Board

Organizations of all types from small nonprofits to mega corporations are governed by a board of directors that appoints the agency head. Serving on a board of directors requires strong leadership, commitment to the mission of the organization and impeccable credentials.

Board of director responsibilities may include fiscal oversight, fundraising, strategic planning and personnel actions. Those who meet board member qualifications may find the experience challenging, but deeply rewarding.

Board of Directors Responsibilities

Individuals appointed to a board of directors meet regularly to review budgets, operations, strategic plans and personnel matters. Advice and guidance is given to the organization’s management team. Board members may take the lead in fundraising activities for nonprofit organizations and may have been selected for their ties to community resources.

Many board members are chosen at the late stage of their careers and bring decades of experience and business acumen, according to Forbes. Others are younger and ambitious with forward thinking ideas that can grow the organization. Honesty, integrity, independent decision-making and objectivity are personal qualities that Forbes considers necessary for board members to possess in order to properly fulfill their responsibilities.

Serving on a board of directors is a major commitment that should not be undertaken lightly. In fact, bank board director Charles J. Thayer writing in Directors & Boards suggests that the potential risks of serving on a community bank board of directors can outweigh the rewards. Bank board of directors qualifications include understanding of banking laws because directors are expected to know and follow 800 rules of the American Association of Bank Directors to avoid the perception or reality of financial mismanagement.

Board Member Qualifications and Disqualifications

Board member qualifications include basic eligibility criteria that must be met for further consideration. Those who do not meet basic requirements are eliminated early in the selection process. Directors must be carefully vetted to ensure they have the ethics and integrity to serve in this capacity. Qualifications for serving on the board are typically outlined in the organization’s bylaws and vary from one organization to the next.

For example, FindHOALaw, a resource for homeowner associations (HOAs), suggests that an HOA board member should minimally be a member in good standing who is committed to regularly attending board meetings. Disqualifiers would include anyone with a felony conviction, or applicants or nominees who have a conflict of interest that affects eligibility, such as being related to a sitting board member. Being embroiled in a lawsuit against the HOA would also be grounds for disqualification.

Typical Board Member Qualifications

Required qualifications align with the type of board member skills needed to effectively lead the organization. Qualifications for a seat on a corporate board look different from those required to serve on a local animal rescue nonprofit organization, for example, but universally shared qualities include a commitment to duty of care and loyalty to the mission, vision and purpose of the organization.

Large companies often require in-depth knowledge of the industry to make competent decisions as a board member. For example, Colgate-Palmolive requires its directors to have held a position as CEO of a large corporation or comparable leadership, experience in information technology, or regulatory and public service. Possessing a master’s degree or a doctorate is also considered helpful.

Commitment to Diversity

Board member qualifications typically include commitment to diversity. Members of a board of directors from diverse backgrounds offer unique perspectives and ideas for reaching underserved populations and untapped markets. According to the National Association of Corporate Directors, commitment to diversity and inclusion is essential to innovation and an organization’s long-term viability and expansion.

The Council of Nonprofits suggests that charitable and philanthropic organizations should be doing more to increase diversity on the boards. Instead of limiting qualifications to CEOs who may be predominantly white males, board membership could be open to millennials, for example. Asking for nominations from communities served by the organization may also result in a more diverse pool of qualified director applicants.

From pandemic recovery to economic, political and social changes and activist investors, boards of directors are widening their duties and problem-solving as they address how to navigate obstacles and opportunities for the future. Staying aware of these trends is crucial. Here are four key areas boards need to consider this year.

Surges in Activism

2022 had the highest record for activism activity in history. Activists investors’ agenda was to take advantage of low stock prices and stressed financial forecasts of struggling companies. Their focus was on company strategy and operational performance, when in past years the focus was more on M&A and capital allocations. This noted, the jump in activity produced higher success for activists. 2022 showed a 200% increase in adoption of shareholder rights plan from 2021. Preparing and defending against activism has boards busy with updating their bylaws with amendments regarding voting and decision-making abilities.

Expanded Focus on Risk Management

Areas for coverage in risk management are broadening. To address this, some boards are separating Audit and Risk Committees into separate committees. Others are revising their committee charters to include the new duties and systems to monitor critical functions, safety issues, oversight of the strategies and policies and practices adopted to address risks. These new areas include cybersecurity, cryptocurrency, ESG, climate, new laws permitting officer exculpation from personal liability for monetary damages expands the committee work. This requires new areas expertise on boards, and the SEC has proposed new rules regarding cyber expertise on boards.

Continued Focus on Board Diversity

Investor expectations for board diversity includes firm investor voting policies and proxy advisory guidelines. The influence from such groups as Blackrock, Vanguard, Fidelity International and ISS has impacted practices. For example, ISS recommends against the Nom and Gov committee and other directors at a company that has no women on the board. The disclosure rules regarding diversity are underway. Nasdaq-listed companies must provide annual public disclosures of diversity statistics with a board diversity matrix to comply or disclose their explanation as to why they do not meet the objectives.

The Relationship Between the Board and Management

With the expansion of responsibilities, the board and executive leadership are dealing with new pressures. Directors must get more involved in understanding of company operations, challenges and fiduciary expectations. Directors and executives are now encouraged to come together to define their respective roles and responsibilities and authority to ensure the check and balance between governance and management and to uphold a healthy collaborative partnership. Based on our research in 34 countries, the most highly correlated factor for a high performing board is the functionality of the group dynamics.

Written by Theresa Sintetos

Whether they have years of board experience or whether it’s their first board director position, all board members benefit from governance training. Board directors have many important responsibilities. Their work is never done.

Organizations that train and educate their board directors make an important investment in their leadership and that has a direct bearing on the organization. Continual training in governance makes average and good boards great.

The right tools assist boards in bringing their knowledge and expertise into the boardroom.

Why Board Members Need Governance Training

Current and new board directors all bring valuable skills to the organization they lead. Both groups have much to learn from each other. No matter how long someone has been serving on the same or different boards, there are always new things to learn, new challenges to address, and new problems to solve.

Serving on a board is not all work, though. Board directors work very closely together. They share a special sense of friendship and camaraderie. Advanced training brings all board directors current on governance issues which keeps them all on the same page. Governance education promotes candor and straight-talking on tough issues without causing harmful discord on the board.

Boards have much to accomplish in the space of a board meeting. As a result, they have precious little time to get to know each other during board meetings. External activities, such as spending time at governance seminars, workshops, and conventions provide valuable opportunities for boards to connect and form stronger relationships outside the board. The connections they form will help them to think and act as one when they’re faced with challenging times.

Sitting Board Directors Play a Role in Mentoring the Incoming Board

Long-term, seasoned board directors have much to contribute to the rest of the board. Experienced board directors have learned much about governance from past boards where they’ve served, as well as their experience on the current board.

Veteran board members offer much value in mentoring newer board members and helping with succession planning. Every time there is changeover on a board, it becomes a new board that’s different from the old one. New boards will soon form their own dynamics. Building bonds and earning trust takes time and it’s important for boards to put in the time to make it happen.

Newer Board Directors Have Room to Grow in Governance

Newer board members may lack governance experience, but if they were recruited well, they’ll bring other valuable skills to the board. When new board members combine their existing knowledge with the basics of good governance, they have much to contribute to the board.

Inexperienced board directors are often motivated to join a board because it gives them experience and enhances their resume. Once they join a board, it quickly becomes apparent how much work it is, and how little they know about governance. By putting in the time to learn more about governance, less experienced board directors can participate more robustly and intelligently in board discussions and become better contributors to the board.

Board dynamics are an important part of a board’s work. Existing board directors are bound to notice newer board directors that put the time and effort in to learn more about governance. That’s a good first step toward gaining the respect and admiration of the other board directors. Getting governance education demonstrates that new board directors value the organization that invested in them. That goes very far with the rest of the board.

Good Governance Benefits Your Community

Your organization plays a vital role within your community and it deserves the best of skills, perspective, and leadership that the board has to offer. A responsible board quickly gains the respect of the business leaders and people living in the community. Continued governance training shows that the board values governance education and takes their duties seriously. That’s important because those are the people that will become volunteers and donors to help sustain your organization.

Moreover, as boards grow and learn together, it’s easier for them to put personal and political agendas aside and put the needs of the organization first.

Responsible Boards Are Current on Governance Issues

All board directors should be familiar with the term fiduciary duties. When a board director accepts a seat on a board, they automatically accept the duty of care, duty of obedience, and duty of loyalty. These duties are important because board directors also accept legal liability for the decisions they make. If a board decision is ever in question, courts will apply fiduciary duties as the standard against the board’s decisions and actions. Knowledge about governance issues helps boards to make informed, wise decisions collectively, and it demonstrates they acted on an informed basis.

