How to Improve Board Effectiveness

Nicholas J Price

As regulators and legislators hold boards of directors more accountable for their duties and responsibilities, boards must be more cognizant of their level of diligence and engagement in board matters. The pressures require boards to get the right talent on their boards, including having an effective board chair. Boards must know and understand their roles, especially in the areas of oversight, guiding organizational behavior and clearly delineating their responsibilities from management's responsibilities. Studies have shown that boards struggle the most with board processes. Digital tools, such as board self-evaluations, can help boards to elevate their performance and to streamline board processes as the best means for improving board effectiveness.

Clarifying Differences Between Board and Management

Effective governance requires boards to be clear on the difference between their role and the role of management and to make sure management holds the same perspective. The differences usually vary somewhat from one board to another. Board directors should be able to confidently communicate the major functions that they perform, as well as the major functions of management. Boards improve their performance through making policies and developing the strategic direction of the board. Boards that understand their roles well will be able to balance the compliance aspect of board work with the performance aspects of the board. Effective boards also work toward improving and maintaining good relationships between the board and management.

Boards have a greater responsibility in strategizing than management. The board is responsible for adopting a sound strategic direction, approving strategy, developing strategy and communicating their strategic plans to management.

Board directors should keep at the forefront of their minds that their role in appointing, reviewing, developing a good working relationship with and eventually replacing the CEO goes beyond merely employing the CEO. Boards should be ever cognizant of the fact that they employ the CEO. Having clarity on the differences between board and management roles is that link between the planning process and the implementation phase. The board's responsibilities include oversight, internal controls and managing risks and shouldn't extend to micromanaging the management. Being aware of the division of these responsibilities should lead the board to experience deeper insight into the relationship between risks and rewards.

The Importance of Annual Board Self-Evaluations

Regulators require annual board self-evaluations and shareholders expect them because they help boards to become aware of their strengths and weaknesses and to identify gaps in board composition. Evaluations explore many components of board function, including diversity, skills, competencies, motivation and board dynamics. Evaluations should help boards to better understand what skills they have in comparison to the skills they need. At the same time, board self-evaluations will help boards to find the proper balance between board directors who have expertise in governance and those who have expertise in other, specific areas.

Because of their increased accountability, more boards are invested in doing self-evaluations. They also realize that evaluations need to be more than just an exercise or a requirement. The results will help them make, implement and monitor changes.

To get the most from board self-evaluations, boards need to begin with clear objectives for the evaluation. The process requires a strong board leader and input from senior managers who interact with the board regularly. In constructing the questionnaire, boards need to explore their performance beyond compliance issues and to review their effectiveness across the full spectrum of their responsibilities. Directors need to commit to reviewing their results and must be willing to address current or emerging issues.

McKinsey & Company is a strategy and finance company that conducted a 2018 Global Survey of Directors where they surveyed 1,100 board directors on performance issues. The survey indicated that boards struggle the most with processes, such as board self-evaluations. Diligent Corporation successfully helps boards address their challenges with processes by providing digital tools. Diligent Boards is a secure board portal platform that allows boards to streamline their processes for board meetings. Governance Cloud is a suite of digital tools that integrate seamlessly with Diligent Boards and other digital tools for a total enterprise governance management solution.

Improving Board Oversight

The media has cast a spotlight on the failings of major corporations, causing increased pressure on boards to recognize that oversight is an essential board function. Strong oversight ensures that boards are monitoring how their decisions align with the company's strategic direction and owner expectations. Oversight also ensures legal compliance.

Board oversight demands that the board identifies key performance drivers and establishes appropriate measures for determining success. Boards need to agree on an acceptable format for reports, so they can ensure that they are reporting all issues and statistics accurately.

It's the board's responsibility to make sure that they have all of the information they need to help them make the best decisions. As each board has different degrees of knowledge and different skill sets, they need to make requests for the specific types of information they need, even when that information is different than what they routinely receive. Boards also need to be willing to step outside their comfort zones and request expert, independent advice when they need it.

Effective Boards Guide Organizational Behavior

Effective boards form policies that guide the organization's behavior because, ultimately, they are responsible for the actions and decisions of the organization, including the actions and decisions of the board and management. The range of policy-making extends to including how the board and management delegate responsibility, streamlining meeting processes, improving the understandability of reports, making valuable use of committees, and whatever else they need to do to function as efficiently and effectively as possible.

A Competent Board Chair Leads the Way to Board Effectiveness

The board chair plays an instrumental role in the effectiveness of the board. A competent board chair needs good leadership and meeting facilitation skills, among other qualities, and a sound relationship with the CEO. An effective board chair knows how to bring out a variety of perspectives from the board and to engage all board directors during board discussions. The board chair who performs the job well will create a respectful and trusting board culture.

There are many ways to improve board effectiveness. Improvement can happen by looking at board processes, the board chair and the board composition. The most important factor is the board's self-awareness that they need improvement. The volatility of today's marketplace requires boards to take advantage of every tool that they can access to help them perform at their best. Governance Cloud by Diligent is the leading resource in fully integrated governance solutions and the industry's leading resource for board software.

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Nicholas J. Price
Nicholas J. Price is a former Manager at Diligent. He has worked extensively in the governance space, particularly on the key governance technologies that can support leadership with the visibility, data and operating capabilities for more effective decision-making.