What makes an effective board?

What makes an effective board?

THE landscape on which directors exercise their oversight responsibilities has shifted since the aftermath of the global financial crisis in 2008 and as a result of numerous corporate scandals that rocked the corporate world.
Directors are now exposed to personal risk and liability over and above their usual complex oversight responsibilities. Directorships are no longer for the faint-hearted, who might be there for the prestige the position holds.
To be a director you need to be courageous and prepared to go into battle as it were. One needs to be fully conversant with the operations of the enterprise. Directors should be ready to actively engage in virtually all aspects of an enterprise’s operations if they have to be truly effective. There are factors that the board should do and be aware of if it has to be effective.

For a board to be effective it has to transition through a four phase continuum from the “foundational” level to “developed”, then to “advanced” until it gets to “the strategic” level. Boards which are operating at the foundational level mainly focus on compliance.
Such boards are weak performers because they are trying to play it safe and are unwilling to take strong positions on issues, or make tough decisions, or play proactive operational roles. Whereas when a board is strategic the directors take appropriate risk to make significant contributions and lasting impact on enterprise value.

Most boards find themselves stuck on the foundational level without moving to being strategic because:

  • They lack clarity of roles of individual directors and the board as a whole. Role ambiguity results in slow decision-making and is one of the causes of unnecessary director conflicts.
  • There is no alignment and agreement on company strategy resulting in the board’s inability to prioritize strategic issues and rather the board ends up concentrating on operational rather than strategic issues.
  • Some boards have poor team dynamics which leads to power struggles. For a board to be effective it should be comprised of professional peers who respect each other and work well together as a team.
  • The composition of the board, if not done well, could end up being a serious impediment in the functioning of the board. The board needs new perspectives and skills if it has to tackle complex challenges that are encountered in this complex environment. Boards that lack the ability to objectively evaluate their makeup to determine if they have the right people and skills will not function effectively.
    In most cases board composition is compromised in organizations where the founder dominates board discussions and therefore stifles all attempts to alter the composition of the board or suppresses attempts to change the way the company is to be run. High-performing boards ensure that they recruit new members with the right talent and those who are able to provide valuable strategic input.

Effective boards regularly review their own performances, individually and collectively. Typically the governance committee oversees the board members’ performance by assessing the members’ skills and the board as a whole in a number of wide ranging skills sets like legal, financial, marketing, long-range planning, and communication or leadership skills.

The process usually involves the committees evaluating themselves, as well as their peers, before assessing the board as an entity. The final evaluations are shared with the rest of the board and any weaknesses are addressed through board development programmes.
Highly effective boards have a culture of engagement built upon a commitment to inquiry where members ask the hard questions within the structure of the board meetings rather than publicly criticising board decisions after the fact.

Asking the hard questions, demonstrating periodic scepticism when merited, and even expressing strong and dissenting views are all appropriate and welcome elements of board-member engagement. To be able to ask the hard questions requires that the directors appreciate the business model and are also provided with information timely.
For boards to be effective they should uphold the basic fiduciary principles of the duty of care, loyalty, and obedience. Board members should be aware of what each principle requires of them as individual directors as well as part of the board as a whole, and how those principles relate to the work of serving on a governing body.

These principles should form part of the board’s orientation program. The principles call upon boards to recognize that they hold ultimate authority and should act both independently and prudently in making policy decisions and meeting their responsibilities and they should act in the best interest of the organisation and its mission and needs not the interests of any other party and or a board member’s personal interests.
If a board is to function effectively it needs to appoint an effective board chair who is able to steer the organisation through the dynamic, complex environment that is in a state of constant change.

A high-performing board requires a leader who can support and facilitate a model of strategic governance, develop an essential and candid relationship with the chief executive officer, one who has the respect of his or her board colleagues, and ensures that the full board is focused on issues that matter.
Boards that engage in strategic governance allocate a span of policy-making authority to standing committees while enabling the full board to focus on more strategic issues. Boards should trust that committees will do important work and have a substantial ability to present to the board action decisions and recommendations that are fully vetted. In that respect committee agendas should focus on issues that matter to the strategic direction of the organisation.

Effective boards should look at key challenges impacting the organisation through the risk dimension. Most boards use the enterprise risk management framework in their decision making process.
The process of assessing risk factors and making policy decisions based upon them allows boards to ask questions and make choices in collaboration with senior management in line with the level of risk tolerance that the organisation is prepared to carry.

These decisions can range between anything from investing in projects by accepting the upside risks of a bold initiative to that of mitigating threats or avoiding some initiatives that might run too high a risk to the business model. Most businesses have failed because they failed to proactivelymanage risks.
For boards to be able to deal with risk appropriately they need to be composed of high-quality individuals, who are outstanding in their respective fields so that they can understand certain complex trading systems within specific industries like financial sector, for instance.

Not understanding the business model properly due to a lack of relevant skills can result in the organisation incurring huge losses because members, out of ignorance, might overlook the warnings about the risks involved in the system.
Structures and processes constitute the essential factors that determine the effectiveness of the board. In terms of structures, the composition of the board contributes to effectiveness.
A well-managed board has diversity of opinion, experience, personality and gender. The independence of board members is also crucial. The effective function and the necessary number of board committees are to be taken into account as is the size of the board in making the board effective.

In terms of processes, there are many processes that are key in ensuring an effective board namely, the board evaluation processes, the strategy process, the risk process, the board induction and development process, the CEO and key managers succession processes, and the regulatory process.
There are barriers to having an effective board. These barriers need to be addressed if boards have to function well.

Some of these issues that can make the work of the board ineffective are:

  • Micromanaging less important matters
  • Ineffective nomination and governance committee
  • Failing to rotate and cross-train board members
  • The board staying too small
  • Hanging on to unproductive board members
  • Failing to have a strong strategic plan
  • Weak committee work and

Failing to do an orientation for new members

Board effectiveness comes about by ensuring that the issues discussed in this article are constantly sustained. It’s therefore very critical for boards to keep fine-tuning themselves towards better effectiveness. A systematic and continuous improvement along these issues is critical to ensure that the board remains effective.

Jakarasi is a business and financial strategist and a lecturer in business strategy, advanced performance management and entrepreneurship.
For assistance in implementing some of the concepts discussed in these articles please contact him on the following contacts: sjakarasi@gmail.com, call on +266 58881062 or WhatsApp +266 62110062.

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