Something board directors should always be cognizant of is that a crisis can happen within an organization at any time, even if things have gone smoothly for decades. A board that knows governance issues well is better equipped to handle anything that comes their way, no matter how difficult it is.

The business environment is continually changing. Regulations and compliance issues are evolving. Continuing education in governance ensures that boards know what their legal responsibilities are and have the knowledge base to fulfill them.

Something many boards fail to recognize is that their responsibilities are important not only for the current time but also for the future. Effective boards are forward-thinking. The idea of “future-proofing” the organization should be evident in strategic planning and fundraising efforts. It’s a good strategy to map the board’s current skills against the skills the board will need over the next three-to-five years. Gaps in needed skills are instrumental in helping with board recruitment efforts.

Overall, there are hundreds of good reasons for boards to invest in governance training and there are no good reasons for not doing it.

BoardEffect board software is a valuable tool to help boards get organized and document their efforts as they pursue board development.

Boards are expected to conduct annual self-evaluations which are essential for developing a strong board. BoardEffect software makes the process of self-evaluations easy and efficient. The portal offers many other governance tools and features to help boards stay at the top of their game.

There’s a lot of discussion going on these days about board service and why there aren’t more women on boards. Over the next few weeks we’ll discuss that and look at some strategies that might help you if you aspire to board service.

A seat at the corporate board table is an aspiration for many leaders and for good reason. Board service bundles together a host of rewarding experiences: The opportunity to be an “insider” and view, first hand, how another company works at its highest levels and the privilege to work beside and soak up the wisdom of the brightest, successful and most articulate professionals who will ever cross your path.

But there’s more. It is prestigious to serve on a corporate board, particularly when the firm is publicly-held and directors are elected by shareholders, rather than appointed by the CEO as in the case of private corporate boards. Another feature of boards of directors in large public companies is that the board tends to have more “de facto” power. Many shareholders grant proxies to the directors to vote their shares at general meetings and accept all recommendations of the board rather than try to get involved in management, since each shareholder’s power, as well as interest and information is so small.

How Boards Work

The board consists of individuals that are elected as representatives of the stockholders to establish corporate management related policies and to make decisions on major company issues. Every public company must have a board of directors. Some private and nonprofit companies have a board of directors as well.

In general, the board makes decisions on shareholders’ behalf and has a legal duty to act solely on their behalf. The board looks out for the financial well-being of the company. Such issues that fall under a board’s purview include the hiring and firing of executives, stock dividend policies, and executive compensation. In addition to those duties, a board of directors is responsible for helping a corporation set broad goals, support executives in their duties, while also ensuring the company has adequate resources at its disposal and that those resources are managed well.

My Board Experience

Over the course of my 30-year business career, I’ve been blessed with a host of “highs.” In looking back, the pinnacle experience has been (and still is) the opportunity to serve as an independent director of a NYSE, micro-cap company, Luby’s/Fuddruckers Inc. (LUB).

Here are ten reasons why I relish my corporate board seat:

What I learn in a year of board meetings is equivalent to “renewing” my M.B.A.
I get to contribute to corporate strategy at its highest level of complexity.
I’ve stood shoulder-to-shoulder with my fellow board members, and our shareholders, to win a hard-fought proxy fight with a hedge fund.
I’ve come to appreciate each of our business units’ unique corporate cultures.
I‘m blessed to work alongside principled and accomplished fellow directors from whom I’m always learning.
I’ve come to be comfortable with “productive conflict” even when I’m the sole voice on an issue.
I’ve become a better listener and to be open-minded to differing perspectives.
I’ve learned that my job as a board director is to coach and mentor the executive team. At the end of the day, they run the company.
I’ve come to truly prize the individualized passion, wisdom and wit of my fellow board directors; and to deeply appreciate how our skills sets and idiosyncrasies unite us and keep us strong.

Fact is, serving on a corporate board has made me a better business person and matured me as a human being. I want the same for you!

Truths To Think About

For too many decades, America’s corporate boards have been filled by a chosen few.

I’m passionate about helping level the playing field and make board seats obtainable to a wider, more diverse range of talent. As I see it, the future success of our corporations and our country’s free enterprise system, depend on it.

Here’s the reality: Corporate board seats are scarce and competition is fierce.

But you don’t have to sit passively just wishing and hoping. There are actions you can take. In fact, the “right” initiatives can immeasurably increase your odds of landing a seat.

But here’s the tricky part: Joining a corporate board is by invitation only. (Sometimes board recruiters build the candidate list. But many times, the board works independently.) While the landscape is changing, direct solicitation is still considered taboo, so your actions should be carefully choreographed so that the board finds you and determines that you are just the right person for the seat. You’ll want to rely on your sponsors and supporters to do the initial canvassing for you.

Your Time Is Now

In my opinion there is no better time than today to start working on earning a board seat. For one thing, most all of the information that you’ll need is online. Instead of hoping you serendipitously hear about a recently vacated board seat, that information will be readily available on the internet. You might even be able to glean what they are looking for in a replacement and who else on the board you may know or be a degree or two separated from.

The most important thing is to determine if you are board ready. If you are, then let’s learn together how to earn that seat that you think would be the best fit for you.

The topic of “Corporate Governance 2030” might encourage wild speculation in this period of great, some would say, epochal change. Some might see the demise of the corporation; others, the emergence of new organizations with intelligent robots playing the role of boards. And so on and so forth. The truth is that 12 years is not such a long time. Heuristically turning to the past 12 years, one sees that the changes in corporate governance have been relatively limited. Only in the banking sector have there been any truly significant changes. These were not the result of a huge technological disruption but of a crisis: the most common reason to change corporate governance expectations, regulation and practice. One should therefore expect limited change. But change there will be, and it will be mainly driven by four key drivers: diversity, disclosure, data and Development Financial Institutions (DFIs)

Context

Many commentators and pundits have been making predictions about a radically different corporate landscape than the one we are facing today. These predictions have been around for a while: the information and communications revolution was supposed to usher an era of smaller, more nimble companies with very few employees scattered around the world, facing millions of very well-informed rational consumers who buy on the web and can manage endless choice. These nimble supply players can change game plans at the speed of light. Their strategic decisions are not the result of hierarchy-bound iterations as in classic corporations. Rather, they emerge through some sort of networking osmosis.

This has not happened yet, and it might take a long while before it is really upon us, longer than 12 years. It might be true that companies in the ITC sector employ fewer people than old world companies, while enjoying vastly higher valuations and therefore market capitalizations. It might also be true that the information revolution has brought about a significant change in the pecking order of sectors. And AI is already changing significantly the tasks of human workers—and replacing many of them.

But wholesale corporate decentralisation has not happened: industrial concentration levels, if anything, have increased, largely as the result of powerful network effects, facilitated by an efficient merger “food chain”; which, in its turn, is efficiently intermediated by the capital markets. There are still small, medium and large businesses, and there is no indication that they will use boards less or in significantly different ways than their predecessors. The only thing that has probably changed is the funding of it all—the “food chain” works differently: it is now less about public equity markets and more about private flows of capital.

Where there were once IPOs now there are efficient private markets. The UK has now only about half the listed companies it had twelve years ago.

Much of the what this blog discusses is about emerging markets (EMs) and the often smaller, private companies that populate them. For them, the development of private markets is actually a very good thing. Most of these enterprises will benefit from the fact that capital markets are more comfortable and can more efficiently fund privately-owned businesses. The new “food chain” might present an opportunity to smaller, private businesses wherever they may be. For EMs this might translate into a chance to leapfrog developed economies.

Like everywhere else, technology might create significant, and disruptive opportunities in EMs, especially in sectors such as banking and payment systems. But EMs’ key competitive advantages will still be driven by traditional sectors where labour cost advantages are more important than opportunities for labour substitution. But even in those sectors where technology will play an increasingly significant role, the key issue of trust in a company and its institutional framework will not disappear. So, do not expect a change in the role of corporate governance as a generator of trust.

There is an important caveat. My thoughts are based on, some will say, bold assumption that the long-standing trend of global economic and regulatory convergence will continue. This convergence started a few decades ago and was framed by an international cooperation framework established after the second world war. As we all know these arrangements are now facing significant headwinds, probably stronger than at any other time in the last 80 years. My assumption is that what we are currently witnessing in geopolitical and international economic relations is a backlash, not a total collapse of that framework. If it is the later, then many of the points raised in this blog post might become irrelevant.

