Picture a model board of directors for a second. One whose members understand and perform their duties and meet more regularly to evaluate the company’s performance, and one that promotes diversity and inclusivity. Such a board is best described as effective.
But are all boards of directors effective? The answer is NO! According to a C-Suite survey, only 30% of executives think their boards of directors’ performance is good or excellent, 90% believe at least one of the directors should be replaced because of ineffectiveness, and only 20% think their boards are armed with the correct combination of skill and expertise.
The study clearly shows that more is expected from the board of directors. Building effective boards depends primarily on the board’s ability to understand and fulfill its mission and achieve its strategic objectives.
Effective boards are built around several pillars, which include members, governance policies, internal culture, and information infrastructure. More importantly, companies can measure their board effectiveness to identify areas for improvement. Nonetheless, the process can be marred by a few challenges. This guide will address all that. So, let’s dive into it!
Key Takeaway:
- Board effectiveness is defined as the board’s ability to fulfill its mission and be successful in its goals. It’s the degree to which a board of directors drives the company to its desired results.
- Common characteristics of an effective board include clear duties, diversity, inclusivity, strategic planning, transparent governance, ethical compliance, sustainability focus, stakeholders’ engagement, and mission commitment.
- Board effectiveness can be measured through self-assessment, external assessment, board observation, key performance indicators, and peer evaluation.
- An effective board is built around its people (members), policies, information infrastructure, and culture.
- An effective board is built in 7 key steps: demographics mapping, effective recruitment, size management, ongoing development, members recognition, board portal establishment, and board assessment.
- Clear governance, enhanced diversity, trust building, risk awareness, board education, member engagement, fighting groupthink mentality, competency map development, effective leadership, active oversight, and continual performance review can improve board effectiveness.
- Common challenges to board effectiveness include unproductive members, technological challenges, poor dynamics, a lack of diversity, succession planning, and member mistrust.
What’s Board Effectiveness?
Board effectiveness refers to the capability of the board of directors to attain desired results or expected outcomes. It’s how successfully the board drives the company to achieve its objectives. Generally, a board of directors that fulfills its mission and attains its goals is deemed effective.
Characteristics of an Effective Board of Directors
So, how do you identify an effective board of directors? How does it distinguish itself from a less effective one? Well, here are its notable characteristics:
a) Clear Duties
An effective board is one whose members (the directors) know their roles and responsibilities and carry them out satisfactorily. That includes the following:
- Establishing key company policies
- Financial oversight
- Strategic planning
- Compliance oversight
- Reputation management
- Attending board meetings
- Serving on assigned board committees
- Monitoring the organization’s performance
- Appointing, evaluating, and supporting key executives
- Internal conflict resolution (serves as the court of appeal during internal conflicts)
b) Diversity
A board is more effective in carrying out its mandate when it receives views from diverse individuals and considers them when making decisions. In this case, board members come from different geographic locations, ethnicities, professional backgrounds, genders, and ages.
c) Inclusivity
An effective board encourages a more inclusive internal culture to promote open communication, collaboration, and respect among its members. All its members feel a sense of belonging and appreciation, which enables them to give their best to the board and company.
d) Strategic Planning
An effective board has a strategic vision. Its long-term vision is well articulated and aligns with its strategic initiatives and goals. Generally, strategic planning helps build resilience toward corporate success and supports innovation within the boardroom.
e) Transparent Governance
Transparency is crucial for proper corporate governance; a board must demonstrate that to carry out its duties effectively. Board members who are transparent with each other are more likely to avoid conflicts of interest, which helps the board attain its objectives and become more effective.
f) Ethical Compliance
An effective board upholds the highest ethical standards, promotes the best ethical behaviors, and has a firm policy against unethical practices. It emphasizes the importance of moral conduct, enabling the company to stay compliant with regulatory authorities and building stakeholder trust.
g) Sustainability Focus
An effective board prioritizes sustainability initiatives, plans for environmental stewardship, and fosters a culture of sustainable practices among its members.
h) Stakeholders’ Engagement
An effective board effectively engages its stakeholders on various corporate issues and carefully considers their views when making decisions. The board also regularly communicates with stakeholders to understand their concerns and gain their trust.
i) Mission Commitment
A board should commit to realizing its mission to execute its mandate effectively. A solid commitment to its mission aligns its decision-making with its strategic objectives, fostering better stakeholder engagement and trust.
Board Director Skills and Personal Attributes
Board members should possess several skills and personal attributes that are key to promoting board effectiveness. They include the following:
- Strong leadership
- Strategic thinking
- Digital literacy
- Analytical skills
- Adaptability
- Industry knowledge
- Governance expertise
- Financial literacy
- Business savviness
- Regulatory expertise
- Strong communication
- Team player
- Learning Mindset
- Confidentiality/Discretion
- Problem-solving ability
How to Measure Board Effectiveness (Key Evaluation Metrics)
Measuring a board’s effectiveness is vital in determining areas for improvement, identifying and managing risks, promoting continuous leadership and development, and improving stakeholder confidence.
