A company will succeed or fail according to the effectiveness of its board, and therefore it’s critical that every organisation has two things firmly in place; the right people and the right processes.
But how do you know if you have an effective board, and what can you do to make board governance and performance better?
This article considers the role of a board of directors, why evaluating their performance is important and highlights many common reasons that prevent a board from operating effectively.
It also offers practical advice on how to evaluate board effectiveness, who should be involved in the process and suggests board appraisal tools and best practice that can be used to make the process robust and reliable.
It argues regular assessment of board effectiveness is not simply an increasing expectation and regulatory requirement for companies, but an essential tool to ensure that the organisation is achieving the best results for its customers, staff and shareholders.
1. What are the board of directors’ roles and responsibilities
The role of the board “is to ensure the company's prosperity by collectively directing the company's affairs, while meeting the appropriate interests of its shareholders and relevant stakeholders,” according to the Institute of Directors.
And although the structure and purpose of every individual board differs with the business it represents - this simple definition is a useful reminder of the core values that needs to be at the heart of every board of directors regardless of the size of the company.
The role of a board of directors is never a simple one because of its need to constantly be safeguarding the existing interests of the company while always looking to take calculated risks to ensure the business is moving forward.
This leads to a number of key board responsibilities that require careful consideration:
- Safeguard the prosperity of the business by managing risk, whilst ensuring that the company is still suitably entrepreneurial and agile to actively take new opportunities and continually move forward.
- Ensure that board is made up of people with sufficient knowledge of the business that they can take fast and effective short-term decisions, whilst retaining sufficient distance from the management that they can still take objective long-term strategic calls.
- Defend the financial and commercial interests of the company while simultaneously ensuring that the company is responsible towards its staff, suppliers and the community within which it operates.
The Institute of Directors’ Standards for the Board summarises succinctly that an effective board should focus on four key areas:
- Establish a coherent vision and values for the company
- Create an effective structure and strategic framework
- Being accountable to shareholders
- Delegating properly to management
The board must ensure that the vision is both realistic and able to evolve to suit the pace of change within the company while also reflecting this vision through company policies. It’s also important that the board regularly reviews and adjusts company policies.
The board must identify strategic opportunities within the current market landscape, and assess the company’s strengths and weaknesses in a potentially different future business landscape. They must also establish the company's attitude towards risk and develop a robust risk management strategy while ensuring the company is adequately equipped to implement this and other key strategies.
The board should put in place effective and reliable communications channels and practices between themselves, shareholders and relevant stakeholders throughout the business. Simultaneously they are required to take into account the interests of shareholders and stakeholders while promoting goodwill amongst them.
The board must communicate with senior management, but ensure that authority within the company is properly delegated to these people; allowing the directors the time required to evaluate and assess the effectiveness of the business strategy and policies.
2. What reasons lead to a weak board of directors
There are many reasons that a board of directors can be weak and ineffectual, but the issue often comes back to one simple issue - the board isn’t performing at the right level.
Abraham Maslow’s hierarchy of needs is a common psychological theory in personal development - but just as he argues individuals should attempt to move themselves through stages from the basic physiological to a point of self-actualisation, it is instructive to consider the board of directors in the same way.
A Harvard Business Review study argues that any board broadly finds itself in one of four stages of developmental performance.
It identifies a foundational board as being the least developed and the most likely to be weak. The aim of a board should be to move to the next stage, developed, before continuing to be advanced and ultimately achieve the title of strategic.
They identify a number of key issues that commonly hold back the development of a board from becoming strategic:
- An ambiguity of roles within the board of directors
- Inadequate management of process leading to poor preparations and indecision
- Poor strategic alignment that hampers a board’s ability to prioritise issues quickly and effectively
- Bad dynamics within the board causing fractures and power struggles
- The wrong composition of the board. Are the right people there to represent the interests of the company, its shareholders and customers?
3. What is board effectiveness?
There is increasing pressure on boards to be more engaged and effective than ever before thanks to the pressures of globalisation, changes in technology and fluctuations in economic circumstances. This has become more acute since the global financial crisis of 2008.
In order to ensure that the board is capable of delivering the results needed by the company and is operating at a highly effective level, as well as to comply with new regulations and legislation, it has become common practice to assess and measure the performance of the directors and how they work as a team.
4. Why is it important to measure the performance of the board of directors?
Measuring board performance is not just sensible to ensure that directors are working in the best way to govern and improve the company, in many cases it is a regulatory necessity.
The UK Corporate Governance Code states that:
- annually the board should undertake a formal and rigorous evaluation of its own performance and that of its committees and directors
- the Board of FTSE 350 companies should be evaluated by an external institution at least every three years.