So, there will be changes in governance over the next twelve years in EMs and elsewhere; and sometimes they will be significant, albeit not earthshattering. Their drivers can be summed up under four broad headings: diversity, disclosure, data and DFIs.

Diversity

Diversity of all kinds and at all levels, is one of the most pervasive trends of the new millennium—a child of globalization and convergence, but also of deep structural change in Western societies.

In the governance sphere, we speak about diversity mostly in the gender context. This is a very important subject and we are probably just at the beginning of a new social paradigm. What is happening in the West is setting the tone elsewhere—almost everywhere. This trend will increasingly impact private businesses across EMs, even in the most conservative places. Increasingly more young women in the elites will be educated just like their brothers. This will probably accelerate changes throughout society.

But diversity is much more than gender. And I will use it in this very broad sense of maximizing the number of different perspectives around a decision-making table—the board.

In fact, boards were invented for diversity purposes: we want different voices around the table, not one king (or, rarely, a queen) who takes all decisions unchallenged. The wise drafters of 19^th century company laws did not have mental categories for “group think” and formulation or availability biases; but they could see that managing other people’s money (as Adam Smith put it) required more than a king-like powerful individual, no matter how honest or intelligent.

Of course, a basic common understanding of the business at hand is required around the table, and the more complex the business, the more this understanding comes at a premium. But the more diverse the people around the table are, the more likely the board is to avoid the trap of such biases when delivering productive, challenging, rounded, and balanced guidance.

Until now typical public company (Plc) boards were populated by executives of other companies, a distinct group with a lot of business and organizational experience but often facing perverse incentives. Family companies were often crowded with (what else?) family members. And start-up boards were often an incest ground for a few, very experienced and influential VC representatives with extensive cross-directorships.

I truly believe that we are entering the age of diversity, in this broader sense. Even the patriarchal families of the most conservative of EMs are beginning to understand this and invite outsiders to counsel them. Founders of small businesses understand that access to capital comes from inviting others to the decision-making table: these others bring diversity and diversity brings comfort all around.

But who are these others? In the core OECD markets a new breed of director is emerging and they are all about diversity. In fact, diversity is at the core of their career path. I call them the “portfolio directors”, some call them professional NEDs. Portfolio directors will increasingly be used in all types of companies, from the large PLCs (where their presence is already significant) to the small EM family businesses, often with the help of DFIs, the fourth driver. This latter trend is still in its incipiency but will grow significantly over the next 12 years.

The currency of portfolio directors will be their proven capacity to challenge constructively, which would be demonstrable through a successful track record as NEDs, not as executives in other businesses. Demonstrability will be based on the availability of data—the third driver. Discoverability of past performance will make NEDs less prone to being lapdogs of the controllers. We are not there yet, but this is an area where 12 years might make a lot of difference.

Currently, a phenomenon that is common in both the new age tech companies of Silicon Valley and the traditional family businesses in EMs is the presence of a King—an ultimate controller who can take decisions at will and for whom the board is either a legally imposed nuisance or a bunch of cheerleaders. Indeed, how is a Malinois or Peruvian business patriarch different from Mike Zuckerberg or Elon Musk? Well, their boards are full of the great and good and they are diverse, but only in terms of gender and, possibly, ethnicity. This is a step above than the patriarchs’ board of children, cousins and personal lawyers/consultants. But the reality of Big Tech leaves a lot to be desired: armed with multiple voting rights the Silicon Valley “kings” want boards to be “story tellers”—rather than drivers of challenge. Each one of these directors is hand-picked by the king and serves at the king’s mercy.

A better example of public market governance in the tech sector might come from the largest emerging market, China. Jack Ma has eased himself (and many of the first-generation executives) out of the well-known company he created less than two decades ago, Ali Baba. A couple of years ago, he relinquished the CEO position keeping the chairmanship. Now he has announced that he will be leaving the board all together. Compared to the Silicon Valley kings, he looks more like the Good Shepperd.

Reassuringly, most founders of tech start-ups that IPO in the US show the behavior of Jack Ma rather than that of the “kings”, as recent research suggests. Most of these companies have already lost their founder from their board when they went public—not everyone wants to be king forever. This might however also be because companies take longer to IPO in recent times. The private part of the “food chain” is, these days, longer and often permanent. Let us consider one of its great constituents, the “unicorn” Uber.

In many respects “King” Kalanick was like the rest of his Silicon Valley peers—a big, intelligent ego, armed with significant multiple voting rights. But when he fumbled, he was driven out. His nemeses were not “independent” directors but representatives of significant shareholders, other than himself. Their voice was backed by the credible threat of loss of market confidence and impaired access to capital. I do believe that the private investment “food chain” that we discussed earlier, as opposed to the public route, has delivered such powerful, engaged shareholder directors, and will increasingly do so in the future. Unlike the public markets where boards essentially co-opt themselves, in the private equity context it is the shareholders, often several of them, who appoint the board. The principal-agent problem is less pronounced; hence governance risk is less acute. And as private finance becomes more and more ubiquitous in both core OECD and EM markets, the delivery of challenge in the private company board room will grow.

There is one more aspect of board room diversity that I would like to touch upon. Like in the case of multiple shareholder representation, it is more about the diversity of interests that the board focuses on rather than the diversity of its members. In other words, the importance of stakeholders is increasing and will increase even more in the coming 12 years. In some countries, like Germany, this has long been the status quo. But stakeholder power is now a prominent feature of corporate governance reforms in many countries. Germany is becoming a beacon for some important corporate governance reforms in other countries. Even the UK, the European bastion of shareholder value, has this year revised its venerable CG Code, the oldest of its genre in Europe, to include specific responsibilities for the board with regards to stakeholders. Boards now must consider employees and other stakeholders views when developing strategy and compensation plans and need to establish communication lines with their workforce. The era of unadulterated shareholder value that started in the 80s seems to be behind us. The markets are acknowledging this, albeit quite clumsily, through the rise and “mainstreaming” of Environmental, Social and Governance (ESG) screening and integration, and of “impact” investing. The pressure from investors will only encourage boards to consider stakeholder perspectives, even worker participation looks now like a distinct possibility in the UK.

But none of these trends could be sustained and become the future without disclosure.

Disclosure

First, I believe that, the core OECD public markets suffer from a saturation of disclosure requirements —there is too much, not too little of it. The number of pages in the annual reports of UK FTSE 300 companies have on average more than trebled in the last 20 years. Investors have probably more information than they can use, and often the forest is lost to the trees.

But the focus of this post is not about disclosure in the public markets, where we might in fact see some retrenchment over the next twelve years, first and foremost on the need for quarterly reporting. The focus is rather on two different issues: changes in governance disclosures in EMs; and the beneficial impact of disclosure practices in OECD public markets on disclosure trends and culture in private markets. The gist is that the amount of disclosure in OECD public markets as well as the corporate and investor cultures that have developed around these disclosures are generating positive externalities for EMs and privately-owned companies in all markets. These two directional trends can be demonstrated by developments in two areas.

The first area is that of corporate governance codes, more specifically the structure and implementation mechanisms for these codes in emerging markets. All corporate governance codes claim the UK Code as their ancestor. But many of them, especially in EMs, do not possess one of its core features: the comply-or-explain mechanism, which allows companies to comply with quite specific provisions of a factual, binary nature; or to explain why they do not comply with such provisions. The primary purpose of the comply-or-explain approach is to increase disclosure of governance practices in the market. By asking companies for a simple “yes” or “no” on their compliance with a very specific provision and by making their response an obligatory disclosure item, the Codes render governance arrangements of individual companies transparent to the market.

In contrast, in EMs one would all too often find Code provisions that are ostensibly comply-or-explain, but in practice yield little transparency about real governance practices among the local listed population. There are at least two reasons for this: first, their provisions are often too general with a response requiring a judgement rather than a statement of fact. For example, if the provision is that “the board has to function effectively”, everyone can and will respond in the affirmative, and such an affirmative response cannot be realistically challenged. Second, provisions are often synthetic and cannot be effectively answered in a binary fashion: for example, “a majority of directors should be independent and competent”.

Until now, the objectives of policy makers in many EMs (and several OECD countries) was primarily to educate local companies on best practice through CG codes rather than to increase transparency in the market. This has started to change. My company, Nestor Advisors, has been involved with the support of the EBRD in efforts in Russia and Turkey to restructure Codes towards more disclosure-friendly formats; and to ensure that there is an efficient, user-friendly disclosure system to effectively get the information out to the market.

