How to achieve enduring board effectiveness

Making effective determinations about the competencies, backgrounds and experiences needed on the board is key to building a strong board, keeping in mind that diversity across multiple dimensions is essential to board effectiveness.

Based on an understanding of the companies’ strategies and emerging mission-critical issues, key stakeholder demands, and increasing regulatory scrutiny of board effectiveness, boards should develop and maintain, in collaboration with senior management, a competency map (or board skills matrix) that identifies and scopes the skills and type of experience needed on the board. This analysis, which should have a forward-looking orientation, enables a more accurate and objective determination of effective board composition, size and committee structure.

The best board members have traditional leadership values and skills, such as strong ethics and integrity; diligence and conscientiousness; an executive-level ability to communicate with, inspire and empower others; and a commitment to progress. Besides these qualities, board members should demonstrate curiosity, a continual learning mindset and a forward-looking entrepreneurial energy. They should be well prepared, stay abreast of governance issues and look to continually improve their performance.

Board size is largely dependent on the competencies needed on the board and should therefore be flexible and change as necessary based on the circumstances. Every director should understand and acknowledge that board seats are not open-ended guarantees: His or her presence on the board will be based on the board’s needs for his or her individual competencies and performance on the board. Processes for director refreshment and on- and offboarding directors should be clear and timely, and board succession planning should be evergreen.

In view of the board’s collective competencies, boards should strategically allocate member talent across committees. Due to regulation and exchange requirements, boards have established audit, compensation, and nominating and governance committees and financial services-regulated risk committees. Today, more boards are establishing other standing committees to absorb some of the work overload faced by existing committees and/or to drive focus on strategic issues. Our research indicates that the most common additional committees are executive, finance, risk and compliance committees. Additionally, ad hoc committees can be very useful in nimbly addressing important shorter-term board matters.

Even when committee structure is established, questions arise around whether and how to allocate certain mission-critical board matters effectively across committees. For example, risk and technology continually expand and metamorphosize. The focus on environmental, social and governance (ESG) matters is also evolving to highlight historical long-term value drivers and illuminate new priorities. We see that boards are allocating such topics across multiple committees, with certain overall responsibilities resting with the full board.

Effective board and committee leadership is critical. Board committees themselves should select their chairs based on competencies and leadership ability. Any board leader, whether an independent chair or lead independent director, must be dynamic, organized and free of any conflicts of interest.

Board renewal or refreshment, like diversity, is seen as a significant driver of board effectiveness. Data shows that effective board refreshment can lead to better corporate performance and avoid board staleness or complacency.  To support effective refreshment, boards should engage in evergreen director succession planning.

Evidence of effective board composition, structure and leadership

• The board maintains, in collaboration with management, a detailed board skills matrix in assessing board size and composition.
• The board’s corporate governance guidelines and committee charters clearly allocate roles and responsibilities between the board and its committees, including mission-critical issues such as strategy, risk, culture, compliance, technology, cybersecurity and climate change.
• Board members periodically move across different committees, and committee structure and composition are reasonably fluid based on the company’s needs.
• Committee chairs regularly collaborate on the most effective ways to govern overarching board responsibilities relating to strategy, risk and long-term value.
• Board and committee oversight responsibilities are periodically revisited as business environments and priorities shift.
• Committee chairs report to the board when they need additional resources, refreshed competencies or workload reallocation.

After carefully designing the right board structure, the right operating practices must be implemented for effective governance. Board and committee leaders should know what mission-critical issues they need to address and collaborate with management to develop and maintain meeting schedules and orientation programs with appropriate frequency, sufficient time and relevant content. Meeting and orientation agendas should drive scheduled meeting times rather than the other way around.

Using last year’s calendar to create this year’s is no longer an effective practice. Boards and committees should anticipate spending more quality meeting time, both in person and virtually, in discussion with — vs. hearing presentations from — management, independent advisors, employees and other key stakeholders. All directors should understand that it is their duty to come prepared to engage, discuss issues and deliberate at meetings and not simply to review board materials and hear presentations.

Time is an issue. Many boards lament that there is not enough time for board governance necessities. To help, boards should get clarity on mission-critical company issues to help reduce board scope; improve the board information infrastructure to obtain timely, high-quality, clear and concise information on current and emerging mission-critical issues from the right people; use unanimous written consents for board or committee action on routine noncontroversial matters (or in other appropriate circumstances); and/or make more time.

