How to implement an effective board governance framework

 What is Effective Board Governance framework?

 According to the European Confederation of Directors Association (ECoDA) and the Institute of Directors UK, an effective board governance framework defines roles, responsibilities and an agreed distribution of power amongst shareholders, the board, management and other stakeholders. The 2008/2009 global financial crisis, numerous corporate scandals, and bank takeovers by the Central Bank of Nigeria in 2009 have provided a stark reminder of the need for a robust governance framework. These crises made corporate boards and directors not only to face deep and widespread erosion of public trust, complex oversight accountability but personal risk and liability. Boards were seen to provide weak oversight function or to be complicit in allowing executive greed, rewarding underperformance and failing to prevent corporate excesses and frauds. The inevitable outcomes of this situation are: lawmakers and regulators pushing for stronger regulation, and activist shareholders striving to exercise greater influence over corporate governance.

 Effective board governance is therefore a process to restore public trust and confidence in the board, which is essential for the growth and profitability of the company. Such a governance framework should deal with matters such as:

·        how shareholder's interact with the company;

·        the board's specific responsibilities, its structure, size, composition, process of appointment to the board and the organisation and logistics surrounding board meetings; and

·        the identification of potential directors/management candidates and setting up appropriate incentives for such candidates.

 It should also provide, where possible:

·        a systematic, effective and formalised process for the delegation of authority;

·        checks and balances to ensure that no one individual has unrestricted power to take decisions and a mechanism for scrutinising any decisions taken by an individual;

·        clear lines of accountability both internally and externally;

·        increased transparency; and

·        a mechanism by which possible conflicts of interest for a director or shareholder may be disclosed and resolved

 Factors That Hinder Board Effectiveness

i)     Lack of clarity: Role ambiguity slows decision-making and causes needless director conflicts.

ii)    Poor process management hinders effective board preparation, meeting management, and communication. This results in indecisiveness and a lack of urgency on critical challenges facing the organization.

iii)   Lack of alignment and agreement on company strategy causes disinterest among board members, who then simply default to tackling regulatory and compliance issues. Poor strategic alignment also hampers a board’s ability to prioritize issues and set their near-term agendas. This often causes board disruption and sends damaging signals to financial markets.

iv)   Poor team dynamics fracture boards and lead to power struggles. Like any effective working group, a board should comprise of professional peers who respect and work well with each other.

v)    Board composition is a serious impediment, if not done right. Today’s challenges require new perspectives and skills. But boards often lack the ability to objectively evaluate their makeup to determine if they have the right people and skills at the table.

 Requirements for Effective Boards

EcoDA and the IoD believe that effective boards should do the following:

 1. Own the strategy

Most boards convene strategy meetings/retreats, but they sit through presentations of the executive team’s plans. Effective boards ensure non-executive directors contribute to developing the strategy, and feel a sense of ownership of the strategy. The more a board understands and owns the strategy, the more responsive it can be to help seize opportunities such as major acquisitions when they arise.  

 2. Build the top team

Boards have a key role to play in selecting, developing, evaluating, and planning the succession for the executive team. Leading Private Equity firms view their involvement in building the executive team as a top priority - and a clear factor in creating market value. The challenge facing many directors is how to be effective in this role in the presence of a forceful CEO or CEO/chairman.

 3. Match reward to performance

CEO remuneration is the most controversial issue for most boards: they want to attract the best talent, and yet the remuneration benchmarks just keep on rising. Part of the solution lies in ensuring that exceptional pay requires exceptional performance. Effective remuneration systems measure what matters - and only what matters. They pay for performance, with real consequences for mediocre results. A good reward system is simple, transparent and focused on sustained value creation, balancing short-term and long-term focus.

 4. Ensure financial viability

Beyond process and compliance, boards have a role in taking key financial decisions, such as ensuring appropriate levels of debt leverage, and scrutinizing major investments and acquisitions for value. Directors must be able to understand as well as trust the numbers to provide a challenge where necessary.

 5. Match risk with return

Boards typically have formal processes for assessing and managing operational risk that incorporate commercial, financial and legal considerations. Yet few boards understand the true risks inherent in their companies’ strategies. Empirical studies reveal that 70% of acquisitions fail to create value and 70% of moves into new markets away from the core business also fail.

 6. Manage corporate reputation

Doing what is right for the board and the company means not succumbing unduly to outside pressures. If boards are to avoid the trap of “check-box” compliance and short-term focus, they need to take action to reclaim control over the agenda setting, and target those investors who are in for the long term. Transparency and effective communication are key.

 7. Drive effective board process

An effective chairman, who values and upholds the role of the board, is vital. The chairman sets the tone from the top, ensures a governance model that works in practice, focuses the agenda on issues of performance, builds a team of directors with the right mix of skills and experience, and reviews board effectiveness regularly. A board’s ability to add value depends heavily on how effectively directors can work with the chairman and CEO.

 Way Forward

IoD UK position is that Boards exist to ensure the interests of shareholders and stakeholders are fulfilled by organisations. Corporate boards today are expected to be more engaged, more knowledgeable and more effective than in the past. Some of the tools that a growing number of boards are using to examine and improve their effectiveness is in-boardroom training on corporate governance and best standard ethical practices, retreats and annual board evaluation. Director development programmes are becoming very relevant because if you do not train them do not blame them. 

 Annual assessments of boards have become the norm in many countries, especially with listed companies in Canada, France, the U.K., U.S., Italy and Spain and is gaining attention in many Asia Pacific markets. When done effectively, board evaluations provide a forum for directors to review and reinforce appropriate board and management roles and ensure that issues that may lie below the surface are identified and addressed promptly. In short, evaluations give the board an opportunity to identify and remove obstacles to better performance and to highlight best practices.

 Independent directors are key to improved board effectiveness. They play a vital role on boards in providing independent judgement in all circumstances. 

 To test the effectiveness of your board, I will leave you with four principal questions that are asked by experienced board assessors:

-      Is the entire board fully engaged in and contributing to the strategy?

-      Does the board effectively review its own performance?

-      Does it give sufficient time to succession planning?

-      How many of your directors are Independent?

 Conclusion

Effective Board Governance is the key to creating a sustainable organization. In this paper, I have reviewed and highlighted the strategic importance consistent and sustained investment in Board selection, composition and evaluation play in board effectiveness.