The many enemies of transparent markets have been saying that disclosure-focused CG regimes are fit for only those markets that have an able, sophisticated buy-side population. This is, nonsense. More transparency in the public market benefits first and foremost lest developed EM and frontier markets; it attracts investors who might not enter without some platform that provides credible non-financial information. Such a platform might in fact make all the difference. What is more, it provides the right signal; good CG information underpins credibility of financial information, and vice versa.

Coming to the same directional trend, the adoption of public market CG disclosure norms by private companies has been increasing in several “core” OECD markets. I believe this will become a growing trend in the next 12 years as private markets continue to attract more and more diverse investors, with some private companies becoming effectively quasi-public. This is a trend that is likely to reach EMs, especially if DFIs actively support it. In EMs, the emergence of a culture of disclosure generates significant positive spill-overs on the rest of the economy, boosting the goodwill of various stakeholders on whose good faith companies often depend.

Moreover, disclosure usually begets more disclosure. As disclosure becomes richer, boards, shareholders and stakeholders want a more holistic understanding of the business they are involved with. Propelled by failure and crises, the knowledge and understanding of the “culture” of the individual companies is increasingly coming within the sights of boards and stakeholders.

Starting with the financial sector, understanding the culture of a company is becoming increasingly a best practice requirement for boards. I am convinced that within the next 12 years, cultural “audits” will become the norm for larger companies.

So, are boards, shareholders and stakeholders interested in culture for the same reasons that Claude Levi-Strauss was interested in the culture of the Yanomami tribe in the Amazon? Maybe not exactly, but their reasons might not be not be as different as one would expect. Culture is important in companies because, apart from policies and procedures, it influences the way people understand their surroundings and, most importantly behave towards them. Just like Levi-Strauss, corporate leaders are interested in what drives people (in corporations and in tribes) to do things in certain ways; in what way “structure” may underpin behavior that in its turn produces goods/artefacts but also, ultimately a perception of the world, values.

It is said that culture is how people do things when no one is looking.

A related reason that culture is important was eloquently stated by the eponymous Peter Drucker. He famously said that “Culture eats strategy for breakfast”. Meaning that organizations, inhabited by humans, will always do what they feel comfortable with instead of what they planned and documented on a piece of paper.

Cultural audits, as increasingly practiced by banks in the UK and elsewhere, depend on the availability of various pieces of information about governance practice and process, but also on other indicators such as customer and employee satisfaction surveys. All of these constitute elements of an elaborate system of internal and external “disclosure”. Cultural audits will not only be relevant to banks and large listed companies: some banks are already reflecting on how to develop “red flags” for their clients, often SMEs. Indicators might include things such as big differences in pay between the boss and the employees, high turnover of management, “staleness” of boards (age, same people around the table for a long time). Whether as an element of credit assessment or of an inevitability/due diligence test, these cultural audits will depend on the availability of data.

Data

Data, the third driver, will increasingly fuel developments in the other three areas discussed in this post. As noted above, a key element of technology-driven disruption in many sectors is the availability of “big” data allowing companies to find niches and price their products with unprecedented precision. Such data will also help identify risks with a granularity that was not hitherto available to providers of equity and debt capital.

In the governance space, work is already under way. And while today data provision is focused on governance of banks (such as in the case of Aktis, a data provider that I chair) or large listed companies (such as in the case of Sustain analytics or ISS) all existing data providers are considering ways to acquire, aggregate/anonymize and serve back governance data from and to private companies, providing benchmarking but also measurable “rankings” to potential investors.

The availability of data will also have a profound impact on the way boards work: for example, as compliance becomes automated, compliance data and logs will become a source of oversight for audit committees. Expanded use of board portals which are becoming the norm in many OECD core markets, will also provide board directors with better opportunities for deep dives into a company’s policy and control environment.

DFIs

I truly believe that in EMs, especially in frontier markets, the recent DFI commitment to actively seek better governance, a “conversion” of almost of Damascene proportions, has become a significant driver of change and will become more so over the next twelve years. IFC was certainly a trailblazer in this respect but others have followed closely.

A few years ago, the governance departments of most DFIs (some of them still nascent) started coordinating their approach to the governance of their investees. The IFC, the EBRD, the IDB, the ADB, and bilateral DFIs, such as DEG, FMO, IFU and Proparco, decided that they needed a common approach. Based on the IFC methodology, a DFI approach to governance was developed and endorsed. And DFIs now cooperate in continuously improving the methodology, in sharing experience from its implementation and even in carrying out individual investee engagements.

In 2018, KfW DEG, the German development bank, produced what will be considered a high water mark in the DFI space: The new Nominee Director Handbook. In my view it provides extensive ammunition in dealing with the still rudimentary governance in many of the boards its nominees sit on. By upping the game at board level, DEG nominees will produce significant results in many individual investees. But the most important impact is the positive externalities that might benefit all companies in the investee’s immediate ecosystem. These externalities will be multiplied significantly, because now DFIs “sing from the same hymn book” and collaborate on fostering governance changes.

Conclusion

One can sum up the perspective of this post on the future of governance in the following 10 points:

Diversity at every level and of every kind will continue to grow.
Private companies will increasingly have outsiders on boards, who in many cases will be “professional” challengers, instead of lapdogs.
Stakeholders will figure frequently on board agendas—and on boards themselves, possibly as a result of regulatory changes.
While public company disclosures in the OECD might be streamlined…
…private company boards will become more demanding on regular disclosures, and so will their shareholders.
A more holistic view of the firm will emerge through systematic cultural audits.
Diversity, disclosure and interactions between principal and their agents, as well as stakeholders will increasingly require high quality governance data…
…which will increase demand for data platforms at every level.
The DFIs ‘weight in the EM governance area will continue to increase; they will become an important source of demand for diversity, disclosure and data…
… thus becoming themselves an important driver of change.

Introduction

The modern era of governance and its handmaiden “compliance” has spawned a plethora of rules and guides about how boards and management should do their respective jobs.

This is fine, but many situations encountered by directors in boardroom settings are not straightforward, nor can they be neatly categorised so that they can be dealt with “by the book.”

This article discusses how chairs should deal with what can often arise in boardrooms, where subjective comments, biased or pre-emptive behaviour and strong personalities can cloud good decision making.

As a corollary, management can be guilty of the same shortcomings, and management reports received by boards can vary greatly in content and format, and on occasion, are characterised by what they omit, as well as what they say. Facts can be in short supply, and opinions can often drive decisions.

The article also question why there is so much variability in board papers, not just between companies, but also within companies. It also looks at how boards of directors can understand and deal with what can be misleading reports with the underlying management behaviour and shortcomings.

Quite simply most of these issues can be put down to the fact that companies are run by groups of unique individuals with a range of personalities and behaviours. A good CEO can get the best out of his or her team, and good chairs can navigate the path towards rational, and evidence-based decisions by the board. However, it is important that the leaders, in this case the CEO and the chair, understand what is going on and have strategies to deal with them.

The board

Much has been written about boardroom personality types and how to build and operate a balanced and effective board, and also about correlating CEO behaviours with success. Understanding what you are dealing with is important, but knowing how to manage these personalities to drive success is also crucial.

To put this into context it would be interesting to know how many company successes and failures are the result of, on the one hand, exceptional individual CEOs, supported by good boards; and, on the other, poor choices of CEOs by incompetent boards of directors?

Changing CEO’s early on in their careers is not a good look but recognising problems early on may make this decision crucial.

Boards are a collective, and consensual decisions are best practice in most circumstances. Agreeing to disagree can sometimes be the only way forward where there are significant differences of view over issues, and where the best outcome for the Company becomes the key driver for the decision.

Likewise, major problems can arise where the board has significant shareholders as directors, who push their personal agendas in preference to the interests of the company. The role of the independent directors is more important in these circumstances and they need to step up and have their voices heard, over what can be dominant and aggressive behaviour.

Management

Boards have more face-time with CEOs than any other management team member, with the exception sometimes of the CFO, who can often double as the record taker, and therefore is generally present for the entire meeting. It is axiomatic that the CEO should preface and present major proposals to the directors, but CEOs vary in their abilities to do this thoroughly and objectively. At one end of the scale CEOs can have an overdose of leadership traits, characterised by hubris; whereas others struggle to present a coherent and persuasive argument, even when important information is available.

With the former, there is one celebrated case where an extremely persuasive CEO was able to convince the entire board of his SOE to go along with his view of the world, and in the process disregarded what were obvious risks, and matters which ordinarily boards would have had have a duty to address and scrutinise. “Black Hats” around the board table can be very challenging for some CEOs, but are a necessary element in board composition and behaviour. Having said that, the Black Hats need to be careful and non-confrontational in putting their views forward.

Management needs to recognise this, and address director’s concerns factually and professionally, even occasionally conceding that there are unresolved issues when seeking decisions.

