Governance
What can directors do to affirm their role, drive board effectiveness and reclaim control over their own agenda? They can start by holding up a mirror to their own board performance, as measured against the "seven habits of an effective board." While these habits may seem straightforward, very few boards score well in all areas.
1. Own the strategy
Most boards convene special strategy meetings and retreats, but typically 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 downside for mediocre results. And they ensure that rewards are simple, transparent and focused on sustained value creation, balancing short-term and long-term focus.
4. Ensure financial viability
Sarbanes-Oxley has had its main impact here, focusing on the probity of financial reporting and the audit process. Yet beyond issues of 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.
Directors must overcome diverse challenges and constraints if they are to perform their roles effectively. Some of these challenges are structural, some arise from wrong-headed external pressures, while others stem from poor team dynamics or shortcomings in values, capabilities and focus.
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. This is critical: 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's 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, 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.