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Improving board effectiveness

By Gerry Brown

Ineffective boards bring enormous consequences for society. Misperceptions of risk have led many boards, and thus their organisations, into poor decision-making or worse – including business disasters.

A sensible approach to addressing board performance has to consider the cultural and psychological dimensions of corporate governance as well as the technical and regulatory aspects.

Remedies for ineffectiveness lie primarily with each board. It is up to directors to take action and not expect governments or regulators to do it for them.

Regulators cannot solve many problems in any case, and some businesspeople say that we have enough regulation already.

Compliance with regulations can easily turn into box-ticking exercises which fail to address deeper cultural problems, especially if a board or an individual director is determined to bend the rules.

Regulations need to be more strictly enforced – with much bigger penalties. These could include performance improvement notices and, in serious cases, delisting companies.

Regulators need to pay greater attention to why and how these governance rules affect directors and also stakeholders, including employees, society and shareholders. Regulators also have an important role in publicising companies’ governance, performance and advocating greater professionalisation of the role of directors.

The right culture is key

The aim of changing board culture must be, first, to foster a culture of independence on the part of the directors and, second, to improve interaction on the board itself and between the board and company executives.

Board members should, for example, meet regularly without the chair, as well as make regular visits to the business outside of board meetings – it is amazing how many don’t. Talking to staff in person is crucial too. Board culture will directly affect how the executive responds and interacts. When boards operate in an evidence-based and transparent fashion, this encourages the executive to collaborate fully. Research shows that this implants and encourages a shared culture. Independence of thought, meanwhile, gives directors the confidence to speak out against groupthink.

The most effective boards do not rely on instinct alone to argue for change. Instead they seek evidence to contest, develop and support their views. They know that concepts such as culture, conflict and values – too often dismissed as opinion – can be appraised, instilled into the business then managed on an evidence-led basis.

Boards should bring in culture experts in the same way that they consult outsiders skilled in finance, investor relations or cyber security. Board members must be dynamically active and remain aware of global trends to avoid complacency. Having a diverse board membership is a step in the right direction but not a magic solution. If an organisation has a culture of open – and, if needs be, confidential – communication, it will help to bring important issues to attention in a timely manner rather than having them reach board level only when they are marked “most urgent”.

Improving board effectiveness also requires directors to do the basics well. They need to know the company’s purpose and what they are responsible for before they take control of key issues.

For nearly every board, significant issues will include business strategy, investor relations, risk management, audit, succession planning – for both the board and the chief executive – and remuneration.

Board evaluation is also vital but it is too often overlooked. This is a critical assessment of the board’s performance that results in a plan of continuous improvement. Evaluation should be used to show all stakeholders that the board knows its own strengths and weaknesses. In 2003 the Tyson Report, a UK study of the development of non-executive directors said : “It is both common sense and a documented conclusion of research … that people and organisations do not learn without data and feedback.”

Making boards more resilient and effective means creating a cultural space where directors can scrutinise, challenge and hold honest debate. This invariably requires the recruitment of a diverse board of the most effective people. Improving the quality of non-executive directors is critical. Getting the right board structure is vital. Non-execs, in effect the long-term custodians of a business, must have a very strong voice.

With regard to board leadership, more emphasis has to be placed on the role and skills of the chair. Too many chairs are still appointed primarily because of their seniority, connections or status in the business community. There are many examples of how one powerful individual or their cabal has dominated a board to disastrous effect.

There has to be independent challenge and scrutiny of CEOs; if they act against the interests of stakeholders, the board should be given the power to remove the CEO from office. The chair has a critical role to play in this but, equally, the board must be able to see the CEO’s performance benchmarked against business objectives.

Given the scale and complexity of the problems we face, business has to succeed. The stream of collapses and business failures must be stopped. We need more and better education and training for directors, along with improved stakeholder engagement and an understanding of what being an effective board member means. Above all, we need a new shared sense of collective responsibility by directors, shareholders, regulators and employees. Board decisions are not taken in a self-contained safe space but they do affect the lives of all.

Gerry Brown is chairman of Novaquest Capital Management, the private equity firm, and co-author of Disaster in the Boardroom: Six Dysfunctions Everyone Should Understand.

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