness of the board is an important task that is often overlooked by companies. Moreover, many fail to see that the contrast between a board that is merely ‘functioning’ as opposed to one that is ‘performing’ can be crucial – a small distinction on the face of it, but one that could very well prove the difference between business success and failure.

“In many cases, the behaviour of the board is mirrored by subordinates,” suggests Dr Dembkowski. “So, if a board is merely functioning, you can be pretty sure that this is also true for other teams in the company. Thus, regular evaluations and reviews that provide insights into how well a board is performing are essential to ensure that sound strategic and operational decisions are made.”

To that end, notes Dr Dembkowski, the UK Corporate Governance Code serves as a blueprint around the globe. “Nowhere else is the practice of conducting board evaluations more advanced than in the UK,” she suggests. “However, generally speaking, board evaluations are unloved, and we continually see a low level of real engagement with the process and poor follow through.”

That said, PwC and The Conference Board advocate the following steps to assist companies in evaluating boardroom effectiveness and challenge old paradigms. First, take full advantage of annual board and committee self-assessments, along with adopting a robust process for individual director self-assessments. Second, commit to having difficult conversations with underperforming peers. Third, do not shy away from director succession planning – do the work now to build a pipeline of qualified, diverse board candidates. Fourth, embrace continuous learning and do not hesitate to call upon outside experts and advisers to get a fresh perspective. Finally, get serious about increasing boardroom diversity and leverage direct search firms and other consultants to bring the board diverse candidates.

“Additional metrics include comparisons with other boards,” adds Dr Dembkowski. “Board members are competitive. If they see data from other organisations that they admire and regard as worthy of being seen as their peer, they listen and take action.”

Navigating the pandemic

The coronavirus (COVID-19) pandemic and the major disruption that it caused served to push companies’ leadership into the spotlight, with boards having a critical role to play in navigating the economic and social legacy of the crisis.

“Boards have had to take on a more facilitation role throughout the pandemic to help them connect the dots, be resilient and build trust at a time when it is at its lowest,” observes Rachael Johnson, head of risk management and corporate governance at ACCA Global. “They also have had to become a lot more agile and dynamic in both supporting and challenging senior management.

“Company directors must be brave in this respect because they need to initiate some of the most uncomfortable conversations in order to collect and address all the right information needed to make good decisions and keep discussions on these issues ongoing,” she continues. “This is where the true test lies because if you do not build the relationships and lines of communications needed to get to the bottom of issues, then you will not have what it takes to be trusted and therefore be effective at driving through all the uncertainties in the world today.”

Stop the rot: survive and thrive

As the ultimate custodian of company sustainability, the board needs to adapt to anticipate challenges on the horizon, act accordingly and offer solutions – stewardship that is vital in helping companies to survive and thrive amid the rapid transformations happening throughout the world today.

“Boards are responsible for driving companies and making sure their stakeholders are safe and going in the right direction,” says Ms Johnson. “So, if they are to be effective and successful at navigating their companies through multiple crises and intertwined risks, boards need to be composed of the expertise and backgrounds relevant to the issues that potentially affect them most.”

Furthermore, the demand for expertise is becoming increasingly acute, as investors, lenders, suppliers, regulators and other stakeholders raise their expectations. “We will see more requirements for certifications and other proof of expertise in coming months and years,” forecasts Ms Johnson. “Board evaluations and self-assessments are already mandatory in certain sectors and jurisdictions, so accountability is only going to become more important.”

In the view of Dr Dembkowski, technology will play a key role going forward. “We will also see that more and more companies will use digital tools and more sophisticated means of analysing data than we see at present in order to determine the overall effectiveness of their boards,” she concludes “Take notice: there is truth in the age-old saying that it all starts at the top and the fish rots from its head.”

© Financier Worldwide

BY

Fraser Tennant