Board Consulting

Global attention on corporate governance in recent years has meant that boards of directors, whether they be of publicly listed or non-listed companies or for other forms of organisation, are now focusing more on their effectiveness. As a firm which has reviewed the effectiveness of over one hundred boards of directors in the last five years on every continent and in every major industry sector, we felt it was timely to take stock of the results our reviews have yielded, and the boards that commissioned them. Our analysis revealed that most boards face five key challenges:

• Inadequate competencies: although the vast majority of board members are capable, other members are not fully qualified to play their most critical and delicate roles.
• Lack of diversity: comfortable collegial environments risk discouraging robust, constructive debate and can lead to dangerous rigidity that stifles independent thought and change.
• Underutilization of skills: even competent directors feel that their skills are underutilized due to lack of briefing on critical issues and under-involvement in key decisions.
• Dereliction of duties: less than half the directors reviewed believe that their company has achieved the right balance between short and long-term goals, or that it is appropriately capturing its strategic objectives. In many cases directors believe boards have insufficient debate on strategy and that management rarely presents options for discussion.
• Poor selection and assessment processes: board members are typically very critical about their selection and the way their performance has been reviewed, or not reviewed, in the past.

Towards more effective boards

The review results suggest that although talented directors are being recruited, some boards are effectively wasting the time of many directors and are certainly underachieving. What can they do to address these problems?

• Choose the right directors: governance codes as such do not make a board effective. At a minimum all board directors need a high level of competency in four basic areas, namely results orientation, strategic orientation, collaboration and independence. Appropriately motivated directors perform the most effectively. Although power and influence are key motivators for an executive’s long term success, effective directors are more likely to be driven by team achievement. Boards also need diversity, which means recruiting directors with different experiences that lead to a range of perspectives.
• Appoint the right chairman: great boards tend to have great leaders. Not only does the chairman preside over board meetings, but s/he must often intervene personally between meetings. An effective chairman will invite rich, open, fact-based and logical discussion and s/he should be adept at supporting the growth of other board members by providing them with constructive advice and honest feedback. An effective chairman also needs to hold key executives and other board members fully accountable.
• Make succession planning the first priority: setting in motion the right succession plan and selecting the best candidate for CEO is almost certainly the board’s single most important task. After all, it’s top class management, not the board, that makes the biggest difference to company performance and value. In addition to CEO succession, some visionary boards are now planning for their own succession several years out. Such planning helps the board to ensure that it has the necessary blend of skills and expertise for the long term.
• Focus on a few key agenda items: most highly effective boards have considerable discipline, always establishing a clear agenda that covers at least four key items. These items are compliance with the applicable governance codes and regulation; regular reviews of the CEO’s performance as well as succession planning; the allocation of sufficient time to discuss strategies that create and develop long term value for shareholders (or stakeholders); and the need to monitor the company’s operating and financial performance.
• Review the board’s collective and individual contributions: many board reviews focus on compliance. But reviews should also investigate the effectiveness of the board as a whole and the performance of individual directors. There is no universal model for how a board should operate and every organisation should determine its own approach for reviewing its board and the standards it will accept.

All too often current board practices are inadequate. This represents a risk for those companies that fail to improve, but it also presents an opportunity for any organisation with the determination and discipline to change. As the baby-boomer generation retires and the pool of qualified directors shrinks, effective boards will have a clear advantage in attracting and retaining outstanding individuals, setting corporate strategy and selecting the right leaders. This, in turn, should have a positive impact on shareholder value.

Note: This article is an abridged version of the article ‘Are you Underutilizing your Board?’ which appeared in the Winter 2007 edition of the MIT Sloan Management Review (see http://sloanreview.mit.edu/smr/issue/2007/winter/14/). The abridged version was first published for the CEO Forum Group at http://www.ceoforum.com.au.