Board Effectiveness Reviews: Looking Beyond Compliance to Create Better Boards

by Dr Dorel Iosif

Chair, Carbon Management Society Ltd.

Most boards of directors I know meet, review papers, deliberate on risks, approve budgets and make decisions about the future of their organisations.

The critical question that is seldom asked is: How effective is the board?

The irony is that while boards spend a lot of time evaluating the work of the executive, business units, projects and investments, they dedicate surprisingly little time understanding and evaluating their own effectiveness.

A board effectiveness review is precisely that: a review of the effectiveness of the board.

Done right, it is not a process to score board members; it is a process to really think through how the board can be more valuable to the organisation, both in terms of creating value and dealing with challenges in the future.

The best governed companies understand that governance is not static, that the world changes and that boards have to adapt.

A company that five years ago was governed incredibly well, might need a succession planning review today, because the skills, experience, knowledge, and temperament of the directors has changed and is no longer as relevant as it once was. The board effectiveness review therefore provides an opportunity to take a step back and understand how we can help the company be successful over time.

At the most basic level, a board effectiveness review looks at three areas:

Are we doing the right things,

Are we doing them well,

and do we have the right people to be able to do them?

A board effectiveness review typically starts off by looking at the purpose of the board and the focus areas. For example, many boards dedicate too much time to reviewing information or evaluating the past. While the information is important, most boards should spend more time discussing the future and allocating resources to the most important initiatives that will determine the success of the company.

One very helpful question to ask is: if you walked into any board meeting this year, what would you think the priorities of the board were? The answer is most likely different from what the board thinks it should be. That is an important starting place for a review.

Another important aspect of a board effectiveness review is looking at decisions and decision making. The most effective boards encourage challenging each other and different points of view. Ineffective boards tend to be either too polite, and therefore not challenge each other, or too rude, with people being unnecessarily confrontational.

The most effective decision making processes happen in boards where people are able to challenge each other, but respect the different views.

As the leader of the board, the chairperson is critical to setting the tone of the board.

The most effective chairpersons create an environment where everyone can contribute, focus on issues rather than people, and are able to challenge each other without people feeling intimidated. This means that the chairperson plays a critical role in balancing the views of different directors and making sure that the board does not get stuck focusing on unimportant issues.

As part of a board effectiveness review, it is important to understand how directors feel about the chairperson and whether they are able to perform this critical role effectively.

The chairperson is also responsible for building relationships between the board and the executive, which is a discussion that is often part of an effectiveness review.

A board effectiveness review should also look at the dynamics within the board and the relationship with the executive.

Governance is most effective when there is a healthy relationship between the board and the executive, with both being honest and open with each other, while understanding that they have different roles and responsibilities.

Most boards fall into one of two traps.

Either they get too involved in the detail of the business, which defeats the very purpose of having a separate board, or they do not get involved in the detail of the business and end up blindsided by problems that could easily have been avoided had they been paying attention.

As part of an effectiveness review, the relationship between the board and the executive should be examined and some recommendations made, if necessary.

Another important aspect of a board effectiveness review is a discussion of succession planning, which leads us to the next topic: capability. It is not unusual for a company to grow or change in a way that makes the experience and skills of a particular board member no longer relevant or needed. Companies therefore need to think through whether their current board has the right skills and experience to be able to govern the new company, or whether they might need to consider succession planning.

The most effective boards invest time thinking through what they need to do to ensure that they have the right people with the right skills at the right time, but they also understand that simply adding more people to the board will not make the board more effective. They also think through what other skills, experience, and knowledge might be important to help the board evolve, such as diverse perspectives on key issues.

In addition, it is becoming more important for companies to consider interim options, where the company can benefit from the experience and insights of very high quality executives, without the commitment of a permanent appointment. This is particularly true during times of transformation and growth, or when new opportunities emerge, but it also applies to other scenarios as well. Therefore, it is not uncommon for a board effectiveness review to trigger a much broader conversation around organisational capability.

How the review process is done is also important. The most basic form of a board effectiveness review is a self assessment by board members. While this can be a useful exercise, it is inherently biased, since people will tend to score themselves higher than they should. Most reviews involve confidential conversations with directors, executives, and sometimes other stakeholders, as well as the self-assessment. It is amazing how many issues come up during these conversations that were not discussed during the self-assessment.

More recently, companies have started to involve external governance experts in board effectiveness reviews, particularly for larger companies. External reviews add value, since these professionals bring fresh insight and perspective to the process and understand what other boards are doing elsewhere. They are also much more objective in their assessment. A board effectiveness review is ultimately an opportunity to really think through how the board can be more effective, which is why the most useful reviews are those where the focus is on taking specific actions, rather than producing a report.

At the end of the review, the board should have a small set of improvements that it can realistically implement over the next 12-18 months, which will help it become more effective. These could relate to information, agendas, committees, succession planning, stakeholder conversations, or oversight areas - anything that will improve the effectiveness of the board.

It is also important to understand that board effectiveness reviews are not a one-time event.

The most effective boards do these reviews on a regular basis as part of their calendar.

They understand that being an effective board is a process, not an event.

They also track the recommendations from previous reviews to make sure that action is taken, as well as update the recommendations periodically, so that they continue to add value over time.

The world is changing rapidly and becoming increasingly complex, with significant disruptions occurring in geopolitics, technology, the workforce, cyber security, the environment, and society more broadly. These are critical issues that boards of directors need to grapple with for all companies, irrespective of their size or industry. This means that effective governance has become much more important and boards need to take their responsibilities more seriously.

A board effectiveness review is ultimately an exercise in humility, since the review makes it clear that even the most effective directors can always improve.

It is also an investment in the future, since it provides the opportunity to think through the long-term needs of the board and how to meet those needs.

The companies that will be the most successful in the future are the ones where the directors really want to understand how they can be more effective before circumstances force them to do so. The most effective boards are not made up of the biggest names; they are the boards that ask themselves those uncomfortable questions and that have the humility to update themselves as circumstances change.