Some of the critical areas to evaluate a board’s effectiveness include its structure, composition, training, development, and governance and here are five metrics to use:
1. Self-Assessment
Assessment involves using questionnaires and surveys from individual directors. The questionnaires and surveys focus on the performance of the individual directors as well as the performance of the board as a whole.
Here are some of the areas that a self-assessment may cover:
- Board composition
- Corporate governance
- Decision-making by the board
- Key strategies
- Communication within the boardroom
- Risk management efforts
2. External Assessment
In external assessment, the board hires outside directors and expert consultants to conduct an independent, in-depth evaluation of its performance to help uncover issues that inside directors are often likely to overlook. The external assessors achieve that using surveys, reviews, and interviews.
3. Board Observation
Board observation involves hiring an external observer to attend board meetings, closely monitor the discussions, and identify weaknesses among board members that need addressing. The external observer provides unbiased feedback to the board, allowing it to analyze and improve its overall performance.
4. Key Performance Indicators
Key performance indicators (KPIs) are metrics designed to assess the board of directors’ performance against specific predetermined objectives. These objectives include risk management, ethical compliance, corporate strategies, governance, financial performance, and stakeholder engagements. Generally, KPIs allow the board to get tangible outcomes in terms of performance and effectiveness.
5. Peer Evaluation
Board members can also evaluate each other’s performance, strengths, and weaknesses; that’s what peer evaluation is all about. This assessment metric encourages open communication, transparency, and accountability to each other within the boardroom. Furthermore, it promotes mutual learning, which is critical to building effective boards.
Pillars of an Effective Board
An effective board of directors is founded on four essential pillars, which are as follows:
- People (board members): A board’s effectiveness is determined by the people that constitute it, the directors. Its directors should come from diverse backgrounds, ethnicities, and professions and represent different age groups and genders to make better and more effective contributions.
- Policies: As policymakers, board directors should set clear guidelines that promote ethical compliance and social responsibility. Failure to do so equals board failure, and no board wants to be accused of failing in its mandate.
- Information infrastructure: Boards can only be effective when the members have access to real-time insights on various issues affecting the company and surrounding the business landscape. Information going through and across the board should be accurate, relevant, concise, and timely.
- Culture: An effective board should have an internal culture that encourages inclusivity and diversity, promotes transparency and collaboration, and challenges the status quo.
How to Build an Effective Board
As mentioned, building board effectiveness is a process that requires a combination of several efforts. Here are the key steps:
Step 1 – Demographics Mapping
It starts with closely assessing the board’s present demographics to identify areas needing improvement and possible recruitment. That involves checking for the following:
- Ethnic diversity (whether board members come from diverse ethnic groups)
- Age diversity (whether different age groups are represented within the board)
- Gender diversity (whether there’s a fair representation of both genders)
- Geographic diversity (where members of the board come from different geographic locations)
Step 2 – Effective Recruitment
Once a board maps out its present demographics and identifies gaps, it should recruit suitable candidates. This may mean bringing in outside directors who can offer a less partisan opinion. It may also mean considering non-CEO executives such as the COO and CFO. The recruitment should generally be inclusive and non-biased.
Step 3 – Size Management
During recruitment, the board needs to maintain an easy-to-manage size. This usually depends on the company size. Small and medium-sized firms can manage with 5-7 board members, while larger enterprises may opt for 9-12 members, depending on their size.
For best results, a manageable board of members is essential. Even more importantly, the number should be odd to avoid deadlocks during a voting exercise.
In order to keep the size manageable, the board should be divided into committees to handle issues like compensation, business strategy, budgeting, and recruitment.
Step 4 – Ongoing Development
Board members need to learn how to make better contributions to the board continually. This can be attained through retreats, mentorship programs, field trips, and management training programs. Moreover, it helps to invite outside facilitators and experts who can share their expertise and industry knowledge.
Step 5 – Members Recognition
Everyone wants to be acknowledged for their individual effort, including board members. They are more motivated to give their all when the board acknowledges their contributions and offers them more responsibility. They also appreciate being recognized at events and public forums.
Step 6 – Board Portal Establishment
In modern corporate governance, there’s an increased need for establishing key instruments for organizing and sharing board agendas, evaluating board performances, setting up committees, and conducting meetings remotely.
