Corporate Governance: Board Effectiveness
We’ve been involved in corporate governance consulting now for over twenty years. We’ve also served as Directors for public, private and not-for-profits organizations.
Here’s what we’ve learned about corporate governance:
- Every Board of Directors we’ve ever met has cared deeply about providing strong governance.
- Individual Directors care just as deeply. The few that don’t have been distracted or disillusioned. They seldom stay as Directors for very long.
- Despite all the caring, no two Directors can define the Director role or the role of their Board consistently.
- This lack of consistency jeopardizes Board governance effectiveness. Boards spend too much time and effort debating non-governance issues.
- This matters: governance failures occur on a regular basis – from Enron to Volkswagen.
- Governance failures are seldom reported as governance failures. They are reported as corporate or management failures.
- The way to fix corporate governance is to simplify the Role of the Board and focus Boards on fulfilling that role properly.
This infographic captures the focused role that we teach our governance clients. It is not a new definition.
There are only three elements: risk, strategy and the CEO.
What makes this definition effective is the onus it puts on the Board to execute these elements – and only these elements – in their governance discussions.
Sound too simple? Try this. Out of the limited amount of time your Board has available to provide strong corporate governance, how much time is going towards the role outlined here?
- Risk comes in four flavours. Legal, financial, environmental (outside the organization) and operational (inside the organization). Most Boards are reasonably well informed on the legal and financial risks. Not so much on the environmental and operational risk. If RIM’s Board managed to miss the risk posed by the iPhone and VW’s Board missed the risk posed by faked emissions results, what risks might your Board be missing?
- Strategy is what separates sustainable leaders from everyone else. And it starts with mission. Quick, what’s the mission of your organization? You can’t govern effectively if you don’t know why you’re in business. Once you understand that, everything else – the strategies, tactics, even the org chart – fall into place.
- Hiring and performance managing the CEO. Most Boards understand their role to hire the right CEO. An increasing number of Boards understand that performance management of the CEO is also part of their role. CEO’s are generally the only employee reporting to the Board. We expect every other employee to be well managed. The same must apply to the CEO.
The Five Elements of Board Effectiveness
For a Board to focus on risk, strategy and the role of the CEO it needs to have these five elements in place. Here’s how:
- Board Composition: Directors with the skills and expertise to understand risk, strategy and performance of the CEO. If this sounds like a no-brainer, it’s not. For example, despite what almost everyone thinks about their strategy skills, very few people are good at corporate strategy. Do you have some good corporate strategists on your Board? What about a Director who understands technology risk?
- Board Information: Information that informs the Board on risk, strategy and performance of the CEO. Think of the information your Board receives. How well does it help you understand the environmental and operational risks the organization is facing? Is it framed that way or do you have to interpret it? What more is required for you to be better informed?
- Board Processes: Processes like Board meeting agendas help keep the Board focused on risk, strategy and performance of the CEO. If you look at your last Board meeting agenda, how much time was dedicated to the three elements of the Board’s role? If each of the agenda items had been reframed in the context of risk, strategy or CEO performance what would have disappeared from the agenda? What different questions would you have asked?
- Board Leadership: It’s the Board leaders (Chairs and Committee Chairs) who ultimately determine what the Board focuses on. Some take their direction from the CEO – a basic governance mistake. Others are respected, experienced leaders who understand the Board’s role and the relationship with the CEO. As a Board Chair, what kind of focus are you leading your Board towards?
- Board Culture: Studies show that organizations with Boards who work well together and with the CEO perform better. However, working well together doesn’t mean always agreeing on everything. Focus your Board and CEO on risk and strategy. How well is it working together on these priorities? What’s missing?
At Boardroom Metrics our mission is to eliminate governance failures by helping Boards focus on their role. We do that through consulting, training and public speaking. If we can be of more assistance, please let us know at [email protected]