In the case of an over-assertive CEO, a well-balanced board with an experienced chair will know who they are dealing with; and indeed may have had the responsibility for choosing the CEO — although this is not always the case.

This is why recruitment of the CEO is such a crucial decision, and it is important to know whom you are really employing before it is too late. Thorough due diligence with trustworthy referees can often reveal unsatisfactory characteristics and it is vital that a CEO has integrity, balance and openness in all their dealings with the board. Mutual trust is essential.

Conventional wisdom says that CEOs have a “use by” date and this is often quoted as being seven years, which is also the average longevity of a CEO in New Zealand. Equally some exceptional CEOs grow with the job and the challenge, and they should be supported by their boards and chair to go the distance, providing they continue to grow the company without taking excessive risks.

There are significant differences in approach between management and boards, and how personality and style can impact on company decisions. The board collective, more often than not, has a wide range of competencies, skills, experience and personalities. On the other hand, management can often be embodied in a single individual who has the delegated responsibility to report to the board on behalf of a team of functional managers, whom collectively run the business, operationally and financially.

As we have seen very recently with one of our SOEs, the wrong choice of CEO can lead to the hollowing out of the senior executive team and a huge loss of talent and experience. “Command and control” behaviours are no longer acceptable management styles in today’s world.

Strategy

Strategy formulation is at the intersection between the board and management, which is why good boards share the load with management in this area, and follow good process to ensure there is a high degree of ownership of the final document. Someone once said that strategy doesn’t just happen once a year, and in these uncertain times it needs to be frequently re-visited, and revised if necessary.

It can be tricky when the strategy is not agreed by all the directors, and there have been cases where this has led to “throwing the toys,” and resignation. While understandable, it may be better to stay and see how things play out, and perhaps persuade the board to an alternative view over time.

Key takeaways for boards

Both directors and chairs need to be aware of the influence of individuals and their behaviours in the debate and the discussion which precedes decisions.
Chairs need to know their board members and their personalities. They should be alert to where some directors may choose to take the discussion and be prepared to nudge it gently back on course.
Similarly, individual directors should keep their own counsel and contribute objectively and constructively, particularly when management is present. Enthusiasm needs to be tempered with sound reasoning.
Strategy is about the longer term and tactics are usually short term. Even some directors struggle to know the difference.

Top-5-Ways-to-Improve-Board-Culture-for-Your-Organization.jpg

A board’s culture is reflected in the traditions and habits that boards develop over time that set the standard for the way that board directors think and act. Good governance suggests that boards should enjoy a sense of mutual respect and collegiality. Culture is a fluid concept that grows and changes with time. Healthy, productive boards strive to achieve a strong and connected board culture. Boards should be cautious that culture can also form on its own and the shape that it takes doesn’t always benefit the board. By taking a strategic, thoughtful approach to molding the proper board culture, the board and its stakeholders benefit profusely.

There are distinct steps that boards can take to try to improve their culture. The first step begins with recognizing the importance that a healthy culture can have on an organization. The next step is to evaluate your organization’s current culture and make a conscious decision to work together toward improving it. Your board’s culture should hold an important and periodic place on your board meeting agenda. Creating a healthy board culture isn’t a “one and done” exercise. It’s important to review it and evaluate it periodically so that it becomes a regular goal for improvement.

Recognize the Importance of a Strong and Healthy Board Culture

Board culture begins with a thought or a concept. Building a strong culture requires taking the concept out of the mindset and putting it into practice. The board needs to communicate the desired culture and give it a voice. It starts by the board modeling the culture they want to see. In other words, it requires not just talking the talk but walking the walk.

It’s worth mentioning that boards can have teamwork without having a strong culture. Imagine how much stronger a board can be when it has both. The board gets its authority from the collective nature of the way it makes decisions.

Implement the Characteristics of a Strong Board Culture

While the culture forms as a result of the collective efforts of the board, every board member plays an important role in helping to form it. In order for the board to come together to build their culture successfully, they need to understand their company, their competitors, and the industry space. It’s helpful for managers to offer their perspective of what the culture is or should be. One way to get everyone on the same page with how to define their culture is to put it on the board agenda and discuss it.

Be inquisitive about how your board functions in action. Is there a balance between collegiality and directness? Are opposing views critical or constructive? Do board directors attack issues or each other? Do the majority of board members feel that they can speak to managers with candor? In conducting regular board self-evaluations, are enough of the questions dedicated toward culture? Does the nominating committee consider a board candidate’s views on culture during the interview process? Do candidates share a similar view of culture as the rest of the board?

Revisit the Topic of Culture During Times of Drastic Change

Significant changes within an organization can alter the culture quickly, especially when there are changes in leadership. Changes can affect culture negatively. Substantial changes in an organization can also present new opportunities to transform the culture into new and better dimensions.

Whenever an ethical issue arises, it’s wise to consider if there have been other ethical issues that were minimized or shoved under the carpet. When ethical concerns go unchecked, it bears a strong connection to the culture and signals the need for change.

A merger or acquisition is a major event that can seriously affect an organization’s culture. By working to achieve and communicate a new view of the culture, it shows that the organization is concerned about culture and is willing to give it the time and attention it needs.

The CEO or executive director has a strong impact on the culture of an organization. This is a good thing when the current CEO holds a strong view of the culture and models it well. Culture can become challenging during times of CEO succession. The new CEO will have a strong impact on if or whether the culture changes either positively or negatively moving forward.

Evaluate the Culture at Periodic Junctures

Once an organization achieves the desired culture, it’s important to monitor it. Often, an organization’s culture is only put to the test when it faces a crisis of some sort. A strong and healthy culture provides a good foundation for boards to be able to bounce back from challenges.

Boards can sometimes gauge culture by reviewing key management reports. Reports provide specific data on environmental issues, safety issues, and other concerns. How the board handles those issues can be very telling about the board’s culture.

Risks accompany opportunities. As boards work on risk management issues, it can quickly become apparent how far apart leaders are with their risk tolerance and how well it aligns with their strategy. By recognizing this fact, everyone can begin working toward realigning their perspectives in the interest of improving board culture.

Evaluate Whether the External View of Culture Matches the Internal View

While a board may believe that it is solid on its own view of culture, it’s important to consider whether its culture is strong enough and prominent enough to reflect the same culture outside of the company.

According to a 2015 survey cited by Heidrick & Struggles, the majority of boards appreciate the value of culture, but they don’t believe organizations put it into practice as often as they preach it. The survey showed that 87% of the organizations responded by listing culture and engagement as a top challenge.

About half of the organizations felt that shaping culture was an urgent issue.

Board evaluations may be one of the most viable ways to assess board culture. That’s one of the valuable features of a BoardEffect board portal system. In addition to offering boards the benefit of secure communications and a process for streamlined board meetings, the software has a survey tool built into the platform that’s perfect for doing regular assessments of board culture. With the combination of board director commitment and the right digital tools, organizations can begin enhancing their culture at the earliest possible time.

Author Lena Eisenstein

Organizational capacity is comprised of several elements that, if maintained at optimum levels, enable an organization to deliver against its purpose, mission and promise and achieve its goals efficiently.

However, one powerful element of capacity is often overlooked. If leveraged well, this single element can drive progress exponentially and become an organization’s secret weapon for rising to the top of the competitive heap.

That capacity-building element is the board. Board members bring necessary expertise, networks and funding that benefit every type of organization (private, public, nonprofits, foundations) beyond what internal resources can provide. They also increase capacity at a lower cost than most other capacity-related resources such as employees, equipment and facilities. The cost of capacity resources includes time, and board members bring their own.

During the 2020 pandemic, most boards stopped meeting in person, and some organizations stopped investing in and nurturing their boards because leadership was focused on more pressing issues.

Post-pandemic, these factors have come home to roost as organizations are feeling the effects of a board that is less engaged and, in some cases, not performing as well as it once did.

As a result, many of my clients are seeking new ways to engage their boards and want a refresher course on governance.

But pandemic or not, when boards need to enhance performance and become effective governing bodies, there’s no training for that. What’s needed is development, not merely a workshop or two.

Here are three keys to leading a successful board development effort:

Review Your Board’s Structure

If you haven’t formalized board governance structures like committees, officer succession, nominating and term limits, this is the time to do so.

Governance structures provide guidelines that define how a board should operate which generally improves performance. These structures are interrelated and interdependent with each structure bringing another to the forefront.

For example, meaningful committee work reveals what skills are needed on the board, and understanding the terms of board members and officers allows the board to develop a succession plan and nominating process to accomplish those goals.

