01 Oct 2018
Board assessment, corporate governance and improving performance - Part 1
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Just how important are regular board assessments?
In our white paper, ‘Board Assessment, Corporate Governance and Improving Performance’, we discuss the corporate board of directors and the value of regular board assessments. In the first of two extracts, we dive into the nuts and bolts of corporate boards, including their various structures, responsibilities and competencies.
Everyone is familiar with the concept of a corporate board, but they can vary in structure, size and function depending on corporate governance regulations and practice. Let’s consider the different forms this oversight body can take.
Board types: unitary or two-tier?
A ‘unitary’ board (sometimes referred to as the Anglo-American board model) is a single board of directors comprising executive directors and independent non-executive directors (INEDs). The latter are typically not involved in the day-to-day management of the business but may be responsible for monitoring the performance of the executive directors.
On a unitary board, each member is expected to promote the company’s best interests and ensure its success. The board works together to shape the corporate strategy and hold company executives accountable for meeting targets and delivering on that strategy.
In Germany and other countries that follow the Rhineland example, a ‘two-tier’ board is preferred. The first tier is a management board led by the CEO that is responsible for the day-to-day running of the business. The company’s chairman runs a separate supervisory board, which has a wider membership and is responsible for strategic oversight of the organisation.
The supervisory board typically includes representatives of major shareholders, environmental groups, employees and lenders. In contrast to the INEDs on a unitary board, these individuals are not considered to be ‘independent’ as they act in the interests of the groups they represent.
Two-tier boards meet separately, so the supervisory board is not privy to executive discussions about running the business and the management board is not involved in discussions of corporate strategy in the first instance. Members of one board cannot sit on the other and managerial functions cannot be delegated to the supervisory board. Ultimately, the supervisory board has the power to sack all or part of the management board if it does not think the latter is meeting expectations.
Good leadership sets a board’s tone and performance standard. It is important to have an effective chair who can run meetings well, establish the trust of her fellow board members and lead a constructive discourse.
In addition, a board must be filled with people who have the requisite ability and experience to guide the business.
Board members must be given sufficient information and authority to contribute to the discussion and should be empowered to challenge management decisions when necessary.
Finally, the board must take the employee perspective into account, either through the participation of a human resources executive at board-level or by inviting union or employee council representatives to give board presentations.
Experience and competencies
A board needs both a breadth of commercial experience appropriate to the company and industry and a measure of diversity to ensure different perspectives are represented and to guard against groupthink.
For example, the board of a large MNC should contain members with experience of operating in organisations of similar scale and scope. Experience relevant to the company’s strategic agenda or governance imperatives must also be present. This relevant experience could be financial, technological or legal, or related to digital transformation, people matters, and/or doing business in international markets.
In addition, when selecting board members, the challenges and demands of a specific business environment matter. If a company is actively building its business through mergers and acquisitions, its board should include members who understand finance and have experience with large corporate integrations and related challenges.
Is there an ideal board size?
A board that is too large may not be able to work together efficiently or allow for meaningful participation from all directors. Conversely, a small board can be very effective and, with the right leadership, can become a very collegiate and close-knit team.
According to a 2014 study by governance researchers, GMI Ratings, for The Wall Street Journal, smaller boards engage in deeper debate and are capable of more nimble decision-making.
A unitary board (or supervisory board in a two-tier structure) of about seven members can encompass a diversity of views and have enough members to sit on important board subcommittees overseeing remuneration and audit. However, one challenge for a small board is that as the organisation grows and evolves, it may need to add members with a particular skillset or to staff additional subcommittees.
At fifteen members, board meetings become more staged and formal, but not necessarily less effective. A skilled chair will set an appropriate agenda, solicit contributions from all members and keep meetings moving at a good pace.
Ultimately, the number of board members is less important than how the board is managed.
Selecting the right board members
Broadly speaking, an INED will have a breadth of leadership experience, a commercial mindset, and the financial acumen to add value at a senior level.
This experience and expertise should be coupled with an understanding of what boards do and the right temperament to be a cooperative, but forthright INED. They should be a good listener but also be confident enough to speak up in front of executives and fellow directors when discussions become highly-detailed and even heated.
Ideally, a prospective INED will be a strategic thinker with a breadth of experience in organisations that have matured through different stages of development. Those with a background in change management will be able to hold stakeholders to account on critical proposals and follow through on strategic initiatives. Having served previously on a Divisional Board or as a Trustee is also a useful relevant experience.
In our next and final extract from our white paper, ‘Board assessment, corporate governance and improving performance’, we argue that regular independent board assessments can improve a company’s performance and how best to go about them.
To read the full report, download it now: