Performance in the spotlight: assessment and board effectiveness
May 2016 | SPECIAL REPORT: OPERATING AN EFFECTIVE BOARD
Financier Worldwide Magazine
Investor focus on board performance has reached new levels of intensity, as a growing number of institutional investors have joined activist investors in calling for greater transparency about board composition and performance.
A robust assessment is a critical tool for ensuring that the board is well-equipped to address the issues that drive shareholder value. When done effectively, board self-assessments serve as a tool to review and reinforce appropriate board and management roles, ensure that the board has the right perspectives around the table and bring to light issues that may impede performance. The best boards examine the six questions outlined below.
How effectively do we engage with management on the company’s strategy?
Oversight of the business strategy has always been a core responsibility of the board. But, today, the threats and opportunities facing companies are more dynamic, and regular strategic discussions have assumed greater urgency. The chief executive officer and his or her team ‘own’ the strategy, but the board provides critical oversight. Directors should question assumptions and the soundness of the strategy, fine-tuning where needed, and measure performance against a set of agreed-upon objectives. A clear, sound strategy should serve as the foundation for all of the board’s work, and high-performing boards are disciplined about making sure that it does. They also strike the right balance between important oversight responsibilities and forward-looking strategic matters, where directors’ expertise can be valuable in shaping future results.
How healthy is the ‘balance of power’ that exists between our CEO and board?
The relationship between the board and the CEO requires balance. The board is ultimately responsible for selecting the CEO, reviewing his or her performance, aligning CEO compensation with the performance of the business, and planning for the succession of the CEO. At the same time, the CEO is a close partner in many of these endeavours, sometimes taking the lead. To minimise confusion about the respective roles of the board and CEO, it’s helpful to have an open channel for communication. Effective use of executive sessions is part of the answer. Regular meeting in executive session, both with and without the CEO, helps reduce the awkwardness that can arise when the board has executive sessions only on an as-needed basis. When the board meets without the CEO, it is best practice to debrief with the CEO immediately. The CEO evaluation also provides an opportunity for the board to assess aspects of the CEO’s performance – including succession planning – that are critically important to shareholders.
What is our board succession plan?
Investors are paying more attention to who is on the board and the skills directors bring to the table. Boards should continually consider whether they have the optimum composition, given the company’s strategic direction and the current business context. Boards should also establish mechanisms to identify the expertise that will be valuable as the context and strategy change. For example, in an industry that is rapidly consolidating, a board will want to consider whether it has the capability it needs to oversee multiple acquisitions or the sale of the business in shareholders’ best interests. The board of a company with a new first-time CEO may decide it needs someone to serve in a mentoring capacity to the CEO. There should be regular reviews of the current composition of the board and any gaps within the board should be addressed to compensate for the natural attrition from director departures and retirements. The best boards also forge agreement about the right degree of turnover and the mechanisms to promote board refreshment, including appropriate timeframes.
What is our mechanism for evaluating the contributions of individual directors and providing director feedback?
On many boards, the elephant in the room is a performance concern related to an individual director. Consensus is growing in support of providing individual director feedback as part of the board self-assessment – not to grade directors, but to provide constructive input that can improve performance. It can be difficult or uncomfortable to raise individual director performance issues, but high-performing boards expect directors to stay engaged and to contribute fully, and are willing to address under-performance. They establish a mechanism for reinforcing valued behaviours and addressing issues; they use director succession planning to encourage healthy turnover and accountability. They also create an environment that encourages individual directors to think critically about their contributions and the relevance of their skills to the company strategy.
What is our board culture and how does it contribute to our ability to advise management effectively?
A really good board understands its own culture and how it impacts its decision-making and relationship with management. Despite the growing appreciation for the importance of culture, few directors are able to describe their board culture beyond ‘collegial’ or ‘engaged’. A deeper understanding of the culture of the board – how directors make decisions, handle disagreements, share information and the spirit in which they do these things – can improve the board’s ability to advise management and provide appropriate oversight. In a fast-moving, highly dynamic industry, for example, the board needs to learn quickly, remain open to alternatives and respond with agility to shifting business conditions. Culture can be shaped by influential figures, such as the chair, the CEO, the founder or long-serving directors; structural elements such as the format and conduct of meetings; selection and on-boarding of new directors; or external events and the board’s response to them. High-performing boards are willing to examine their culture more closely and assess its alignment with the needs of the business.
What processes are in place for engaging with shareholders?
Management is responsible for communicating with investors about the business, but shareholders increasingly want to engage with the board on a range of governance issues, including succession, compensation, risk oversight and other concerns. Often, it’s not until after a board has experienced a challenge from shareholders – losing a say-on-pay vote, for example – that it concludes it needs to improve communication with shareholders. The most effective boards stay abreast of how the company is perceived by investors. They identify in advance who should take the lead from the board (whether a committee or individual board leader) in dialogue with shareholders and in responding to investor inquiries. Highly effective boards strive to understand how the company is viewed externally versus competitors and can reduce the chance that the company will be surprised by activists or proxy fights. And when challenges do arise, the board is more likely to have built up a reservoir of understanding and support among large long-term shareholders.
The bar continues to rise for boards, which not only face pressure from shareholders but also want to hold themselves to higher standards of performance. Boards can use robust board assessments to ensure that they measure up to the evolving standards of corporate governance and have the composition, practices and healthy dynamics to be effective stewards of the business.
George Anderson is the head of board effectiveness services in North America and Katherine Moos co-leads the board practice in Europe at Spencer Stuart. Mr Anderson can be contacted on +1 (617) 531 5731 or by email: firstname.lastname@example.org. Ms Moos can be contacted on +44 (0)20 7298 3333 or by email: email@example.com.
© Financier Worldwide
George Anderson and Katherine Moos