During my daily work of representing C-Suite executives for their interest in independent directorships and partnering with corporate boards by providing them with vetted executives, it is clear to me that investor focus on board performance has reached new levels of intensity. Activist investors who have been historically assertive are now even more aggressive and large institutional investors are jumping on the band wagon. More than any other time, boards are under increased and intense scrutiny from regulators, shareholders, company employees, the media and even politicians.
In my opinion, the best boards are holding themselves to higher standards, but many others are lagging behind. So what is “Board Effectiveness” and how does a board ensure it is taking the right steps toward greater board effectiveness? As board members should be effective stewards of the business, they should consider the following steps:
Having the right directors on the board is considered by many as the most important factor in good governance. Getting the right people who are successful in their respective fields, such individuals with expertise in a domain, industry, financial, operating, compensation/succession, risk, innovation, cyber and diversity is the new way forward, rather than the more traditional old boy network. Just because they are a “name brand” does not necessarily mean they bring right skills, expertise or value to the board.
As market conditions change, innovation continues, competition continues to be fierce and globalization is even more widespread, boards must consider if they have optimized the composition of their board. The “right fit” will evolve as these conditions change. Succession planning, given age and term limits, must be a priority and will drive necessary board refreshment to maintain market advantage.
The topic of diversity is on the forefront of the majority of boards. A board constituted of highly qualified directors from diverse backgrounds, who reflect changing demographics, functional and industry expertise, promotes greater diversity in thought around the boardroom table and support better corporate governance.
The most effective boards are highly proactive and stay informed of how the company is perceived by its investors. The board communicates effectively with its investors. Through this proactive approach, relationships with investors can be more powerful. It engages the investors to help the board on how they are being externally viewed versus their competitors. This can also mitigate potential surprises by activist or proxy votes.
Oversight of the business strategy has always been a core responsibility of the board but is ever more important now with risks, innovation, technological transformations, new competitors and global expansion. A clear, sound strategy should serve as the foundation for all of the board’s work. The board must be active with challenging assumptions, the soundness of strategy and drive forward-looking discussions.
More than ever there are tremendous risks and threats facing companies with some being unknown and many being unexpected. Some of these risks can turn into a crisis which can have tremendous implications. It is a critical responsibility of the board to ensure they have a strategy and action plan to proactively manage risk. This responsibility does not only lay at the feet of a committee; it is the responsibility of the full board and each director to understand key risks.
A great balance must be achieved in the relationship between the CEO and the board. Channels of communication must remain open. At the same time the board has responsibility and oversight of CEO succession. Undoubtedly, at some stage, they will go through a transformation of some sort. These transformations can include an acquisition, divestiture, joint venture or some other type of business alliance. The board must be prepared for these transformations and how it can impact CEO succession.
It is not only critical that the right skills serve on the board, but it is imperative that the board understands its own culture and how it impacts decision making and their relationship with management. A board should have a deeper understanding of its culture, how decisions are made, how to handle disagreements, share information, and understand the why in which they do things. This will have a direct impact on the board’s ability to advise management and provide appropriate oversight.
The board should be committed to a consistent forum that reviews and reinforces board and management roles. This will ensure the right perspectives around the table and could even bubble-up issues that have been lurking below the surface.
Highly effective boards are committed, disciplined and make the time to focus on what matters. They strike the right balance between all of the above factors and in a continuous cycle. Board should always consider whether they are fully optimized in all of the above. It is the demarcation of benchmarks boards and boards who still need to arrive.