Building a more effective board
As part of their legal and fiduciary duties, which include setting policy with the best interest of shareholders in mind, corporate boards are increasingly given the task of dealing with volatility—be it from worldwide economic turbulence, cyberattacks, activist investors, or competitive disruptions. Directors aren’t fully confident that they have what it takes to tackle the challenges, manage risks, and focus on long–term strategic goals, according to surveys the Stanford Graduate School of Business and the National Association of Corporate Directors (NACD) conducted with more than 800 participants in 2016.
The average survey participant worried about not getting enough director training and education in the past 12 months, about reviewing management information that lacked quality before last year’s board meetings, and about at least one fellow board member who they think is ineffective and should be removed.
“In this highly competitive, disruptive, and innovative world that we find ourselves in today, boards have to be extremely nimble,” said Steven Walker, managing director of the NACD’s board advisory services. “I think the biggest area that needs improvement is boards having the courage and the confidence to conduct 360 [degree] self and peer evaluations.”
Boards that evaluate themselves once a year and conduct peer evaluations every two to three years ensure that directors’ skills are aligned with the needs of the board, that underperforming directors are given a chance to improve, and that the board and management work together effectively, Walker said. (See the sidebar, “How to Improve Board Performance,” for experts’ recommendations to help boards operate more effectively.)
Directors agree evaluations are key instruments to ensure the right board composition, but only 41% of the more than 600 respondents in the NACD survey said their boards assess individual members.
Participants in the Stanford survey generally believed their boards have the skills needed to advise and oversee their companies. They particularly rated highly board members’ financial skills, management and industry experience, and audit and accounting knowledge.
About half of the participants (55%) said their companies evaluated individual directors, but just 36% thought their companies do a very good job of accurately assessing the performance of individual directors.
Participants in the Stanford and NACD surveys said boards also fall short in these areas:
To make boards work better and more efficiently, Gordon Barrie, ACMA, CGMA, a U.K. executive coach and consultant; the authors of the Stanford University study; and NACD board advisory services recommend the following:
Assess each director’s position on critical issues
Questions to ask include the following: How effective do you think the board and board committees are? Do composition, structures, processes, agendas, and materials allow the board to meet strategic needs of the enterprise? How well do the board and management communicate? Is the board leadership effective? Is a board succession process established?
Detailed findings of the assessment should be combined in a report, along with recommended actions. Also, the board should decide how to monitor any actions taken and measure their effectiveness.
Assist directors in their improvement efforts
Develop a skills-and-experience matrix to help the board and the nominating governance committee assess directors’ skill sets and pinpoint areas that need improvement. Put together board education plans and coaching plans for individual directors. Schedule feedback sessions to let directors know whether they are doing well or falling off.
Bring in outside experts to challenge the board to be proactive, study the competition, and foster innovation. Also, consider adding to the board a capable CIO who can optimize the commercial management of IT and cybersecurity.
Periodically reevaluate and refresh the board
Create an independent process to periodically reevaluate and refresh the board. Identify a point person on the board who is accountable for managing the process and following through on recommendations.
In addition to annual self-assessments and peer evaluations every two to three years, the NACD’s board advisory services suggests directors ask themselves after every meeting whether the board followed the agenda, accomplished the goals it set in the executive session before the meeting, and spent enough time discussing strategy and risk oversight.
Plan for board succession
Develop a succession plan that includes processes for removing underperforming directors and refreshing the board when changes in corporate strategy require different skills and experiences on the board.
A version of this article was originally published at fm-magazine.com, April 4, 2017.
Sabine Vollmer is a JofA senior editor. To comment on this article or to suggest an idea for another article, contact her at Sabine.Vollmer@aicpa-cima.com or 919-402-2304.
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