In their joint 2021 c-suite survey, PwC and The Conference Board highlighted that while many executives recognised their board had a good understanding of its core responsibilities, confidence in their effectiveness was low. As a result, the survey found nearly 90% of executives felt that one or more directors should be replaced and only 29% rated the board’s overall performance as excellent or good.
What does a board of directors do?
Boards are an executive body responsible for deciding and aligning strategy with operations. Members of the board are appointed or elected to safeguard shareholder interests, direct business activities and ensure the company fulfils its legal and financial obligations. They oversee policy and strategic approaches and support the CEO in leading the company’s management teams.
The responsibilities of board members include:
- Setting and implementing structure and strategic plans
- Guardianship of financial performance and being accountable to shareholders
- Overseeing executive management of the organisation
- Creating and leading the organisation’s mission and values
As the Institute of Directors points out, board teams must walk the line of prudent risk-taking and make balanced judgments relating to company development. An effective board will create a framework that facilitates growth delegating to senior management as needed. It will see the bigger picture and guide the process of achieving the goals and vision it has laid out for the organisation.
In short, being a member of the board is a responsibility not to be taken lightly, one that can often mean high-level and competing issues must be managed and resolved skillfully. This juggling act means a board of directors can take many forms and while there are legal and cultural variations throughout Europe, there are also some core characteristics that sit at the heart of the most efficient and effective company boards.
The board must simultaneously be entrepreneurial and drive the business forward while keeping it under prudent control
Institute of Directors
1. A diverse skill set
Perhaps one of the most critical aspects of success are the skills and experience of the people who make up the board. The responsibilities of board members are diverse and board roles need to reflect the values, interests and strategic priorities of the organisation.
Financial literacy is critical
Guiding and supporting financial performance to generate profit and growth is crucial for public and privately held companies alike. But non-profits also need to create and sustain fundraising to secure the long-term future of operations. Whatever the organisational structure, directors that are able to interpret financial statements and budgets accurately can better predict outcomes, evaluate risk and avoid situations that might erode longer-term value. These can include excessive or mismanaged debt, inappropriate mergers and acquisitions, or just poorly considered decisions that limit growth.
While contributing to the financial stability of an organisation is a core responsibility of board members, there can be some serious personal implications too.
Penalties for financial mismanagement can be significant in most countries and legal territories, with directors often being held personally accountable for errors of judgement as well as deliberate financial wrongdoing. Every board member must fully understand the commitment they are making and be equipped with the skills needed to safeguard the organisation’s and their own interests.
Visionary leadership
Board roles require people who can envisage the strategic direction of an organisation while not losing sight of the smaller issues that may stifle progress. Finding ways to break down barriers to growth means combining creativity with analytical thinking and empathy with business acumen.
Motivating a team and employees is vital too and this means being willing to listen to others, being persistent and focused as well as supporting measured risk-taking. These qualities are inherent in the most successful leaders and company boards of any organisational type.
Decision-making skills
Naturally, the nature of board work means there will be a lot of decisions to be made. Some will impact the daily operations and others will guide the bigger picture, but all will stem from board discussion and approval.
Navigating difficult issues with diplomacy and pragmatism is an interpersonal skill that often comes with experience. As a result, a board’s decision-making style can vary depending on many factors including the length of tenure of its directors and the type of experience they have. Understanding someone’s personal approach to decision-making is an important factor when appointing a member of the board and can help avoid clashes and issues further down the line.
Communication is king
All board members need to be effective communicators. Like any other team, strong verbal and written communication skills are a critical part of getting things done and facilitate what a board of directors does on a daily basis. The nature of board roles and the decisions being taken requires a balance between talking and listening with subjective judgement left at the board room door.
Undoubtedly there will be times when difficult decisions need to be made and communicated through the organisation, and much of how those decisions are received can rest on the style of communication used to deliver them. Most of all, directors that can adjust their communication style based on the audience are more likely to motivate and reassure employees effectively.
Many executives question whether the directors on their boards have the right skills, experience, and background to help steer companies through today’s uncertain climate. Executives point to the reluctance of long-tenured directors to retire, in particular, as an impediment to board diversity.
Board Effectiveness: A survey of the c-suite, PwC & The Conference Board
2. An evolving board composition
Board diversity, and its impact on performance, has been a hotly debated topic for many years, but most analysts point to the improved effectiveness of board teams that have a mix of genders and cultural and ethnic backgrounds.
In their 2018 report, McKinsey & Company confirmed a correlation between board diversity and improved financial performance. Companies with ethnically and culturally diverse directors were found to be 33% more likely to deliver greater profitability while boards with higher female representation were 27% more likely to outperform other firms in terms of overall value creation.
