What drives board effectiveness amid uncertainty

In an era marked by rapid change and increasing complexity, effective board oversight has never been more essential.

In brief

• Corporate boards can leverage their long-term outlook to help the company navigate, prepare for and adjust the strategy for future challenges.
• Strong alignment between directors and management on risks and risk appetite is a crucial part of strategic resilience and effective response to change.
• Board conversations on these key topics promote company agility: evolving strategy in a chaotic environment, aligning on risks and overcoming barriers to change.

In uncertain times, executive teams are often focused on managing near-term challenges, centering their attention on what may change in the operating environment in the days, weeks or months ahead. Corporate boards bring a longer-term governance perspective and are uniquely positioned to help management think further into the future and prepare for risks and strategic opportunities beyond the immediate horizon.

Directors recognize this imperative, according to a survey of nearly 200 public company directors conducted by Corporate Board Member and the EY Americas Center for Board Matters. Using the survey findings and insights gained from ongoing conversations with leading directors, we provide a look at what directors view as the keys to resilience and suggest four conversations boards can have to help management to take action.

Important takeaways from the survey

Dynamic strategy setting is necessary in a chaotic environment

Many boards recognize that strategies that have made their company successful in the past are unlikely to lead to the same results in the future. The world is moving quickly, and many anticipate that boards will face a significant transformation of their business. More than a third of the directors report that external factors beyond their control influence their organization’s decision-making more significantly than internal factors do. Perhaps not surprisingly, nearly three-fourths (73%) say that because of the constant state of unpredictable change, their strategy is constantly evolving—and six in 10 tell us that their strategy will need to change within 12 to 18 months.

Most directors surveyed report strong alignment on their board and with management on what the most pressing current challenges are. One interpretation of this is that boards and management are working well together. An alternative perspective is that boards may be relying uncritically on information from management and could benefit from the outputs of the conversations described in this report. A number of leading boards treat frequent consensus with healthy skepticism to ward off groupthink. These directors and their boards treat unanimity as a sign to take a closer look their alignment with management to help ensure that there are no unconscious biases at play.

Directors and management align on current risks—but some directors see opportunity in taking on more risk

Directors report strong consensus between the board and management on the risks the company faces and how much risk to take. A large majority of board members (87%) believe that their board and management team see eye to eye on risks. Furthermore, there appears to be strong alignment on risk appetite. Ninety-one percent of directors believe they clearly communicate risk appetite and 80% report that management displays evidence they have understood it. However, a third of directors would like management to take more risks at the present—to act more aggressively in alignment with risk appetite. Acting in an uncertain world can be difficult for many management teams. Even more challenging is determining how to act when new risks arise, strategy changes and the operating environment is unpredictable. As EY authors shared in How boards can reframe strategic resiliency in a time of uncertainty, directors at resilient companies (i.e., those that can respond, adapt and thrive in response to change) thrive by taking a strategic lens to resilience and incorporating it across their work.

Significant barriers exist to effectively respond to change

To support management teams as they adjust company strategy and respond to external events, boards can apply a longer-term perspective. This helps companies better predict change and become more resilient, more agile and better able to respond to challenges as they arise. When we asked board members about improving resilience and the response to external change, the two largest barriers mentioned were disruptions within their industry (50%) and disruptions to the greater economy (45%). Further, 32% reported that management’s focus on short-term financial performance created a substantial challenge to effective resilience. The longer-term view of boards can help management elevate their perspective so that response to change sets the organization up for sustainable future success. It can also help give executive teams confidence in long-term choices offering benefits that may not be realized in the near term.

Directors point to leadership composition and culture as critical success factors

We also asked directors about the keys to success, and several factors stood out (see chart below ). These focus on the right combination of skills and experience, the right culture and a deep understanding of the business. Having directors and management with the right skills in place (72%) is viewed as the most important attribute of effectively responding to predicted and unpredicted change. Simply put, directors tell us that experience matters. Critically, this experience must be actualized through the board’s structure (37%) and how it gets work done. A boardroom culture of constructive disagreement (55%) and director understanding of both the business (51%) and their oversight responsibilities (29%) frame the way directors transform skills into action. To ensure that boards remain ready for action, it is often helpful to periodically refresh and renew the board’s perspective on long-term strategic resiliency.

Key conversations to jump-start company action

It is clear that directors’ experience and long-term perspective are critical components of anticipating and responding to change which was the top resilience enabler in our survey. However, it’s not enough to simply assemble a board composed of highly experienced directors. Leading boards engage in several critical conversations to ensure that experience is turned to action. To improve resilience and better respond to disruption, CEOs and directors cannot wait until strategy is formally on the boardroom agenda, once a year. Rather, strategy needs to be embedded in conversations year-round. The principles for each of these conversations are drawn from the practices of leading directors and their boards. Each board should determine which conversations it needs to have and where on the agenda and in the meeting cadence they fit best.