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. hether 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.