Home Finance Board Effectiveness: A Practical Approach to Corporate Governance 2024

Board Effectiveness: A Practical Approach to Corporate Governance 2024

by internationalbanker

By Byron Loflin, Global Head of Board Advisory, Nasdaq

 

 

 

 

An effective board adds value. While this seems obvious and is widely known as an axiom in governance circles, being an effective board member and contributing to the effectiveness of the board at large is often misunderstood. Gaining a board seat has become all the rage in business circles globally of late. It’s often a highly lucrative career option, particularly when factoring in the hours required and the perquisites provided. I searched “board member” on LinkedIn recently and found that more than three million people list it as an “experience”—add to those the board members who do not maintain a LinkedIn profile. I recently came across a quote by Greek philosopher Plutarch, which prompted me to focus this piece on director effectiveness: what it means to be effective and why it is important.

“Holding office is not about power, except to the uneducated leader who is insecure and afraid of the people he [or she] governs…. Educated leaders, conversely, are primarily concerned with the welfare of their constituents, even at the expense of their own power or safety.” – Plutarch

Observations from the field: Characteristics of the effective board member

A board member’s primary roles are to add value when undertaking board responsibilities and duties and to set a healthy tone from the top. Anyone seeking a board seat should carefully consider the organization and ask oneself three questions:

  • Do I support the organization’s vision?
  • Do I support and use the organization’s products?
  • Since total shareholder return (TSR) is of vital concern to the board, will I deliver value on behalf of shareholders and all stakeholders?

In my board advisory role of nearly 15 years, I have interviewed, worked with and advised well over 1,000 board members, chief executive officers (CEOs) and C-suite members specifically on the topic of board effectiveness. In my experience, the most impactful board members are those who:

  1. Bring a broad understanding of the business.
  2. Arrive at board meetings well prepared and focused.
  3. Have led an organization or division and executed on strategy.
  4. Possess an understanding of business psychology and social anthropology.
  5. Maintain a specific skill, or set of skills, while also being well rounded and able to contribute insights on a range of topics.
  6. Challenge assumptions with respect and emotion in check.
  7. Seek continuing education outside the boardroom.
  8. Possess and demonstrate a strong IQ (intelligence quotient) and EQ (emotional intelligence).
  9. Know that the reason for aspiring to be a board member is service to the organization.

I would also add that effective board members understand how visions, missions, values and goals are communicated down through an organization so that the tone from the top leadership effectively signals through all organizational levels why the entity exists and how it delivers value.

Having provided a list of what contributes to being an effective board member, I am often asked to address the circumstances and characteristics of a less-than-effective board member. Avoiding these behaviors is certainly recommended:

  1. Signaling entitlement over service.
  2. Communicating self-importance versus checking his or her ego at the door.
  3. Confusing the board member’s role with the manager’s operational responsibility.
  4. Asking questions that are explained in detail in the board’s pre-read information.
  5. Being verbose and dominating board discussions.

An addendum to this list is that while board tenure and effectiveness don’t directly correlate, many CEOs and chairs emphasize that board members should be more objective and put the best interests of the board and organization first when considering the right time to step down from their roles—similar to the axiom concerning one who has been invited to a house dinner party: Don’t overstay your welcome.

Adding value: The importance of continuous learning and active listening

Board members often ask me how to add value to topics and issues outside of their areas of expertise. Two helpful operative concepts are continuous learning and active listening.

Active listening and curiosity augment board members’ abilities to contribute to all board discussions and effectively carry out their duties of care, monitoring and loyalty. Active listening is the ability to keep an open mind while listening intentionally, with a goal focused on learning and understanding. When integrated as part of a board’s culture, active listening and curiosity promote inclusive, focused discussions, open and candid debates, and effective summarizations to help guide boardroom discussions.

The importance of continuous learning is impossible to overstate. With the development and implementation of groundbreaking new technologies, increased and changing regulatory and reporting requirements, and disruptions coming from every direction, risks and opportunities have never been so plentiful. It is imperative that a board collectively possesses a level of knowledge and understanding that supports effective oversight and governance. Board members who choose not to keep up risk being left behind or, worse, making bad decisions. Concerning technology, in particular, it is no longer sufficient to rely on the expertise of advisors or the bank’s IT (information technology) team; boards must assume responsibility for building functional levels of understanding.

In the fast-paced change environment of the business world today, the opportunity for ongoing executive education is replete. Universities globally sponsor programs for board members’ continuing educations. In our experience at the Nasdaq Center for Board Excellence, board members whom their peers highly regard are those who actively seek continuous improvement and attend relevant conferences and programs.

Thinking beyond the basics: Risk oversight

Risk oversight encompasses a wide range of focus areas. For this discussion, I will focus on two key areas. It is generally agreed that hiring the chief executive is the board’s first and most important responsibility. Regardless of the board’s confidence in the chief executive or how long he or she has held the position, maintaining a succession plan should be a top priority on the board’s agenda. Even if a board believes it has the right CEO who will most likely serve for many years, the absence of a robust, formal CEO and management succession plan invites unnecessary risks to the organization. Developing a strong and deep bench for both planned succession and sudden departures must be strategic and viewed through an enterprise risk management (ERM) lens. Each board member has an important role to play here. Access to and regular engagements with the CEO and members of management at multiple levels provide insights into the status of the pipeline. Board mentorship can be an impactful practice in developing talent.

The average board comprises nine to ten members. The board’s number-one priority is being the stewards of the organization’s long-term sustainability. Hiring and supporting the CEO and maintaining a succession plan should be a top priority on the board’s agenda. CEO successes and failures over the past 20 years certainly point to the necessity of better, more dynamic CEO succession planning.