Review Your Board’s Practices

Governance structures are necessary for realizing the full capacity of a board, but they’re only as strong as the board’s practices.

Governance practices help ensure accountability for decisions, actions and performance. They contribute to a high-performing board and board culture. It’s important to define these practices and expectations so that a strong board culture develops.

Clearly state expectations for attendance, committee participation and fundraising. Doing so will make it easier for board members to show up and step up.

Focus On Board Engagement

It’s hard to reap the benefits of enhanced board structures and practices without also focusing on board engagement. Engagement doesn’t just happen spontaneously, it must be cultivated and nurtured by leadership. That’s why a board that intentionally works on increasing engagement will have a higher degree of success.

Figure out the rhythm and format for board and committee meetings. Develop creative ways for members to participate, interact and strategize. Build in social events and time for networking. Rally the board around supporting organizational leadership and track board work against the organization’s strategic plan.

These are all important board member responsibilities and ensure the board stays focused on those topics and activities that are most critical to your organization’s success.

Remember that board members who feel connected will be better at supporting the organization and, ultimately, increasing organizational capacity in the ways only a board can.

Author: Ann Quinn

ustainability has gone mainstream in the corporate world. Investors increasingly understand that a corporation’s performance on pertinent environmental, social, and governance (ESG) factors directly affects long-term profitability—a recognition that is transforming “sustainable investing” into, more simply, “investing.” Most CEOs also now recognize that ESG issues should inform their corporate strategy. But one important constituency remains a stubborn holdout in the sustainability revolution: corporate boards. It is an unfortunate truth that directors tasked with securing their company’s future are often holding the enterprise back with an outdated emphasis on short-term value maximization.

A 2019 PwC survey of more than 700 public-company directors found that 56% thought boards were spending too much time on sustainability. Some of the myopia can be traced to a lack of diversity on boards. Most directors are male, white, and from a similar background, and many are retired executives who came of age professionally at a time when the link between ESG factors and corporate performance was not clearly understood. But a large part of the problem is that until recently, boards didn’t have a mandate to grapple with sustainability; instead, their time was consumed by compliance tasks driven by the corporate secretary and by inside and outside counsel.

The concept of “corporate purpose” provides the impetus that boards need to increase their focus on ESG concerns and manage their firms for long-term success. A clear and compelling mission should be at the heart of every company’s efforts to enhance its positive impacts on the environment and society. Without such a purpose, a company cannot have a sustainable corporate strategy, and investors cannot earn sustainable returns. And the ultimate responsibility for defining that purpose must rest with the board, because it has a duty to take an intergenerational perspective that extends beyond the tenure of any management team.

Our research on injecting purpose into corporate governance draws on extensive conversations with board chairs, executives, and owners of more than 100 corporations operating across a wide range of industries in more than 20 countries. We’ve undertaken that research as part of the Enacting Purpose Initiative, a multigroup project led by the University of Oxford in conjunction with the University of California, Berkeley; the investment management firm Federated Hermes; the corporate law firm Wachtell, Lipton, Rosen & Katz; and the British Academy. The initiative brings together leaders from academia and practice in the United States and Europe to provide research and guidance on linking corporate purpose to strategy and performance.

A major output of this effort is a framework to help boards deliver on purpose. Called SCORE, it was initially devised by Rupert Younger, the director of the Oxford University Centre for Corporate Reputation and the chair of the Enacting Purpose Initiative. SCORE outlines five actions—simplify, connect, own, reward, and exemplify—that can help boards articulate and foster a firm’s durable value proposition and its drivers.

Simplify

Enacting purpose begins with knowing what it is. For that reason, purpose needs to be simple and clear—straightforward enough to be understood by the entire corporate workforce, the wider supply chain, and other stake-holders.

How should purpose be communicated? A good place for boards to start is with a statement of purpose signed and issued by all the directors. The board chair and the governance committee should take the lead in drafting it. The statement should define how the company aims to create value by fulfilling unmet needs in society. It should acknowledge the negative impacts the company must mitigate if it is to retain public support and its license to operate. And it should present a distinctive message—not something so generic that the name of any major competitor could be substituted. If those criteria are met, the statement can be a powerful tool for sharing a company’s vision for long-term value creation, even in industries with negative externalities.

EQT, a global private-equity firm, describes its purpose this way: “to future-proof companies and make a positive impact.” EQT defines future-proofing as anticipating what companies need to do to stay relevant amid increasing social and environmental pressures. Its one-page purpose statement, which was first published in its 2019 annual report, explains the firm’s commitment to “being more than capital.” EQT requires that any investment meet clear financial objectives but also contribute to the United Nations Sustainable Development Goals. The company’s founder, Conni Jonsson, told us that writing the statement was fairly easy and that publishing it unites executives, directors, and investors on the company’s priorities. “For us,” he said, “aligning on the statement of purpose was merely manifesting what has been our mindset since inception.”

Connect

Once corporate purpose has been articulated, it must be connected to strategy and capital allocation decisions. Strategy is about making certain choices and consciously rejecting others after serious deliberation. Capital allocation decisions naturally follow. Sometimes the process might lead a firm to sacrifice short-term profits by abandoning a lucrative but socially harmful product, such as when Dick’s Sporting Goods decided to stop selling assault weapons. Other times a company might undertake a project that will certainly lose money, such as when Medtronic publicly shared the design specifications for its ventilators early in the Covid-19 pandemic to speed up manufacturing of the lifesaving devices.

Connecting purpose to strategy gives a CEO the necessary foundation to prioritize long-term goals and resist pressure from activist investors and others who care only about short-term returns. “We have made some specific investments that we might not have made without our purpose being so clearly articulated,” Mark Preston, the executive trustee and group CEO of the property behemoth Grosvenor Estate, told us. “More importantly, there are probably some investments that we have not made, as a result of our purpose.”

Own

Ownership of purpose starts with the board, which must put in place appropriate structures, control systems, and processes for enacting purpose. This goes beyond delegation to the risk, compliance, and ethics committees. Senior management should take responsibility for ensuring that the company’s mission is embraced by everyone in the organization, right down to workers on the shop floor. It does this through its own actions, particularly when making tough trade-off decisions. Effective ownership requires that employees be fully consulted and engaged in delivering on the company’s stated purpose. Although management is responsible for direct communications with staffers, the board can create and oversee internal communication strategies to ensure that the company’s purpose is being effectively diffused throughout the organization.

At firms where a controlling family owns large blocks of shares or votes—as is the case in many of the largest companies around the world—the family’s representatives on the board can be especially forceful in helping the company find and execute its purpose. That has certainly been true at Ford Motor Company. “Our drive for environmental sustainability has come from our executive chairman, Bill Ford,” says Henry Ford III, a corporate strategist and the great-great-grandson of the company’s founder. “He was the one who really pushed us to do annual sustainability reports where we are transparent about the progress we are making in terms of reaching our environmental goals.”

Reward

Primarily through its compensation committee, the board is responsible for establishing the metrics that will be used to determine promotion and remuneration throughout the organization. Purpose, not simply profits, needs to be rewarded. Today compensation is largely based on short-term financial metrics. That has to change: A broader set of financial and nonfinancial metrics should be used to evaluate performance over longer time frames. And the place to start is with the board’s structuring of compensation for senior executives. For example, after British taxpayers bailed out Royal Bank of Scotland during the financial crisis of 2008, the bank’s board of directors linked 25% of executives’ variable pay to key performance indicators in the areas of “customer and stakeholder” and “people and culture.”

When choosing the right metrics to tie to rewards, performance should be evaluated in terms of both the company’s ESG activities and the external impact of its products and services. Materiality needs to be a cornerstone—the board and management must be aligned on which ESG issues are relevant to the company’s financial performance and should therefore be baked into executive compensation. For example, carbon emissions are not material for an insurance company, but for a coal-fired utility company they certainly are.

Ideally, the measures used to assess performance and drive rewards will eventually be based on a set of independent, rigorous global standards for evaluating ESG impacts, similar to the standards that have long been used to gauge financial performance. The foundation for this has already been laid by the work of the Global Reporting Initiative, the Impact Management Project (IMP), and the Sustainability Accounting Standards Board (SASB). (Disclosure: One of us, Eccles, was the founding chairman of SASB and is an unpaid adviser to the IMP.) When this work is complete, standardized ESG reporting will enable peer comparisons of how each company is positioned to handle the risks and opportunities presented by nonfinancial issues. Boards can then more easily link a company’s performance on these metrics to executive compensation.

