Five Essential Elements of Board-Building
There is much criticism aimed at of boards of directors these days, and justifiably so in many cases. Boards of many well-respected, important companies have fallen short in the area of governance. Indeed, there are directors who have gone public about the shortcomings of their respective boards. It's one thing to acknowledge that mistakes have been made; it's quite another to overhaul a board in a meaningful way and take it to a higher level of performance. In the past 12 years I've worked with dozens of boards and haven't found one that couldn't raise its game significantly. If you're serious about making your board more effective and actually getting significant value from it, there are five essential elements that need to be addressed:
Perhaps the most obvious component of board-building is composition—ensuring that the portfolio of skills resident at the board table is optimal in terms of the company's business model and strategic direction. Effective board composition goes beyond skill sets; board members are only effective if they're engaged. Nothing is worse than a highly qualified director "on paper" who really isn't contributing much in board discussions. Making sure that directors are not "over-boarded" and can devote the share of mind required to be effective is an integral component of reviewing board composition. Conducting an individual director peer review—where a third party collects confidential feedback from other board members on an individual director's performance— can also be a helpful exercise.
The quality of board discussion and decision-making is directly related to the quality of information the board receives. Management is often accused either of providing sparse data or, as is more common, so much that board members have to wade through an inordinate amount of information before reaching the "aha" moment.
Boards typically receive an avalanche of financial data but a woeful lack of information on competitors, industry trends, and other factors relative to the context of business operations. Directors often complain privately about the information they receive—and how it is presented—but rarely ask the CEO and management for changes. If your board hasn't talked about board pre-reading materials, make it a topic for an upcoming executive session.
The debate over the separation of the chairman and CEO roles continues. Yet regardless of what a board does about its leadership structure, it's important not to lose sight of the real issue: leadership effectiveness. Does the person running the meetings—be they board meetings, committee meetings, or executive sessions—provide effective leadership? Does the person draw out different perspectives, manage the board's time well, and drive to consensus on key issues? Do the leaders of the board have a constructive—not a cozy or a hostile—working relationship with the CEO and other top executives? Are they respected by the other board members and the management team? Absent the title, would they be the natural, informal leader of the group? Do other board members and management engage them outside of the boardroom on issues of concern—and value their perspectives?
Many directors view this as the single most important factor in board effectiveness. This is, essentially, how the board works together as a team and works with the CEO and senior management. Is the climate of the boardroom open, energized, and positive? Or is it guarded, polarized—even hostile? Or are board meetings tiresome, with attention flagging and directors constantly checking their watches?
You can put in place all of the governance "best practices" you can find but none of them will have much impact if the board lacks an engaged and energized dynamic.
• Key Responsibilities
Given the amount of debate being generated over executive pay, one might begin to think that a board's single most important responsibility is determining the compensation of the CEO. While that's not unimportant, it receives an inordinate amount of attention because it's the one area where proxy disclosure has enabled outsiders to gain some insight into the board's decision-making processes.
What is seldom heard about—and what typically matters more with regard to shareholder value—is how the board engages on issues of corporate strategy, CEO and executive succession planning, and risk oversight.
Frankly, most boards haven't been doing a very good job in any of these three areas, as evidenced by a 2008 survey of more than 700 public company board members conducted by the National Association of Corporate Directors. Less than 15% of those surveyed rated their board as "highly effective" on strategic planning and oversight; 30% rated their board as only "somewhat effective" or "below acceptable levels" in this area. It was even worse on CEO succession, with less than 12% rating their board as "highly effective" in this critical area and more than 50% rating their board only "somewhat effective" or "below acceptable levels." Risk oversight barely got above 10% in terms of "highly effective" ratings; nearly 35% of directors ranked their board only "somewhat effective" or "below acceptable levels."
There are no quick fixes on this list. Yet attention to these issue can truly make boards more effective. Identifying and beginning to address even two or three areas to work on can have a notable impact on any board.
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