Corporate boards are increasingly tasked to deal with volatility – be it from worldwide economic turbulence, cyber-attacks, activist investors, or competitive disruptions. Directors aren’t fully confident that they have what it takes to tackle the challenges, manage risks, and focus on long-term strategic goals, according to surveys the Stanford Graduate School of Business and the US National Association of Corporate Directors conducted with more than 800 participants in 2016.
The average survey participant worried about not getting enough director education in the past 12 months, about reviewing management information that lacked quality before last year’s board meetings, and about at least one fellow board member who they feel is ineffective and should be removed.
“In this highly competitive, disruptive, and innovative world that we find ourselves in today, boards have to be extremely nimble,” said Steven Walker, managing director of the NACD’s board advisory services. “I think the biggest area that needs improvement is boards having the courage and the confidence to conduct 360 [degree] self and peer evaluations.”
Boards that evaluate themselves once a year and conduct peer evaluations every two to three years ensure that directors’ skills are aligned with the needs of the board, that underperforming directors are given a chance to improve, and that the board and management work together effectively, Walker said.
Directors agree evaluations are key instruments to ensure the right board composition, but only 41% of the more than 600 respondents in the NACD survey said their boards assess individual members.
Participants in the Stanford survey generally believed their boards have the skills needed to advise and oversee their companies. They particularly rated highly board members’ financial skills, management and industry experience, and audit and accounting knowledge.
About half of the participants (55%) said their companies evaluated individual directors, but just 36% thought their companies do a very good job of accurately assessing the performance of individual directors.
Participants in the Stanford and the NACD surveys said that boards also fall short in these areas:
- Level of trust. Only two-thirds (68%) of board members in the Stanford survey say they have a high level of trust in their fellow directors or in management.
- Regard for other directors. The average board member believes that at least one fellow director is not effective and should be removed from their board. Only 48% of board members in the Stanford survey would keep all of the current directors on the board.
- Communication. Only 23% of board members in the Stanford survey rate their boards very effective at giving direct feedback to fellow directors. Fifty-three per cent said directors do not express their honest opinions in the presence of management.
- Board restructuring. Thirty-five per cent of boards represented in the Stanford survey do not have a process for removing ineffective directors. The 65% of companies that do have a process use a wide variety of approaches, but the process is often haphazard. About half of directors (48%) favour term limits to facilitate turnover.
- Skills and experience. Directors in the Stanford survey give themselves low marks for technical knowledge (47%) and experience with cyber-security (18%) and social media (16%). The lack of cyber-security experience is also reflected in the low confidence many directors of publicly traded companies have in their companies’ cyber defences. Only 42% of the respondents in the NACD survey feel confident or very confident that the company is properly secured against a cyber-attack.
- Education. A majority of directors (56%) serving on boards of public companies said their boards spent too little time on director education over the past 12 months, the NACD survey found. Individual directors spent an average 18.5 hours on education in 2016, down slightly from 18.7 hours in 2015.
- Diversity. Many boards of public companies have expanded director search criteria or changed the composition of their nominating committee in 2016 to improve diversity on the board, but more work remains to be done, according to the NACD survey. On average, women occupy 16% to 24% of the seats and racial and ethnic minorities 4% to 13%.
- Director turnover. Only 57% of directors in the Stanford survey strongly agree their board is effective in bringing new talent onboard to update the mix of skills. Forty-two per cent regularly rotate directors to refresh committees, and 23% have a formal succession plan for committee chairs. One-third of directors (34%) rate their board very positively on planning for director turnover.
Strengths and weaknesses of UK boards
The quality of board members can vary widely in the UK, said Gordon Barrie, ACMA, CGMA, a UK executive coach and consultant.
Some UK companies, especially the top 50 by revenue, are very professional about corporate governance, Barrie said. That means they incorporate in executives’ career planning the skills and competences needed to serve on the board, conduct a thorough performance assessment of the board annually and an external evaluation every three years, and have a skilled, independent chairman heading the board to counter an often-dominant CEO. The largest UK companies usually also discuss important board appointments with their largest shareholders.
Others don’t do such a good job, he said. A persistent problem with UK boards is the vetting of non-executive directors, who are often hired through informal networks. They tend to be selected by the chairman or CEO for a particular expertise, rarely challenge the board, and get removed quickly when no longer needed.
Non-executive directors can help boards adapt to change and keep boards from becoming inflexible and susceptible to groupthink, Barrie said.
UK boards also frequently fall short in the same areas pinpointed by the Stanford and NACD survey results, he said. For example, directors’ weak technology knowledge can lead to board meetings being held too infrequently to keep up with the rapid pace of technology and product development, or directors learning the insights they need at the board meeting rather than bringing expert knowledge to strategic decisions.
How to improve board performance
To make boards work better and more efficiently, Barrie, the authors of the Stanford University study, and NACD board advisory services recommend the following:
Assess each director’s position on critical issues. Questions to ask include the following: How effective do you think the board and board committees are? Do composition, structures, processes, agendas, and materials allow the board to meet strategic needs of the enterprise? How well does the board and management communicate? Is the board leadership effective? Is a board succession process established?
Detailed findings of the assessment should be combined in a report, along with recommended actions. Also, the board should decide how to monitor any actions taken and measure their effectiveness.
Assist directors in their improvement efforts. Develop a skills-and-experience matrix to help the board and the nominating governance committee assess directors’ skillsets and pinpoint areas that need improvement. Put together board education plans and coaching plans for individual directors. Schedule feedback sessions to let directors know whether they are doing well or falling off.
Bring in outside experts to challenge the board to be proactive, study the competition, and foster innovation. Also, consider adding to the board a capable CIO who can optimise the commercial management of IT and cyber-security.
Create an independent process to periodically re-evaluate and refresh the board. Identify a point person on the board who’s accountable for managing the process and following through on recommendations.
In addition to annual self-assessments and peer evaluations every two to three years, the NACD’s board advisory services suggests directors ask themselves after every meeting whether the board followed the agenda, accomplished the goals it set in the executive session before the meeting, and spent enough time discussing strategy and risk oversight.
Develop a succession plan that includes processes to remove underperforming directors and refresh the board when changes in corporate strategy require different skills and experiences on the board.
—Sabine Vollmer (Sabine.Vollmer@aicpa-cima.com) is a CGMA Magazine senior editor.