A second board priority is building and promoting a robust risk culture. A highly effective board is one that approaches risk, opportunity and succession together with an enterprise risk management approach, in other words, a wholistic approach.

Consider for a moment the Rubik’s Cube from the 1980s. The cube has 54 squares of different colors on its six sides. Without a mirror, how many sides can one person possibly see? Only three. Suspend the cube over a circular board table at an angle, and imagine 20 board members and managers at the table. Together, they can examine all sides of the ERM cube—all 54 risks. This team of 20 can then identify and prioritize each risk’s materiality and impact. Effective boards monitor these identified risks and probe areas of unpredictability and unintended consequences.

But what about the sides of the cubes that are not visible? The hard-to-predict aspects of risks? The unintended consequences?

Understanding AI

Consider for a moment artificial intelligence (AI), which is quickly becoming part of every board’s discussion. While artificial intelligence has been nurtured as an emerging technology since the 1950s with Alan Turing’s work Computing Machinery and Intelligence and later with the democratized access proliferated by OpenAI, coupled with processing power that is accelerating generative AI, board members once again have a ringside seat to a new era of human intellectual evolution, one that is likely to have a significant influence on boards’ risk oversight and oversight generally. As stated earlier, developing some level of understanding of this new technology is the responsibility of every board member.

For the simple reason that AI is already affecting banking, and to remain relevant, board members should attend events during which they can build their understandings of these technologies and their benefits and risks.

Moreover, board members should expect and even demand that AI improve their abilities to add value in the boardroom. Examples include developing more accurate methodologies for reviewing financial results, providing deeper insights into customer trends and sentiments, synthesizing board-meeting information to prioritize the most important elements and building better scenario understanding through trend-prediction analyses.

Corporate governance 2024 and beyond

Anyone who aspires to take a public-organization board seat today should consider this responsibility with care. The standards to which boards and individual directors hold themselves should be well understood.

Boards’ efforts to achieve continuous improvement and drive excellence in the boardroom are already being augmented with AI tools, meaning excuses for a board’s underperformance will be harder to defend, and scrutiny of governance performances and failures will increase. Boards are conducting annual director assessments in conjunction with their annual board self-assessments to provide individual board members with opportunities to reflect on their own and their peers’ continuing effectiveness and value contributions. Shareholders routinely challenge incumbent and prospective nominees. Board service requires firm and informed commitments.

A board’s corporate-governance journey towards excellence is best served by a leadership culture that embraces humility and continuous improvement. While Jim Collins’ book Good to Great and its underlying research found that the Level 5 leader embodies “humility and strength of will”, a highly effective board member reading this should recognize aspects of his or her ethos and board leadership reasoning within.

I am grateful for the leaders who have provided practical governance insights. Recently, a board chair commented, “What I despise is mushroom management” in response to my question to him about the relationship between the board and management. “What is mushroom management?” I queried back. “That’s where leadership leaves the board and others in the dark.”

A renewed commitment to board effectiveness

Effective boards and well-governed organizations aspire to maintain an open, transparent culture built on a solid foundation of trust (personal, financial and organizational), on which candor and respect are promoted and proliferated.

In that spirit of transparency, I offer aspiring and sitting directors an trusted advisor’s insight and a practical takeaway highlighting the following trends:

  • CEO coordinates board and management interactions beyond direct reports.
  • Annual “offsite” strategy gathering of the board and management.
  • Clear understanding that surprise is an enemy.
  • Ongoing succession planning.
  • Development and implementation of board-level dashboards.
  • Invite challenges of assumptions with openness and active listening.
  • Robust risk culture that evaluates opportunity as a risk.
  • Scenario planning/pressure testing.
  • Understanding customer trends and competitive landscapes.
  • Visiting and knowing the sites or facilities where the entity conducts business.
  • Lifelong learning approach to self-education for the board’s benefit.
  • Sufficient understanding of the entity’s stakeholders.
  • Knowing the culture leaders.
  • Seeking management’s candid input on the board’s effectiveness.
  • Monitoring board and company cultures for consistency.

The effectiveness of a board and its members is observed by its stakeholders, particularly its shareholders, workers and vendors and the communities the organization impacts. The effective board’s foundation is trust, and the goal of board members, individually and collectively, is that the organization delivers positive results. Between these two is hard work, which includes accountability, constructive challenge and strategy.

 

 

ABOUT THE AUTHOR
Byron Loflin is Global Head of Board Advisory at Nasdaq, leading board assessments and boardroom training for Nasdaq Governance Solutions. He is the Founder and former CEO of the Center for Board Excellence (CBE)—acquired by Nasdaq in 2019—and the architect of CBE’s unique board-assessment and advisory platform. He is a member of the Society for Corporate Governance, the Institute of Directors (UK) and the National Association of Corporate Directors.

 

 

Disclaimer: This communication and the content found by following any link herein are being provided to you by Nasdaq, Inc. and/or certain of its subsidiaries (collectively, “Nasdaq”) for informational purposes only. Nasdaq makes no representation or warranty with respect to this communication or such content and expressly disclaims any implied warranty under the law. At the time of publication, the information herein was believed to be accurate; however, such information is subject to change without notice. Nothing herein shall constitute a recommendation, solicitation, invitation, inducement, promotion or offer for the purchase or sale of any investment product, nor shall this material be construed in any way as investment, legal or tax advice or as a recommendation, reference or endorsement by Nasdaq.

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