What is and what does a board of directors?
A Board of Directors (BoD) is a group of elected individuals representing the stakeholders. Non for-profit organisations call it a Board of Trustees (BoT), and while the Board of Directors and Board of Trustees terms sometimes are interchanged; there are significant differences in the responsibilities of the two groups; but also many similarities.
Both BoT and BoD provide strategic planning oversight for the organisations they serve; ensuring the organisations achieve their goals, while managing risks, and fulfilling their purpose. Ongoing oversight ensures also that the organisations processes and its employees always employ ethical business practices. The boards are also responsible for setting policies and ensuring the organisations abides them, as well as holding executive management accountable for their actions and commitments.
Both boards will most probably have sub-committees like: Audit, Risk (and maybe Finance) Committee, Remuneration Committee, and some organisations might even have dedicated Sustainability and Environmental Committees, or Social Value Committees, etc.
The various corporate governance failures in the last decades, raised questions over the root causes of those failures and the role the board of directors played or did not play.
In 2012 a report by the Cass Business School in London (published by Airmic) was listing 7 risks as being the biggest contributors to corporate failure, and the first one was lack of board effectiveness; followed by: board risk blindness, poor leadership on ethos and culture, defective communication, excessive complexity, inappropriate incentive, information glass ceiling. Here the full article in Finance Management: (https://www.fm-magazine.com/issues/2012/feb/understanding-causes-of-corporate-failure.html/)
Having joined a Board of Trustees last year, two questions occupied my mind as a new Trustee:
How do I ensure I am an effective board member? and What does and effective board do?
As a good auditor I did my research and benchmark 🙂 and it seems that some of the characteristics that make a board effective are:
- Providing strategic counsel that focuses on value creation (financially, sustainably, culturally).
- Knowledgeable and experienced in operating within the relevant sector, to ensure it understands legal, regulatory and stakeholder expectations. However, I want to add that there is immense value in having a member of the board from another sector, which maybe has similar challenges; the cross-sector knowledge and experience is very often underestimated.
- Diversity of skills, experiences and backgrounds, and yet ensuring collaboration in an open and inclusive way, which enables different perspectives to be shared and taken in consideration when decisions are made.
- Focuses its strategic view on all stakeholders (employees, clients, and community), taking in consideration macro and micro economic factors; and willing to face the challenges that those might create for the organisation.
- Comfortable in challenging each other and keeping the executive team accountable in the interest of the organisation and in line with the corporate governance code.
Board effectiveness is often assessed by independent parties (consultancies firms) or in some organisations by the Internal Audit (IA) function, if IA has the right skills and knowledge around corporate governance and board responsibilities and it gained its position as a trusted critical and fair business partner.
The main elements to be considered during board effectiveness reviews are:
- Board mechanics, which largely is explained in the board terms of reference (ToR), that include:
- roles and responsibilities, experience, accountability, regulatory requirements, alignment to value, mission, purpose, and culture.
- other sub-committees and their roles and expertise requirements, delegation of authority, etc.
- development and succession plans.
- corporate governance guidelines which apply (and complies with it when needed).
- having clear board ToR, as well as having clear board agenda and minutes, gives first insights its board effectiveness.
- Managed information and decision making, refers to the fact that the board needs to receive adequate, insightful, and value-added information for the decisions they need to make. When it comes to board information, very often we see huge papers with lots of data, and details in them. The board’s mission is not to be dragged into the details and the numbers, unless they want or they need that for a specific decision; the data needs to be translated into relevent information for the board’s purpose which depicts the risks, impacts, opportunities, etc.
Useful information has the following characteristics:
- Relevant (linked to decision which needs to be made, financial, economic, and strategic importance)
- Timely (provided in time to influence the decision)
- Reliable (coming from trusted sources and being able to depend on with appropriate confidence)
- Neutral (not influenced deliberately or by systematic biases)
- Accurate (free from material error)
- Complete and consistent (with the understanding that uncertainty exists and there will always be a margin of error)
- Representative (representing the whole organisation)
- Understandable (board members should be able to understand the information provided to them without too much additional explanations, which is not in the presented papers).
- Board dynamics refer to the behaviours the board members show during their meet ups. I cannot stress enough the importance of board dynamics in ensuring a board is effective. This could be the single and major point of failure of a board; and as an Internal Auditor I did have the chance to present to boards where the dynamics were not great, and trust me you could feel the ice when you were walking into the room. Some of the characteristics of a great board dynamics are:
- Physiological safe environment for all members (executives and non-executives) to openly share their views and opinions
- Healthy and relevant debates
- Ability to make tough decisions when needed
- Open and constructive challenge towards the executive team
There is no one size fits all framework which if followed will ensure that a board is effective, but the above are some of the important elements and characteristics that if in place, there are good chances that the board is effectively delivering on its duties.
Assessing board’s effectiveness periodically even if sometimes that is in the form of self-assessment or reflection on how effective you are as a board member and then as a team, is part of board duties.
Governance specialists are always researching and interviewing boards on what makes them great. Here is an example for Leading Governance UK that published an article on 10 elements which make a board great (https://leadinggovernance.com/blog/10-things-make-great-board/), that definitely resonated with me:
- Understanding their roles and responsibilities
- Lead, not manage
- Engage with others
- Provide strategic, rather than operational support
- Have regular board turnover and great succession planning
- Commit to ongoing learning and development
- Get the right information at board meetings
- Work as a team
- Challenge appropriately
- Review their own performance.
Is your board effective? Are you an effective board member?
If not, what should be challenged so that things can change to create more effective results?
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