The effectiveness of a company’s board is crucial to determining its long-term viability. The board sets the long-term vision for the company, oversees its management and governance and also assesses the performance of the executive team, who are responsible for delivering outcomes that help the company to achieve its long-term vision.
The relationship between the board and the executive team is therefore also crucial. Both have clearly defined roles: the board monitors long-term progress and gives stakeholders confidence, while taking actions to steer the organisation; while executives are engaged in day-to-day achievement of more immediate goals while managing available resources. In carrying them out, the board and executive need to work together, and to trust each other’s competence.
So, it is important for executive directors – including finance directors – in companies of all types and sizes to understand what a ‘good’ board looks like – with regard to composition, working style and link to the executive team – and work to promote this best practice where possible. Below, I share some thoughts from ACCA’s recent Tenets of good corporate governance report to assist directors in building a board and reviewing its effectiveness.
For a board to be fully effective and insightful of its stakeholders, it must have the necessary breadth and depth – or in other words, diversity.
More people are working to prove the link between a board’s diversity, good governance and company performance. Despite this, quantitative research sometimes returns inconclusive outcomes, and this is no surprise: diversity and governance are fundamentally qualitative ideas, and even company performance is increasingly considered beyond financial measures. This means measurement and establishing links between these concepts is inevitably subjective.
Without relying on numbers, however, we believe that there is a clear argument for the benefits diverse boards can bring. ACCA’s 2018 report Risk and the role of strategic leadership highlighted specific benefits: a balanced collective board intelligence that covers skills, knowledge, experience, education and training allows board members to identify changes in risk exposures and to respond appropriately, particularly when it is aligned to the organisation’s mission and business model.
In addition to the oft-discussed issue of diversity, ACCA believes that there is another aspect that needs to be considered: the balance of board composition. While companies may actively seek to increase the diversity of viewpoints, leaders need to assess if this ‘diversity’ is also balanced: how does it compare to the society we live in, which is made up of a broad range of people, or the people the company has recruited to start with?
While this is not an issue specific to the boardroom, in many organisations this balance disappears particularly as you move upwards through the organisational hierarchy. A number of obstacles that exist are deeply embedded in the society: for example, socioeconomic background and gender among others. These together reduce the pool of human resource that board members are recruited from.
Getting both diversity and balance right can be a challenge because some of these obstacles permeate beyond individual companies. However, the first step is for company leadership to address these issues to the best of their ability, signalling their commitment to valuing and nurturing human resource, which in turn contributes to a healthy corporate culture.
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While it is important to have a diverse and balanced board, this alone will not guarantee board effectiveness because rigorous board discussion does not happen naturally.
Instead, it needs facilitating so that individual board members are both enabled and empowered to speak and challenge. The role of the chair is vital here: the chair must enable diverse views to be voiced and heard by encouraging, listening and validating individual board members’ opinions, even where their views are different from others. This cultivates trust between the chair and board members, and among board members.
This openness and willingness to engage in robust discussion should also extend to a board’s relationship with executives. Executives should be able to seek views from the board when needed, rather than required to prepare a definitive proposal or response for every interaction. If executives can be open with the board from the outset and seek support where needed, there will be less risk of a surprise outcome for everyone at a later date.
ACCA’s full report on Tenets of good corporate governance is available here: https://www.accaglobal.com/gb/en/professional-insights/global-profession/tenets-of-good-corporate-governance.html.