How to increase the board’s impact in volatile times

In considering board and management relations post-pandemic, directors pointed to having the ability to act as a sounding board for management and maintaining the heightened level of listening and engagement outside of crisis situations as keys to unlocking the board’s value. The path forward that emerges is one where boards are having more executive sessions with the CEO and discussions in the boardroom are more candid. For some boards, resisting the tug of returning to “business as usual” and keeping the momentum of more open, more often conversations may prove difficult.

What directors said about strengthening the board-CEO relationship

Building the boards capabilities around emerging priorities

The survey found that while directors have high confidence in the value the board is providing around more traditional, process and agenda-driven areas of board oversight (e.g., capital allocation and succession planning), they are far less confident in the board’s contributions around critical emerging priorities.

Increasing the board’s focus on disruption, cybersecurity and crisis preparedness

The current environment is one of relentless change, volatility, escalating cybersecurity risks and ongoing corporate responses to the pandemic. Yet directors still point to traditional, process-driven areas such as capital allocation, succession planning and ERM as the areas where boards deliver greatest value to the organization. Areas such as crisis prevention and preparedness, cybersecurity and disruption were at the bottom of the list. When we consider the types of issues companies will be dealing with going forward, this suggests some level of rebalancing of board focus and efforts may be in order.

For example, our work and conversations with directors suggest that the experience and perspective the board brings during a crisis is highly valuable. Scoping the extent of the crisis, limiting overreaction, ensuring appropriate communications and even taking over the investigation in the case of questionable behavior are all activities boards tend to do well. Yet, after two years of crises, crisis prevention and preparedness was near the bottom of the list. This suggests that there is room for the board to add value in helping the management team plan ahead.

Enhancing the board’s impact around key long-term value drivers

Taking a broader view of how a company generates value – including the dimensions of customer, human and societal value – is crucial to helping companies create long-term, sustainable value. Future-focused companies understand that these considerations can have a significant impact on total enterprise value, access to capital and the talent market for their organizations. However, it is striking to see the extent to which most surveyed directors are focused on the traditional areas of finance that include revenue, productivity, costs and capital.

While 69% of directors rated their board’s effectiveness in oversight of financial matters as very effective, only 25% said the same for board oversight of customer factors (e.g., improving the customer experience and driving innovation) and only 35% said the same for oversight of societal factors (e.g., addressing environmental and community impacts).

In addition to asking where boards are most effective, we asked how they would choose to allocate time. Directors surveyed said that if they could set their board’s full agenda for the year, they would allocate 35% of their time to financial matters. That is where they also rated boards as most effective. It is also significantly more time than they would allocate to discussing the innovation strategy to improve the customer experience—an area that is key to growth in the digital era, and for which they rated the board least effective.

These survey responses indicate ample opportunity to strengthen the board’s oversight capabilities around the critical dimensions of future-forward, long-term value. However, directors are not necessarily thinking about a rebalancing of focus and instead are spending the majority of time in areas that are traditional for the board. Perhaps this is not surprising considering directors have traditionally been sourced from financial and operational leadership roles.

Evolving inputs and knowledge to align to company needs 

To expand the board’s capabilities around emerging priorities, board knowledge building and sharing are fundamental. Our survey indicates strong consensus around the view that directors need to focus on knowledge building (e.g., more strategic discussions and deep dives) more than people (e.g., board composition and culture) or processes (e.g., meeting agendas and committee mandates) to provide more value to the company.

On one hand, this finding speaks to the challenge of information asymmetry, particularly given the need for boards to keep pace with the dynamism of the current business environment. On the other hand, it may also signal that directors are more inclined to embrace knowledge building – as opposed to board composition changes – as the answer to board skills gaps, which in some cases could be problematic. The survey results are also interesting in light of the active discussions in so many boardrooms about whether to bring in a cyber risk or ESG specialist.

When asked what aspects of board knowledge need the most improvement, more external, independent perspectives from advisors and experts topped the list, followed by more best practice sharing and discussions. And yet, despite this emphasis on the need for knowledge building, including the use of external experts, only a third of directors said their board has a mandatory continuing education program for its directors.

The implication of the survey is that board leadership would be well served to consider a formal and customized learning plan that has qualitative and quantitative goals and objectives to keep pace with rapidly evolving external developments and board oversight needs. Incorporating external expertise into such a plan is fundamental to addressing any company bias or blind spots and providing insight into lessons learned from other companies and industries. Further, today’s virtual business environment makes bespoke online education for the board and committees easier to schedule and conduct, and more boards are conducting these sessions outside of the board’s regular meeting cycle.

Assessing the board’s effectiveness in meaningful ways  

A key finding from the survey is the importance of assessing the board’s effectiveness in light of company performance, which is a way to think about the return on the investment of the board.

Approximately half of the directors surveyed said that company performance against goals (e.g., revenue growth, share price) is among the best ways to assess board effectiveness. Directors were careful, however, to observe the company-specific context needed in this kind of analysis. For example, if a company is in debt, directors said that part of the performance might be getting rid of that debt. If it is a growing company, the stock price may come more into play. How the company is operating and its specific challenges and goals must inform the assessment. Director commentary also highlighted that such a performance assessment must track long-term trends rather than short-term movements.

In addition, traditional board evaluations are critical to assessing and maintaining board effectiveness and to serving as a check on whether the board’s confidence in its performance is well founded.

Interestingly, while performance evaluations facilitated by a third party came in second place (tied with management feedback), 69% of directors said their board does not use a third-party facilitator in its evaluation process. Related director commentary and our experience indicate that often a third-party facilitator is brought in when there are specific challenges that the board is seeking to address, such as an underperforming member or an unproductive culture. Having a third party facilitate the evaluation can provide benefits beyond addressing a particular problem. For example, third parties can bring market insights and practices that can enhance and strengthen an already high-performing board. Even the strongest board can benefit from an objective eye.

It is perhaps surprising to see shareholder proxy voting results ranking so low on the list of ways to assess the board’s effectiveness. Boards may want to reconsider these signals for potentially important oversight enhancements. Rising proxy voting opposition to director elections could signal eroding shareholder support for the board and potential vulnerabilities for an activist to exploit, particularly with the new universal proxy voting rules.

Going forward 

As the events of the past few years have clarified, boards can be an engaged, trusted advisor to management when given the opportunity. For the board-management partnership to work, both directors and senior executives must actively foster a healthy relationship built on honesty and respect, and boards must provide a balance of both rigorous, independent challenge and support. Directors are eager to contribute their expertise, but management must have the confidence to leverage it, and boards must have the courage and commitment to broaden that expertise through continual education, intentional turnover and refreshment. Boards can also increase their impact through ongoing, robust assessments, including those that assess board performance through the lens of company performance against long-term, relevant business goals and that use third parties to facilitate board evaluations.