Exemplify

Purpose and how it is being achieved must be exemplified in both quantitative and qualitative terms. Quantitatively, a company should integrate its reporting on financial performance with its reporting on sustainability performance, showing how results in the two areas are related. Qualitatively, it is important to have a consistent narrative that includes stories about what the company and its people are doing to fulfill its purpose.

Patagonia, the outdoor-clothing retailer, gets this better than most. Its stated purpose—“We’re in business to save our home planet”—drives all its activities. The company not only makes eco-friendly apparel but also engages aggressively in environmental advocacy and promotes an appreciation of sustainable practices and the natural world with beautifully crafted, visually appealing stories on its website and social media.

At the U.S. food manufacturer J.M. Smucker, purpose involves “feeding connections that help us thrive.” The firm aims to create “meaningful connections…for those we love and the communities in which we live,” and that’s exemplified in the way it treats its employees. As the executive chairman, Richard Smucker, told us, “You demonstrate your purpose when you take action. Sometimes you’re put in tough ethical situations and it’s about how you respond. For example, when closing plants, we have always given plenty of notice to make time for transition. You get respect because you’ve given respect.” He added, “To communicate our commitment, every year we print a small handbook for all employees with our purpose, our commitment to each other, and our strategy. You can carry in your pocket why we do things, how we do them, and what we do.”

A New Duty

When we promote the SCORE framework to directors, they often respond with a common fallacy: They cannot elevate corporate purpose because they have a fiduciary duty to put shareholders’ interests above all others. Setting aside the growing evidence that superior performance on material ESG issues leads to superior financial performance, it is simply not true that shareholders must come first. Shareholders are obviously important, but other stake-holders—such as employees, customers, and suppliers—are also crucial to a company’s long-term prospects.

To dispel directors’ misconceptions, we recently gathered legal memos on fiduciary duty from all G20 countries and 14 others. None offered an endorsement of shareholder primacy. This was true even in the United States. For example, a memo issued by Wachtell, Lipton, Rosen & Katz stated: “A corporation ignores environmental and social challenges at its own peril. Corporate boards are obligated to identify and address these risks as part of their essential fiduciary duty to protect the long-term value of the corporation itself.”

The key to putting the SCORE framework into practice is finding people and organizations willing to be among the first to act. A natural place to look for them is among the members of Business Roundtable (BRT), the lobbying group that declared in 2019 that the purpose of a corporation is to create value for all stake-holders. Nearly 200 CEOs, including the heads of some of the world’s largest companies, endorsed that idea. Each of those leaders’ boards should now walk the talk by publishing a firm-specific statement of purpose and implementing the SCORE framework. If the directors at the BRT companies fail to act, their behavior will not only breed cynicism but leave them vulnerable to ongoing attack by investors demanding more-concrete action on ESG issues.

If investors are to better identify a corporation’s role in society and its prospects for long-term financial returns, board members need to articulate and disclose their company’s durable value proposition and its drivers. The SCORE framework provides a tool to do that. We hope more boards will use it to promote long-term value creation and a more just and sustainable economy.

By Robert G. Eccles, Mary Johnstone-Louis, Colin Mayer, Judith C. Stroehle

Board composition and performance continue to be under scrutiny by various stakeholders. Institutional investors are paying close attention to the individuals representing their interests in the boardroom, and how the board addresses its own succession. Hedge fund activists are also watching and certainly have not been shy about seeking change. And directors themselves are increasingly vocal about the performance of their peers. In fact, 49% of directors believe someone on their board should be replaced, identifying an opportunity to enhance boards’ skills; 21% believe two or more directors should. They say their top reasons are because directors overstep the boundaries of their oversight role, are reluctant to challenge management, have a style of interacting that negatively affects board dynamics and advanced age has led to diminished performance. So, how do boards use their annual assessment process to measure effectiveness, drive refreshment and raise performance? They shift to a continuous improvement mindset.

49%

of directors believe someone on their board should be replaced.

21%

believe two or more directors on their board should be replaced.

Most boards conduct board and committee assessments as required by stock exchange listing standards. More and more boards are also conducting individual director assessments; 44% of S&P 500 boards include some form of individual director assessment, up from 29% ten years ago.² While some boards are quite good at conducting their board assessments, others could stand to get more out of the exercise. The biggest roadblocks? Viewing it as a compliance exercise, using an approach that doesn’t really allow for honest feedback and failing to follow-up on the results.

Boards and individual directors would benefit from re-envisioning their assessment approach. This involves re-defining the process as one that is ongoing and provides real value and continuous improvement. Here are five key actions to ramp up the board’s next annual assessment:

Lead like a lion. Board leadership is critical to making changes happen. Without a strong leader, it doesn’t matter how meaningful your assessment process is.

Change the endgame. Making the assessment process an ongoing exercise with the goal of continuous improvement can deliver better results. But early buy-in from all directors on the process is critical.

Address the elephant in the room. Boards that have frank discussions about what is holding their performance back can excel. This involves having a way to provide honest individual director feedback, which can be done in different formats. A periodic independent perspective can help.

Take action to get real results. Effective boards are disciplined about identifying and holding themselves accountable for action items coming out of the assessment. They also integrate assessment results into their director succession plan.

Be transparent with investors. Many boards are taking a closer look at their disclosures around board assessments — seeking to provide stakeholders with a greater understanding of the process. Shareholder engagement in this area has risen, and boards are taking steps to be more transparent.

Lead like a lion

Board leadership is critical to making any changes happen. The board leader sets the tone for the culture of the board, and in many cases leads and drives the assessment process. In fact, 85% of directors indicate that a strong focus from the board chair or lead director is an effective method to drive board refreshment.³ Without a strong leader, it doesn’t matter how meaningful your assessment process is. A close look at board culture and whether directors really can be candid when providing feedback is also needed. This involves understanding the way that directors make decisions, handle disagreements and share information. If the board is to continue to grow and improve, the culture has to be open to the idea of giving — and receiving — regular feedback. And, board leadership is key to ensuring this environment exists.

Change the endgame

Let’s face it, the word “assessment” can have a negative connotation. It can put people on edge, even in a boardroom of high-performers. Because of the collegial nature of many boards, it can sometimes be hard to deliver less than glowing feedback about a fellow director — which can turn the process into “something to get finished” rather than a way to enhance board performance. So what can boards do? Take a fresh look at the approach: Boards can improve the value of their assessment process by focusing on continuous improvement and board excellence. Effective assessments should look at ways to enhance board dynamics, composition, oversight and practices. They should reinforce what is working well and highlight those obstacles that are limiting strong performance. And, the assessment is best viewed as an ongoing process rather than just a once a year event. Some boards have embraced a continuous improvement mindset by adding more frequent opportunities to discuss effectiveness as part of their agendas. Others have instituted a formal process for providing director feedback or coaching throughout the year. Boards can also take a fresh look at their assessment approach and evolve the format or ask different questions to drive a better outcome. They may even find it valuable to dive deeper on a few particular areas where they believe there is potential improvement. Get early buy-in: Before the assessment process begins, directors should discuss the approach and decide on any changes they wish to make. This involves engaging directors early and giving them a chance to provide input and voice their concerns so these items can be addressed appropriately. The discussion should cover the assessment’s scope and objectives, how it will be conducted and reported back, and the need to openly share and receive feedback. The goal is to get agreement on what the assessment process should accomplish and obtain commitment and support for it.

Address the elephant in the room

What holds boards back from top performance? Board culture and interpersonal dynamics tend to be the most common sources of dysfunction in the boardroom. Dysfunction can take various forms, whether it is a lack of trust between the board and CEO, disruptive or disengaged directors, factions in the boardroom or poor decision-making processes. These issues, though sometimes apparent to those in the boardroom, can be the most difficult to address. \

To improve board performance, directors need to identify and address what isn’t working, and the assessment process can be a key way to do so. But directors need to be frank in these discussions. And this isn’t always easy to do — especially when collegiality on the board is valued. Fifteen percent (15%) of directors cite collegiality as a barrier to effective board refreshment.⁴ Twenty percent (20%) of directors say that they have a board leader who is unwilling to have difficult conversations.⁵ Add to this the fact that many boards do not have a way for directors to share feedback with their fellow directors. So what can boards do to address the elephant in the room?

Institute mechanisms for honest director feedback: Boards can address whether the assessment process really allows for issues and concerns to surface and be dealt with, particularly the ones related to individual director performance. The process should permit the board, its committees, and individual directors to think critically, have meaningful discussions and identify potential areas for improvement, as well as demonstrate a willingness to address any weaknesses. A high-performing board culture allows directors to feel comfortable being open and candid with their concerns.