Evidence of effective board operations

• Board and committee meeting schedules and core agendas are formalized for the upcoming year or two, reducing scheduling conflicts and director absences, but flexible to meet board and company needs.
• Board meetings are focused on discussion and deliberation, do not run over the allotted time, and agenda items are not deferred until a future meeting or converted at the last minute to a request for unanimous written consent.
• Board members do not suffer surprises at board or committee meetings.
• Executive sessions of the independent directors, with and without management present, are reasonably planned and appropriately documented in the company’s books and records.
• All directors attend all (or a vast majority of) meetings of the board and committees on which they sit.
• The board calendar (still) includes a two-day off-site meeting for strategy, long-term value and related matters, including talent, capital allocation and budgeting, but strategic topics are also included in routine meetings.
• Board orientation is carefully tailored to the needs of the company and the board — time and resources are not expended on “template” learning.

A positive board dynamic is one of the most critical elements in achieving board effectiveness. Many also believe that consistently maintaining a positive board dynamic — one that appropriately balances candor and collegiality — can be challenging. For this reason, all board members, especially board leadership, need to work to nurture and consistently demonstrate respect and trust for each other. Without a culture of respect and trust, boards cannot engage in constructive debate and instead devolve quickly into dysfunction. On the opposite end of the spectrum, boards that prioritize consensus at all costs can drift into performative, “going along to get along”-style meetings where important risks or performance issues are not addressed thoroughly. In their discussions and deliberations with each other, at meetings and informally, all board members should show evidence of their commitment to the board’s mission, values and engagement model through active, informed and productive engagement.

All board members should actively seek out, hear and share new learnings, points of view and ideas. Board members should be intentional about making sure that diverse and potentially dissenting voices are heard, so they can gain enhanced perspectives that enable better problem identification and solution, stronger innovation and reduced blind spots. To elicit broad perspectives, all directors must be receptive to differing points of view and boards must practice inclusion — making space for fresh ideas.

Board members also need to exercise practical professional skepticism and hone their skills for engaging in candid and constructive debate. Each director must call up the courage and conviction needed to raise red flags, within the board itself and with management, and obtain satisfactory answers before lowering them. All board members should have an appreciation for and seek to build a culture of continual feedback.

Achieving a highly collaborative culture requires intentionality and skill, especially since directors all bring different competencies, backgrounds and personalities to the boardroom in order to meet the company’s current and future strategic needs. Boards should acknowledge, and proactively look to avoid, the potential for unconscious bias, disconnect or misunderstanding. Upgrading individual communication skills and conflict resolution is one approach.

Informal and constructive director communications between board meetings can improve director understanding and focus; however, directors must ensure that any critical offline conversation is brought to the full board as necessary. Because boards meet infrequently, it’s also important for directors to build in time to get to know one another. With board meeting agendas getting increasingly crowded, dinners, field visits, or other similar events can seem like easy targets to cut for greater efficiency, but it’s important for board members to continue to build camaraderie and foster a culture of inclusion.

Positive boardroom dynamics include those between the members of the board and members of management. Boards should be mindful about developing and maintaining a strong rapport with management to enhance trust, information flow, and strengthen their respective performance, while still maintaining appropriate skepticism and holding management accountable for performance and culture.

Evidence of effective board dynamics

• Director participation at meetings is balanced: No single director or group of directors dominates agenda formulation, discussions or deliberations, and no single director or group of directors is passive or disengaged.
• If interviewed, each director would state that he or she felt included, heard and respected, and that all members demonstrate respect and trust.
• There are no “camps” or “factions” among board members or among board members and management.
• Directors say something when they see something, and the board takes appropriate action.
• The board engages in informal ways between meetings to enhance trust and build personal connections.

Boards should be highly conscientious and intentional about when and how they make decisions. Leading boards develop a process to support effective decision-making, based on applicable state and relevant laws and the board’s mission and engagement model. Charters should clearly specify the oversight responsibilities of the respective board committees, to avoid duplication of duties or areas falling through the proverbial cracks. Charters should map directly to board and committee agendas so that all responsibilities outlined in the charter documents are covered over the course of the year.

