The Four Pillars of Board Effectiveness

Over the past decade, we have witnessed dramatic and unprecedented developments in business, politics, technology and society. The main consequence of this has been the realisation that governance is the determining factor behind the performance, success and failure of organisations.

Indeed, governance fundamentally is the quality of decision making and its implementation at the top of organisations. Boards are a central body to the governance in an organisation.

Today’s boards are thus eager to improve their performance and to continually fine-tune their effectiveness. So, if business as usual is not an option for boards, what are the main dimensions to target when trying to make a board function better?

In our ongoing clinical work across the last two decades, my team and I have identified four concrete pillars of board effectiveness. These are people quality, diversity, focus, and dedication; information architecture; structures and processes; and group dynamics and board culture.

This simple framework for assessing a board’s effectiveness has a deep-rooted underlying rationale, based on the dialectic process of well-informed contructive dissent towards better decisions. Its practical application has helped transforming boards for the better in many different contexts.

These include large publicly traded companies, large asset owners and investors, family owned businesses, non-profit organisations, council of ministers, government agencies, and other bodies, across all geographies, and in both developed and developing contexts.

The four-pillar methodology, focusing on systematic and continuous improvement along each dimension, has proven to be a strong asset for all types of organisation.

The First Pillar: People Quality, Diversity, Focus, and Dedication

The first of the pillars that support a board’s effectiveness consists of the people who socialise, interact, learn, make sense of situations, and reach decisions in the boardroom. Their quality, diversity, focus, and dedication are often what makes or breaks a board’s ability to perform effectively.

Boards are often composed of high-quality individuals, who are outstanding in their respective fields; for example, CEOs, academics, government officials, etc. And yet, they could lack the necessary knowledge to perform their tasks as members of a specific board. The case of JP Morgan’s 2012 multi-billion dollars loss and its use of a complex trading system (the credit default swap CDX.NA.IG.9 index) illustrate this point. It later emerged that the risk committee at the time lacked the required skills for oversight. This case in a best-in-class institution clearly underlines the significance of the quality of individuals, all the way to board committees: members of the different committees are expected to have the necessary and relevant knowledge.

I am amazed to still see boards without skill maps, but this can be only a first step. Effective boards establish performance and knowledge standards for individual directors, they educate their board members, and they conduct evaluation along those standards. The quality of the board is enhanced by diversity in terms of industry and professional background, as well as diversity of gender, personality and opinion.

Diversity brings specific expertise as well as more potential for innovation, creative thinking and stakeholder understanding (e.g. employee reps). Poorly managed diversity, however, can be disruptive as communication may become more difficult and trust may be lesser amongst more diverse directors. A strong board will thus develop processes to manage diversity well. We recommend for boards to have a systematic board composition oversight, with regular assessment of capabilities required (from expertise to familiarity) and a current composition matrix, even for well-established boards.

More often lacking than skills themselves, the directors’ focus and dedication to the organization’s activities are both essential. Focus could be diminished by directors misunderstanding of their roles and functions within the board, or simply regulatory or other activities taking time away from strategic matters to the organization. To reinforce their focus, boards establish their own statement of purpose and define their role in a manner that adds value to firm activities while materializing an action plan for the next two to three years. Boards need to regularly reflect on their involvement and strive for it to be first, distinctive, in a sense that does not replicate efforts from other quarters in the organization; and second, additive, for example, that improves decisions made by the firm.

Dealing with ambiguities in decision-making is inevitable and is a sign that the board addresses real issues. Well-focused boards distinguish the adequate context in which to perform a supervisory role and in which to offer support to management. Such boards are quick to determine when a proactive risk oversight is needed but they are also efficient in identifying, and in acting on, the need to communicate the firm’s strategic objectives in order to manage its reputation during a crisis. Additionally, the focus of the board is strengthened by a successful agenda; one that is turned towards the future more than the past and whose aim is to capture long-term issues while managing short-term matters.

Dedication to the organization is also an important aspect of this pillar. Dedication goes beyond the allotted meeting time. It implicates, for example, the reasons why an individual decides to become a director. Incentives differ; there is potential for access to networks, access to industry-specific information and an elevated status to determine an individual’s decision to join a board. Such incentives would negatively impact his or her dedication. On the other hand, we are grateful to see individuals become board members because they are highly motivated to make the organization successful. The quality of the directors, their diversity, focus and dedication is thus our first pillar of truly effective boards.