Feedback on individual directors is increasingly viewed as a critical component of the assessment process. Directors can use the output to improve their performance. The format of individual director feedback can vary. The goal shouldn’t be to grade directors, but to provide constructive input that can improve performance. Approached in this way, directors often welcome the opportunity to receive feedback.

More and more boards use some type of individual director assessment or a peer assessment process. Others may implement a mentoring program for directors. Another way to provide individual director feedback can be to have each director meet periodically with the chairman/lead director or nominating/governance committee chair.

Board leadership plays a critical role in ensuring directors receive important feedback. Board leaders frequently get feedback on individual directors or observe behavior in meetings that can be improved. However, awareness of these behaviors does not always translate into action. For example, only 14% of directors say their board provided counsel to one or more board members as a result of their self-assessment.⁶ High-performing board chairs and lead directors will embrace this role.

Six key questions to consider asking in self-assessments

Boards that are committed to self-improvement use assessments to ask:

How effectively do we engage with management on the company’s strategy?
How strong is our relationship with the C-suite and how are we adding value to it?
How effective is our board succession plan?
Do we have the right mechanism for providing individual director feedback?
What is our board culture and how well does it align with our strategy?
What processes are in place for engaging with shareholders?

Consider periodically getting an independent perspective: Companies may choose to periodically engage an independent facilitator to assess board performance. Fifteen percent (15%) of directors say they used an outside consultant to assess their performance in 2020.⁷ And, this number is likely to increase because of growing stakeholder pressure on board performance.

An independent view can be very helpful in providing the board with perspectives on how it compares to its peers or “measures up” to the evolving standards of corporate governance. The third party can also conduct interviews individually and share the collective feedback with the director without providing attribution to help them understand what is working well and where there are concerns or areas for improvement. Ultimately, the independent facilitator has the advantage of being able to more readily identify and air difficult issues, and can help the board reach a consensus on how to respond effectively. While most boards wouldn’t use one every year, many hire third-party facilitators every two to three years or as needed in response to changing board dynamics or emerging challenges.

Take action to get real results

Committing the time to review the results of the assessment process and having an open discussion about the findings are critical. But boards often fall short as they spend too little time — or even no time — discussing and acting upon assessment findings. This is a missed opportunity. Agree on action items and develop a plan for change: Directors should work together during the assessment process to identify and agree on areas in which the board would like to improve. Areas for improvement might be to add a director with particular experience, increase the board’s diversity, schedule a board retreat that focuses on strategy, create more opportunities to communicate with the CEO or hold more frequent executive sessions. At the individual level, a director may be advised to attend an educational program to enhance knowledge in a particular area, engage more often in discussions or change behavior in the boardroom.

14%

Only 14% of directors say their board provided counsel to one or more board members as a result of their self-assessment.

Effecting real change requires a plan for addressing issues raised in the assessment. Such a plan starts with identifying a leader — often the chairman, lead director or nominating/governance committee chair — to drive the changes. The leader should develop an action plan to discuss needed changes with the appropriate parties, as well as identify potential strategies, options and key milestone dates. It is then important for the leader to monitor implementation of the action plan for additional follow-up and results, keeping the full board updated on progress.

Board Action on Assessments

Add additional expertise to the board

40%

Change composition of board committees

32%

Diversify the board

21%

Provide disclosure about the board’s assessment process in the proxy statement

17%

Provide counsel to one or more board members

14%

Not re-nominate a director

12%

We did not make changes

12%

Q: In response to the results of your last board/committee assessment process, did your board/committee decide to do any of the following?

Integrate assessment results into board succession planning: As part of the action plan coming out of the assessment process, the board should discuss whether changes are needed to the board succession plan. The assessment process is a natural platform for reviewing the skills and expertise needed on the board in the context of the company’s long-term strategy. Does the board need access to deeper technological skills? Does it need more diversity of perspective? These discussions should filter into director succession planning, which is often led by the nominating/governance committee.

Today, director succession planning is often performed as a separate, distinct exercise, done on an as-needed basis when facing an impending vacancy on the board. But when findings from the assessment process are integrated into succession planning, the board is more likely to address issues in its composition and make the changes needed to get the right people in the boardroom. If new or different skills and expertise are needed, boards can consider them when seeking new directors. High-performing boards evaluate composition holistically and address it over a longer period of time, perhaps even with a five-year succession plan. Some boards act sooner by expanding their size to accommodate a new director with the needed skills and expertise. For more information, see Board composition: The road to strategic refreshment and succession.

Be transparent with investors

Shareholders are seeking more information about how boards address their own performance, including whether they are using assessments as a catalyst for refreshing the board. Today, disclosures are increasing in this area. Twenty-two percent (22%) of S&P 250 companies included a graphic to illustrate their evaluation process in the 2019 proxy statement. Eight percent (8%) provided results and steps in place to address any issues.8 Benchmark disclosure on assessments and consider voluntarily expanding it: Boards are generally doing more than they disclose. And, with the increasing spotlight on board performance, the time may be right to reassess these voluntary disclosures and provide more insight. The Council of Institutional Investors (CII) suggests that “[s]uch disclosure is an indication that a board is willing to think critically about its own performance on a regular basis and tackle any weaknesses.”9 CII highlights two best practice models for disclosure. One focuses on the mechanics of the assessment process, illustrating the process the board uses to identify and address gaps in its skills and performance. The other focuses on the most recent assessment, recapping the key takeaways and plans for improvement. CII notes that depending on the board’s process, disclosure may include: A description of the steps in the board evaluation, including who is reviewed and how reviews are conducted A discussion of continuous improvement initiatives and the activities that directors participated in during the past year Whether the board engaged an external adviser to conduct the board evaluation and the role that the adviser played (for example, interviewing board members) The objectives for the evaluation and how the board will use the findings Follow-up discussions that occurred. For example, some boards report having a mid-year check-in to evaluate the progress made in addressing areas of focus identified in the annual evaluation Boards can ask management to benchmark the company’s disclosure about the board assessment process with that of peer companies. They can also ask them to draft a sample enhanced disclosure that includes additional information on the board’s assessment practices and considers insights drawn from management’s review of other companies’ disclosures and shareholders’ perspectives. This information can help the board to critically evaluate whether it should voluntarily enhance its proxy disclosures. Be prepared for potential engagement with shareholders on self-assessments: Direct communications between board members and investors has grown considerably over the last several years. Fifty-eight percent (58%) of directors now say their board has such engagement. Shareholders are more often meeting with nominating/governance chairs and asking about board assessments as part of their engagement program. One survey found that in nearly 14% of cases, board-shareholder engagement was conducted under the guidance of the nominating/governance committee chair. If board composition is part of engagement, shareholders may want to understand how boards are assessing their own performance and the skills and expertise needed to oversee the company’s long-term strategy. They also want to understand the board’s position on director turnover, succession planning and diversity. Some high-performing boards even conduct “opposition research” to understand and identify what a tough critic would say about their board’s composition to be prepared for any potential engagement.

Conclusion

Board performance is being scrutinized by shareholders, the media, the public and others. In today’s environment, boards will want to refresh their assessment process to ensure it encourages a continuous improvement mindset and allows for candid and honest feedback. When done well, the assessment often results in changes that allow the board to deliver greater value to the company and its shareholders. And boards will want to tell their investors that they critically evaluate their own performance, addressing obstacles and striving for improvement.

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Board of Directors Responsibilities

Board Member Qualifications and Disqualifications

Typical Board Member Qualifications

Commitment to Diversity

Surges in Activism

Expanded Focus on Risk Management

Continued Focus on Board Diversity

The Relationship Between the Board and Management

Why Board Members Need Governance Training

Sitting Board Directors Play a Role in Mentoring the Incoming Board

Newer Board Directors Have Room to Grow in Governance

Good Governance Benefits Your Community

Responsible Boards Are Current on Governance Issues

Context

Diversity

Disclosure

Data

DFIs

Conclusion

Introduction

The board

Management

Strategy

Key takeaways for boards

Recognize the Importance of a Strong and Healthy Board Culture

Implement the Characteristics of a Strong Board Culture

Revisit the Topic of Culture During Times of Drastic Change

Evaluate the Culture at Periodic Junctures

Evaluate Whether the External View of Culture Matches the Internal View

Review Your Board’s Structure

Review Your Board’s Practices

Focus On Board Engagement

Simplify

Connect

Own

Reward

Exemplify

A New Duty

Lead like a lion

Change the endgame

Address the elephant in the room

Six key questions to consider asking in self-assessments

Take action to get real results

Board Action on Assessments

Q: In response to the results of your last board/committee assessment process, did your board/committee decide to do any of the following?

Be transparent with investors

Conclusion

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