Companies need their boards to function effectively. Board members provide executives with a different perspective and direction, drawing on their wider external experiences. The most effective boards meet regulatory requirements, keep the company accountable and provide sound strategic counsel.
We explore some perspectives on what makes an effective board.
Delivering board effectiveness
Truly effective boards clearly define their role and purpose, and have directors who can work well as a group while fulfilling their individual roles, such as overseeing succession planning, acquisitions and capital allocation.
By considering their existing performance, addressing team dynamics and identifying gaps in experience and knowledge, they can implement plans for the future.
Recruiting and developing directors who will contribute well as the business evolves is the secret to building a high-performing and fully functioning board. Which explains why succession planning and the role of the nominations committee is rising up the agenda.
However, findings from our Corporate Governance Review show that while 78% of FTSE 350 companies discuss senior management succession planning, only 6% give further detail.
This is something boards will need to work on in order to meet the UK Corporate Governance Code, which requires the nomination committee to identify future skill needs, introduce greater diversity and develop future leaders several layers below the board.
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Effectiveness and governance – seven key factors to consider
Within governance, the principle of effectiveness relates to the collective skills and expertise of an organisation to meet its purpose and strategy.
Academics speak of a board continuum, which describes boards as foundational, developed, advanced or strategic. Foundational boards play it safe, exhibiting basic levels of compliance and are unwilling to make tough decisions or take strong positions. At the other end of the spectrum, strategic boards are insightful and high performing, with directors who take appropriate risks to make significant contributions that have a lasting impact on value.
This may be overly simplistic given the propensity for individual directors to influence a board's performance on individual matters. However, it can be a useful benchmark of the typical characteristics that are more often associated with these different operating models, which in turn allows for a balanced self-assessment.
Useful factors to consider when assessing board effectiveness include:
- Does the board have an appropriate environment, diverse mix of skills, experience and independence to ensure there is robust but effective challenge and stewardship of the organisation's purpose and strategy?
- Does the organisational design support and/or enable strategic decision making?
- Do people understand their roles and responsibilities? Are individual directors formally evaluated in terms of their performance on an annual basis?
- Does the chair create an open and inclusive environment at meetings where all are encouraged to contribute? Is the chair's performance appraised by their directors?
- Are management boards clear on their roles and responsibilities? Is management information timely and clear?
- Does the board have clear and timely access to information to assess both the performance of the business and its management of strategic risks?
- Does the board provide independent challenge and plan for its succession? Is diversity and training of the boardroom considered in its planning?
There are wider issues that modern boards cannot afford to ignore: the pensions crisis, sustainability, social responsibility, risk management and business ethics. The chair's role is to establish and run an effective board, which is only achievable by combining the right mix of skill, experience and perspective.
And, of course, once a company has an effective board, the directors then need to be held to account, which we explore in Driving good governance through accountability.
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