A typical checklist for self-assessment on the first pillar could include the following questions:

1. How close to the heart of every board member is our organization?
2. Where do I truly add value to this board?
3. How confident am I in my board colleagues to steer our company in the right direction?
4. How is our diversity in terms of abilities, personalities, competencies?
5. How clear are we about the role of our board? The role of each committee?
6. Is the agenda turned enough towards the future?
7. How does my knowledge compare to the one of the ideal board members on this company?

The Second Pillar: Information Architecture

Sophisticated information architecture is key to successful boards. An easy rule of thumb is that each director should profit from a balance of internal and external information, a balance of information dependent from top management and information independent from top management, a balance of formal information and of informal information. When this balance is achieved, information design is usually solid.

Indeed information is best when it is designed in a way that informs the board about all the essential activities undertaken by the company and the issues facing it. When thinking of information design, boards typically think of information coming from management (how brief, well focused and strategic it is, prioritized, with executive summaries, key issues to tackle and options to consider). But information architecture should include also external information (what can we source from outside the company, such as from social media). It should also include formal information and informal information sources (such as informal networks: the ability of the chairman of Singapore Airlines to maintain good relationships with union representatives is an important source of information for the company).

For the formal internal information, jointly designed board briefings that include financials with forecasts, a CEO report, risks and opportunity maps, materiality maps, analysis of the genepool and summary of financial analysts’ views contributes to the quality of the information architecture. Additionally, regular communications between management and the board, for example management letters in between meetings adds to efficient information. Committee reports are also fundamental in fomenting the effective architecture of information. Adequate reports, nevertheless, encompass analysis of specific issues rather than just recommendations. A key checkmark is whether the board is actively involved in designing the information and whether that information design changes with the firm, its environment and its strategy.

Informal channels of information are key as well and should be well elaborated themselves; for example meetings with employees and informal meetings of board members, all need both structuring, to give them potential, and some freedom, to give them creativity without infringing on management’s rights. In short, sophisticated (but not necessarily complex) information architecture is key to successful boards.

Here is a first checklist to reflect on the information pillar:

1. Do I know and track intimately business and its key value drivers?
2. Am I well informed of competitive trends, customer evolution, regulatory changes, technological changes, stakeholder evolution?
3. Do I have enough information independent from management available for my judgment?
4. What informal processes of information do I have?
5. How involved was I in designing the information architecture? How involved were my fellow board members?

The Third Pillar: Structures and Processes

As governance becomes more sophisticated, its structures and processes are evolving greatly. Board effectiveness is hugely influenced by the quality of the structures and processes organised by the board secretariat and steered by the chair.

Structures such as committees (Sustainability? Social impact? Technology?) deserve regular reflexion. In terms of processes, there are many processes beyond the straight running of the board: evaluation processes, the strategy process, the risk process, the board education process, the CEO and key managers succession processes, the regulatory process, the materiality process, the performance review process, etc. For example, the board strategy process plays a significant role in increasing effectiveness. The board strategic involvement occurs along three dimensions: co-creation, supervision and support (for more details, see our MIT Sloan article How Strategic Is Your Board?).

Good processes will enrich the three dimensions. Typically, regular meetings will complement retreats. External presentations will complete internal ones. And focused, decision-oriented meetings will complement long term understanding of the industry and business from a strategic perspective. And such process elaborates on various aspects. It strengthens firm strategy by contributing to define it, aligning it with objectives and ensuring commitment. The process also enhances the strategic reflexion of the board and reinforces the interactions between management and board. The process creates a stronger basis for communicating the company’s strategy, internally and externally. Another decisive process is that of board evaluation. A poor evaluation process contributes to governance failure; therefore, thriving boards engage in self-assessment or external assessment, in terms of their roles, dynamics and their members’ performance. A good practice is to utilize available technology, for example the use of tablets, for board evaluation during meetings which provides results in ‘real-time’ and thus offers an opportunity for careful and dynamic scrutiny beyond the one-year evaluations. CEO succession is also a critical process. A successful succession planning, whether based on ‘horse race’ or search, internal or external, aims at the transparency of selection, the quality of the on-boarding process and the smoothness of the transition.