Some boards may choose to adopt the common management-level practice of the “authority matrix” or RACI (Responsible, Accountable, Consulted, Informed) model. Simple RACI mapping that highlights various board topics and defines who (e.g., full board, management, a particular committee, lead director) is responsible or accountable for making the decision and who must be consulted or informed after a decision is taken can be incredibly effective around clarifying the decision-making process. The matrix should be detailed enough to define for management when it must seek board approval to act and what the process is to communicate relevant information on matters not requiring board decision but still part of the governance process. Board members and management should agree on when the board expects to be consulted or informed about matters not formally requiring board approval or notice.

When engaged in the decision-making process, boards should diligently assess whether they have all relevant information. They should ask whether there are gaps in their knowledge or understanding, identify and examine key assumptions, and have practices to discover and address any biases or blind spots. They should ask probing questions and demand satisfactory answers about issues before them. For highly complex or significant matters, boards should work with the CEO or other members of senior management to fully understand all aspects of the matter. And, of course, boards must comply with their organizational and governance charters, including bylaw provisions, corporate governance guidelines, committee charters and, as relevant, company agreements calling for board approvals on certain matters (such as around valuation, indebtedness, specific policy, etc.). Decisions must also be documented in board minutes, so it is clear what agreements have been achieved.

For every matter before them, boards should question and assess how well the decisions they may make align with the company’s purpose, culture, strategy, risk tolerance profile and sustainability goals. Boards need to spend the time, access appropriate resources and consider alternative scenarios and outcomes before making final decisions.

Evidence of effective board decision-making

• The board and management maintain a delegated authority matrix, specifying corporate business matters that require board decisions.
• The board maintains a checklist of approval requirements in its organizational documents and under relevant law.
• The board chair establishes appropriate transparency around director voting by discouraging informal decision-making discussions and overseeing that the board’s books and records are in order.
• The board does not make decisions without sufficient considerations about the quality of the information, timing, and risks and rewards.

The ultimate outcome of a high-performing board is reflected in the success and prosperity of the business itself. A board should see the evidence of its efforts manifest in company financial performance, including growth through the innovation it fosters and cost reduction from the risks it helps the company avoid.

Indeed, investors, regulators and other stakeholders are seeking greater board effectiveness and are increasingly interested in board evaluation processes and results. The final component in the pyramid includes a board evaluation process that not only results in a more effective board but also leads to investor trust.

A rigorous and strategic evaluation, especially when facilitated by an independent third party, allows boards to more objectively examine whether individual directors, board committees and the full board have the skills, experience, judgment, dynamics and processes necessary to act as effective stewards of their companies and what changes may be implemented to enhance board effectiveness. Board and individual director self-evaluation plus peer evaluation can enhance board and personal performance as well as unmask board and director dysfunction.

Ongoing evaluations should encourage and maintain a real-time feedback process where directors provide constructive advice and criticism on current board operations or performance. This effort can identify how certain processes could be adjusted to drive greater relevance, clarity and conciseness.

Prior to designing and implementing an evaluation process, boards should determine the specific goals and objectives they want to achieve. The process should not be used simply as a way to assess whether the board, its committees and its members have satisfactorily performed their required duties and responsibilities. Instead, the evaluation process should be designed to carefully test whether the board’s composition, dynamics, operations and structure are effective for the company and its business environment, both in the short and long term.

Leading boards use targeted questions with the goal of eliciting valuable and practical feedback about board dynamics, operations, structure, performance and composition. High-quality feedback is what enables boards and directors to see how they can better perform and communicate, with the result that the company itself better performs and communicates. Template evaluation questionnaires cannot achieve the same depth of insight as a well-drafted, custom-designed questionnaire.

Additionally, conducting one-on-one interviews as part of the evaluation process can elicit valuable, detailed, sensitive and candid director feedback that may not be captured through questionnaires alone. Hiring an independent third party to facilitate the evaluation can meaningfully enhance the objectivity and rigor of the process and results. Third-party specialists provide new and different perspectives that can lead to improved action item development and evaluation results.

Evidence of effective board outcomes and evaluation

• The board, its committees and each director conduct self-evaluations annually, enhanced by third-party facilitation when needed.
• The evaluation process results in the identification of concrete actions the board agrees to take within a specified period to enhance effectiveness through the achievement of specific milestones.
• The board’s collective competencies map to the company’s strategic and technical needs.
• The company’s disclosures around the board evaluation process enhance trust in the board.