Moving into the new year, board of directors are assessing the triumphs and failures of their current practices, key concerns and smoothing ongoing efforts to promote diversity. Good governance is as ever increasingly challenging, a seemingly relentless pursuit. We have analysed how experts weigh in on how to make a good board great, so board efficiency soars in 2019.
2018 has seen many corporate governance scandals, among Telsa CEO Elon Musk tweeting about taking the company private without disclosing this information to his board beforehand. Board of directors are therefore rightly reflective as the year draws to a close.
However, the wider question of what failed boards have in common can be varied and difficult to pinpoint. What is key to understanding is that it is impossible for a board of directors to monitor performance and oversee a company without real time updates and the complete documentation necessary. Accessibility to current information is a pragmatic step forward in 2019, as digitised boards become more indicative of highly effective boards.
Incentive, also, for improving your board of director dynamic moving into the new year is high. Data illustrates that profitability is one motivator. In a recent 2018 McKinsey and Company Board Perspective survey researchers Martin Hirt and Nina Speilmann found that in a survey of 1,100 directors about board effectiveness, “boards with better dynamics and processes, as well as those that execute core activities more effectively, report stronger financial performance”.
Boards seeking to change their board dynamic need to consider the following advice from seasoned experts in order to improve efficiency in 2018.
1: Establish A Solid Framework
Stanford’s Graduate School of Business lecturer David Dodson, a self-proclaimed, ‘serial board member’, has believes that for prospective and current board members the most important step in driving efficiency and performance is to establish a solid framework.
He advises: “My strongest advice to a CEO or a board member is to put that scaffolding in place”. Companies firstly need to examine practices beyond the standard practices like meeting attendance, code of ethics and board size. For all boards, especially those in smaller companies, the key for doing so is to recognise that boards are not one size fits all. CEO’s must encourage and imbue directness and confidence to ensure greater transparency, so often amiss in failed boards. He notes that great companies are those with a clear framework in place, where “the CEO is self-assured enough to be frank with board members”. Resolving problems is easier when board members can trust the solidity of the boards foundation.
What is also important, according to Bill Huyett, emeritus senior partner at McKinsey & Company is to affirm “long-term value creation”, to establish “a common vocabulary of value creation for that company”. Huyett argues that this is an important step given the sheer diversity of boards in terms of professional background as new and current members can smoothly understand “the dynamics of intrinsic value creation in the corporation and its constituent parts”. Each board member must be furnished with the information they need in this particular industry to fully root their knowledge in terms of “value, trade-offs across growth and the margin improvement and asset intensity”.
2: Do not back away from the challenge
Challenging powerful, experienced and intelligent board members is something that should be encouraged by all board members. Research by academics has proven that conflict amongst top tier staff is “natural and necessary”, as long as criticism is constructive and does not “degenerate into dysfunctional interpersonal conflict”.
Management experts agree. According to Jeffrey A. Sonnenfeld, a management professor at Yale University, boards should aim to consistently challenge each other’s views in a ‘culture of open dissent’. He argues that ‘even a single dissenter can make a huge difference on a board’. Having examined management culture in top tier roles, Sonnenfeld notes that ‘there is a difference between dissent and disloyalty”. Board members can be clearly made aware of this distinction from how leaders engage with this within the board room, or as Sonnenfeld remarks, ‘it has to be something that leaders believe in and model’. Boards who foster this culture of respectfully challenging their counterparts are stronger and more effective.
3: Drive Performance with Technology
Board leaders can use digital board portals, like DiliTrust Exec, to see board member participation and interaction with key documents and increase engagement with material via polls, surveys and interactive comments like voice notes or post it notes. According to a 2018 McKinsey board perspective study, 56% ‘of board members seek out relevant information beyond what management provides, to deepen their knowledge’. To boost performance, corporate secretaries can securely upload additional documents and alert each board member with the touch of a button this action. Inadequate knowledge about a company’s industry is cited by studies as one key issue with board performance which halts good boards becoming more effective.
4: Difference in Directors
Spencer Stuart, a global executive search firm, cited in their 2018 United States Board Index that the introduction of fresh directors is not happening at a pace fast enough to change the board of director landscape in the United States, A recent 2018 Financial Times report on gender diversity in the finance industry correlates this point, as 70 of the world’s biggest banks revealed that ‘women made up a weighted average of 27.2 per cent of the companies’ most senior ranks’. Director difference is imperative for challenging debate and driving performance.
Evidence points to the fact that increased profitability is linked to increased female participation in boards. An MSCI study in 2018 found that average employee productivity growth was higher for companies that employed three of more women at board level between 2012 and 2016 than those who had one or no female directors. Implementing director diversity is just one way boards can drive efficiency and productivity in 2019.