Here is a self-assessment checklist on our pillar of structures and processes:

1. What is the list of processes that are particularly important to my organization?

• strategy, nomination, evaluation, performance review, CEO succession, risk, board education, audit, regulatory compliance, onboarding/outboarding, others?

1. How do I feel about each of these processes? Do I have a clear view of each? Is each complete and detailed enough?
2. Do we have the right committees? The right people on them?
3. Are the reporting lines fool proof?

The Fourth pillar: Group Dynamics and Board Culture

Dynamics are fundamentally linked to the culture of the board. In this aspect, it is necessary to consider the many board pathologies that are present in the world of governance: routine boards, fragmented boards, disrupted boards, conflicted boards, consensual boards, love boards,… Group-think tendencies, for example, hinder effectiveness as do disruptive or dominating members of the board. A low energy level on the board, the sleepy board, can also appear. In some cases, dysfunctional dynamics are openly employed to set a board up for governance failure. Late distribution of information and not making relevant information available are examples of practices that hinder governance and arise from deeper issues: lack of trust, role overlap, etc. Governance is enriched by the directors’ differences in perspectives and constructive dissent so psychological safety on the board (ability to raise issues safely) and a board that is a secure base to the organization (dedication to helping the organization whatever lies ahead) are central to obtaining a board culture that is open, rich, decisive and agile. For example, having a critical view of assumptions makes for an effective strategy. And yet, despite the importance of these elements, some firms appoint directors who are close associates of the company founder or its CEO. The appointed individuals may be prominent in their respective industries but their practices within the board are circumscribed by their relationship with a dominant figure of the company.

Interactions between board and senior management are an important aspect of the dynamics pillar. Effectiveness is enhanced when rivalries and disputes are minimized while discussions remain rich and challenging. This can only be achieved by a board that makes its rule of engagement clear to all its members, that promotes the equal participation of its members and their mutual respect while promoting meaningful challenge.

Functional board dynamics can also contribute to hindering conflict of interests. A board culture that emphasizes accountability towards the pertinent stakeholders and that it is based on openness and constructive dissent adds to the minimization of such conflicts. It also diminishes the possibilities of directors’ over-confidence: functional board dynamics ensure that board members are connected to reality. The chair’s role is key in developing a successful board culture and ensuring that the one-voice principle central to governance remains solid: no board member has a voice outside the board, the only voice is the board’s, as expressed (but not owned) by the chair. An effective culture can be partly formalized in writing so as to be easily shared and understood. And awareness of dysfunctional discussion styles (fast thinking, influencing, false yes, etc.) and decision styles (autocratic, consensual, indecisive, etc.) are key to evolve group dynamics.

Even more fundamentally, boards are now increasingly discussing their common values, and the level of stewardship they want to provide to the organisation. Thus a deeper (and relaxed!) discussion about our personal and organizational values, and our long term perspectives (transgenerational!) for the organization helps anchor dynamics into a healthier environment where some common views of the organization’s contributions to society can form the core around which constructive dissent and dialog can be built.

A preliminary checklist on this fourth and last pillar can include these self-assessment questions:

1. How energetic is my board?
2. How do I feel about the contribution of the different board members? Why?
3. Does the culture of my board provide for well-managed meetings and ‘equal participation’ in discussions?
4. Do I really listen to the opinions of others? Do I challenge others, respectfully but without conceding, while keeping the relationship personal?
5. Are my contributions short and to the point? Do I make them when I have knowledge or judgement?
6. How regularly do we share our values and our long term perspectives on our organization?
7. Should I talk to the chair about something that we do not address well, possibly even his or her own role?

Conclusion

Boards keep fine-tuning themselves towards better effectiveness. Our four pillars methodology is a proven methodology that we have used to help support many boards transform towards higher success. Society’s expectation is that governance can be improved. A systematic and continuous improvement along these four pillars is a strong asset for any organization.

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Didier Cossin is Professor of Governance and Finance at IMD and founder and director of the IMD Global Board Center. He directs High Performance Boards, a program for supervisory board members and chairpersons. He is the initiator of the IMD Board Practice Series and the IMD Board Director Diploma.

Professor Didier Cossin presents his Four Pillars of Board Effectiveness for energizing boards across all sectors

High Performance Boards has inspired more than 3000 board members around the world. This book is essential reading for professionals and managers interested in governance and board members, senior managers, investors, lawyers, and students of governance.

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