Further to this, the Companies Act 2013 prescribes:
- Section 134 (3) (p): Every listed company and any other class of public companies as may be prescribed by the Rules, is required to make a statement in the Board’s report indicating the manner in which formal evaluation has been made by the Board of its own performance and that of its committees and individual directors.
Similarly the US National Association of Corporate Directors (NACD) says that a board should have a process in place to assess its own performance, that of committees, and that individual directors should undertake self-assessments. And all should be undertaken on a regular basis.
5. Who evaluates the performance of the board?
It’s important that, for a board review to be both effective and impartial, that the right people are involved in the process.
Although self assessment and questionnaires - both at a board level and for the individual directors - should be a regular part of board review structure, it is important that outside parties are periodically involved to allow a different perspective and to tackle any natural biases that may exist.
For an internal review the chair of the board is sometimes best placed to conduct an evaluation process, however in order to ensure impartiality it is often best that the process is devolved to a non-executive director or a board committee.
An external review of board effectiveness is usually best conducted by a consultant who is a specialist in the area, and crucially has no existing relationship with the company to allow for an independent approach free from preconceptions.
6. How do you measure board performance and effectiveness?
There is no one size fits all approach when it comes to measuring board effectiveness. However, as the aim is simple - to ensure that the board is high performing and supporting the prosperity of the business - there are a number of key areas that should be addressed as part of any process.
These must include all the key functions of the board from the fundamental foundations, such as the composition of members and priorities of the group, to processes, coverage, impact and sustainability of the project.
7. What tools can be used during the board assessment process?
A good board assessment must broadly look at the systems that are in place, such as committees and meetings and the way information is documented, explore how main functions are being executed, and the role of the board within the wider company.
PricewaterhouseCoopers have devised a simple but effective tool to help with completing board assessments. (www.pwc.co.uk/communities/board-effectiveness-tool.pdf)
The tool focuses on two key areas of the board: composition and process, and behaviours and activities. It then asks a number of questions and invites the participant to rate each area from one to five, one indicating “Hardly ever/ Poor/ Strongly disagree” with five indicating “All of the time/ Fully satisfactory/ Strongly agree”.
The system also invites directors to give additional comments where appropriate then return the form to the company secretary, allowing the results to become a focus of discussion at the next board meeting.
The tool ask directors to rate the board on the following areas:Composition and Process
- Size of the board
- Terms of reference
- Committees of the board
- Skills, experience, knowledge and diversity
- Succession planning
- Appointment process
- Time commitment
- Induction and training
- Timeliness and quality of information
- Tone of the board
- Board discussions
- Understanding of the business
- Overall strategy
- Evaluation of and attitude to risk
- Remuneration strategy
- Management of crises
- Major developments in the company
- Quality of decision-making
- Board stewardship
- The chairman
- Relationship between the chairman and the Chief Executive
- Role of Senior Independent Director
- Executive directors
- Company secretary
- Performance evaluation
8. What can you do to improve board performance?
Beyond regularly reviewing the performance and effectiveness of the board and acting upon the results, you can improve the performance of any company board by continuing to question and review the group and the individuals’ motivations and behaviours.
There are a number of key areas that if allowed to slip, could see board effectiveness decrease even if annual reviews are taking place.
If the answer to any of the following is no, your board could probably be performing better than it currently is:
- Do the board members have clearly defined roles and responsibilities - and are they being allowed sufficient time to prepare for and execute these duties?
- Is the board clearly delegating to management and reviewing on a regular basis both the effectiveness of this process and the managers to whom they delegate?
- Do the core strategic goals of the company - as defined by the board - fit into the SMART (Specific, Measurable, Achievable, Realistic and Time-bound) model?
- Does the board have a clear vision and mission for the company that is shared both internally and externally, do the people who work for the company have the resources required to carry out this vision and is that regularly reviewed?
- Is the board encouraging constant positive change within the organisation?
- Does the board know the company’s strengths and weaknesses - and are the members reviewing these against present and future challenges?
Conclusion : What is the key to building a better board?
The most effective boards are built on the right people following the right processes - and the only way to make sure that you have both these things in place is to regularly assess the board as a unit, and the individual directors who sit upon it.
The board is the beating heart at the centre of any business, setting the strategic agenda for the firm and instilling the culture of the organisation. To do this it needs brilliant and relevant directors who have a clear understanding of their function and the way that fits into the wider board.
True board effectiveness can only be achieved with both honest self assessment by the board members themselves and independent unbiased scrutiny of the individuals and the board processes by external parties.
An organisation that recognises the need to continually push board effectiveness, and at the same time encourage the board and its members to operate at a higher level, will find that it sees better results cascade down into the company it represents - and in turn achieve better results against its targets and competitors.
Find out how Nurole works for organisations looking to hire exceptional board and senior executive talent.