However, the benefits are not just commercial. Since a diverse board is more likely to follow practices regarding equality, they are less exposed to potential lawsuits for discrimination making the company a safer bet for potential investors. Plus, with a mix of people occupying different board member positions comes the opportunity for fresh perspectives that can help stimulate new ideas and innovation.
Despite the evidence that diversity works, according to the European Commission, women still only account for 30.6% of board members and just 8.5% of board chairs. Although executive-level representation has improved in the last decade, women are still struggling to break into the company board. In an effort to change this, the EU has agreed to a mandate that requires exchange-listed company boards to have 40% of their seats occupied by women by the summer of 2026.
Companies with ethnically and culturally diverse directors were found to be 33% more likely to deliver greater profitability
Delivering growth through diversity, McKinsey & Co
3. A culture of improvement
Like any other team, a company board should regularly reflect on its performance to identify areas for improvement. Looking at the composition of a board, its relationship with shareholders and its ways of working can provide powerful insights to drive efficiency and effectiveness.
Although board evaluations are becoming more commonplace, most countries have guidance or recommendations rather than a legal requirement. In the UK for example, the Financial Reporting Council recommends that FTSE 350 companies evaluate their board’s performance at least every three years, but regardless of official guidance, situations such as the Enron scandal and the collapse of Lehman Bros have led to a greater focus on board behaviours and competence. As a result, shareholders now increasingly expect regular self-appraisal and external feedback.
Although processes vary, a mix of internal and external reflection is useful including management teams, auditors and external stakeholders, shareholders and employee representatives. Typically measured via a questionnaire, areas to review include:
- Board effectiveness - performance feedback from board members, senior management and shareholders
- Policy adherence - progress review of environmental and green commitments, social responsibility, cyber-security management, risk and investment attitudes
- Relationship dynamics - evaluation of communication with shareholders, employees and internal/external stakeholders
- Board composition - board roles and their structure, approach to diversity and inclusion
- Governance and compliance - board papers, meetings, codes of conduct, ethics and director standards
Boards that regularly evaluate their performance, composition and governance processes are amongst the most effective and efficient
4. Process and task automation
With directors spending up to 250 hours per year on board work and often juggling several positions at the same time, finding ways to automate tasks and processes can dramatically improve efficiency.
Software designed with the needs of board roles in mind helps directors do the small things well, such as speeding up processes, simplifying remote working and running meetings with ease. Features such as digital document sharing, secure messaging, electronic signatures and digital meetings and agendas can boost productivity by allowing board members to focus on strategic issues and less on the process of how things are done.
Board automation tools also offer advanced security features meaning confidential papers and information are held securely in one place and always available in any location and on any device. With the growth in hybrid working and digital board meetings, board software has played an important role in supporting company boards to create more efficient working structures.
Board software and automation tools help directors do the small things well, freeing up time to focus on strategic and operational issues
5. Boards that look beyond the day-to-day
Board effectiveness is not just about getting operational decisions made or budgets approved. The most dynamic boards look beyond the next meeting agenda and take a proactive approach to issues such as succession and diversity planning.
While it is generally accepted that experience pays and directors may sit on a board for an average of up to nine years, there is increasing concern that length of tenure can also be a risk, especially when embracing a more diverse and inclusive board. In fact, 60% of executives believe long-tenured directors limit efforts to be more diverse while 53% feel that long-serving directors restrict performance overall.
Solving these challenges means creating a succession plan that is as much part of a board’s strategy as the sales and marketing plan. Taking a proactive approach has a number of benefits including helping to bring in new perspectives to prevent group-think and creating a contingency plan for the sudden resignation or departure of a director.
While many company boards have terms that govern the length of service of its directors, having a backup plan that identifies potential sources of new talent that doesn’t just rely on the personal networks of existing directors is crucial. A strategy that can adapt to the changing business environment and improve representation on the board is key to the most effective board teams and should be seen as an additional responsibility of board members.
Boards should strive to move up the succession planning maturity continuum toward a strategic approach. A strategic approach delivers benefits to board performance and increases long-term shareholder value
The Road to Strategic Board Succession, PwC & Spencer Stuart
In summary
The most effective company boards are agile. They adapt and grow in line with strategic priorities, evolving operating environments and changing cultural expectations.
Members of the board are tasked with walking a fine line between driving a business forward while safeguarding its financial and legal position. This delicate balancing act can mean an organisation can either limit its growth entirely through caution and stagnation or overreach its capabilities through mismanaged ambition.
While operating environments evolve and the demands of shareholders intensify, the most effective board teams will be those that can step back to look at their own composition, working style and practices on a regular basis. Boards that act on feedback from their own c-suite, employees and shareholders will stand out. Those that address diversity better and plan for the future more coherently will perform better. Most of all, as an organisation’s mission and needs change over time, ongoing performance evaluation should lead to constant improvement and strategic adaptability.