That’s where board portals come in and are instrumental in attaining board effectiveness. Moreover, they can help with internal and external auditing, polling, voting, and self-evaluation,
Step 7 – Board Assessment
Lastly, the board has to assess itself to ensure it continually delivers as expected. It must also ensure it has the right members in the boardroom and takes action against non-performing members, even if it means forcing them to step down or vote them out.
Best Practices for Building Board Effectiveness
Organizations can improve their board effectiveness by adopting these best practices:
a) Clear Governance
The board should direct the company’s direction. Board members should also have clear roles and responsibilities to be held accountable. Moreover, the board should demonstrate transparency, social responsibility, and openness in all its engagements.
b) Enhanced Diversity
The board needs to increase its efforts to create a more diverse boardroom. It should encourage more gender parity, embrace racial and ethnic diversity, and encourage the inclusion of minority groups. The board should offer them a platform to contribute and make critical corporate decisions.
c) Trust Building
Trust is vital for board members to work together. However, it’s not given but earned, and one way the board can build trust among its members is by creating an internal environment of inclusivity and diversity. It should also encourage openness when making contributions during board meetings.
d) Risk Awareness
One of the board of directors’ key responsibilities is risk management, and for the board to do that, it has to keep abreast of all potential and new risks. Doing so will help the board take proactive risk assessment and mitigation approaches, which could protect the company from suffering economically.
e) Board Education
Proper training and awareness improve a board’s effectiveness. The most important topics a board must continuously learn include cybersecurity, corporate governance, and fiduciary responsibility.
f) Member Engagement
All board members are important, and their contributions matter. No one should feel left out, disregarded, or less critical. They must be engaged in the board’s affairs for that to happen.
Board members should freely air their views, share their concerns and reservations, and articulate their strong convictions during board meetings. Meanwhile, the board should be able to implement whatever ideas it sees as worthwhile.
g) Fighting Groupthink Mentality
A groupthink mentality occurs when board members are okay with every decision that the majority of the board makes. They don’t want to challenge it even if it’s wrong, so long as most directors agree.
The problem with groupthink mentality is that it deprives individual directors of their ability to think critically and make their voices heard. Thus, it should be discouraged, and directors should have a voice even if it contradicts the majority’s.
h) Competency Map Development
A competency map outlines the essential attributes, skills, and knowledge the board needs for effective governance. It makes it easy for the board to identify qualified candidates to join it. Furthermore, it helps identify areas where existing members should improve to enhance their performance.
i) Effective Leadership
Strong leadership is paramount in running an effective board. The chairperson, in particular, should set the tone of the agenda, be decisive when making decisions, and guide the board members correctly. The chair should also be the voice of reason when a dispute sparks between board members.
j) Active Oversight
The board should be actively involved in the affairs of the organization. It should offer oversight of its operations, risk management efforts, finances, and upper management. All these are key performance indicators.
k) Continual Performance Review
The performance review should be a continuous process to ensure the board always meets its benchmark. The board should evaluate its members’ performance regularly and consider the feedback.
Challenges of Building Board Effectiveness
It’s never a smooth sail trying to build an effective board. Challenges may crop up that need addressing, and they include:
a) Unproductive Members
It’s hard to miss one or two unproductive board members. Such members make little to no contribution and should thus be weeded out and replaced with more competent and passionate candidates.
b) Technological Challenges
Technology in the boardroom changes constantly, and many boards find it hard to keep up, hampering their ability to love its power. This hiccup can be overcome by investing in reliable, user-friendly technology that every board member will find easy to understand and use.
c) Poor Dynamics
Due to diverse viewpoints, tension between board members or a conflict of interest could hamper the board’s effectiveness. The solution is to promote a healthy culture of inclusivity, team building, and transparency.
d) Lack of Diversity
Boards of directors thrive on gender, age, and ethnicity diversity. The board has to collect diverse viewpoints to be effective. For that to happen, internal directors should understand the importance of embracing diversity. The board should institute policies that facilitate that.
e) Succession Planning
Sometimes, the board is left in a panic mode when the leadership unexpectedly changes, which hampers its effectiveness. That’s why succession planning is essential. When there’s a change of guard, everything should be clear about who should take what position, especially at the chair level.
f) Member Mistrust
It’s not easy for directors to trust each other quickly, especially when there are differences in experience levels, backgrounds, upbringings, ethnicity, and age. The solution, however, is promoting an internal framework that encourages inclusion and diversity and discourages any bias on the board.
Wrapping Up!
As the Center for Corporate Governance, we understand that building effective boards may be more challenging than it looks. That’s where we come in. We address the challenges that boards of directors face and offer relevant solutions to make them more effective.
We offer corporate governance training to board directors, board chairs, top executives, and other interested corporate heads, as well as a platform for boards to streamline their management processes. Visit our website today to check out this training program!
