What Makes an Effective Board: Insights from New Survey Data
Currently, there is a growing call for a deeper analysis of the drivers of board effectiveness. This is not surprising considering the limitations of measuring the quality of corporate governance based on recommended board characteristics such as those related to the percentage of independent directors and the separation of CEO and chair roles. Over the years, we have witnessed too many major corporate governance crises stemming from these structural elements.
To shed further light on the innerworkings of boards, the IESE Center for Corporate Governance (IESE CCG) recently conducted a new survey among corporate directors that will be published in the coming weeks.
With this survey, the IESE CCG seeks to bring the views of a greater number of board directors into the corporate governance debate. Their perspectives help clarify the areas that board directors consider truly relevant, while enriching the debate on governance issues and generating hypotheses for future research.
The survey, which included 27 questions, drew responses from 120 board directors based in 26 countries spanning Africa, Asia, Europe, Latin America and the US.
The survey questions covered four critical dimensions of the functioning of the board: the definition and implementation of corporate purpose and corporate culture; board competencies and dynamics; succession planning; and corporate strategy and geopolitics.
Here, I would like to highlight three insights from the report related to the first two dimensions.
The first insight is that boards appear to be playing a key role in the definition and implementation of corporate purpose. The vast majority (87%) of the surveyed directors state that their companies have a written corporate purpose which, in most cases (65%), is approved by the board (not by shareholders and/or managers). Remarkably, boards also seem to have made substantial progress in the connection of purpose with strategy, which was a major challenge identified in our previous survey.
The second observation relates to the competencies and dynamics of the board. Consistent with the above consideration, the most important board competency was considered to be the ability to be involved in the definition and execution of corporate strategy. Respondents considered this capability more important than leadership, team collaboration or the ability to manage shareholder relations, among others.
In line with the above, respondents also identified the following personal skills to be the most critical for board effectiveness: integrity, reliability, critical thinking, being a good team player and independence. This emphasis on professional competencies and soft skills is consistent with the notion that structural board characteristics do not necessarily guarantee effective functioning of the board.
The third insight relates to board dynamics, specifically the need to increase the collaboration of the board with key actors. The survey results suggest that there is room for improvement in the interaction of the board with the top management team (especially with top managers other than the CEO), and among board members (including information sharing). Perhaps more critically, the results signal that boards have a limited level of engagement with key economic actors – not only with activist shareholders and proxy advisors, but also with regulators and asset managers.
The perception that there is an insufficient level of collaboration among key actors – especially in terms of relations between the board and CEO and among individual directors – is somewhat disturbing considering that the survey also reveals that directors view teamwork as key for a well-functioning board.
Within the area of teamwork, the survey results suggest that directors place a strong focus on the following dimensions: collective responsibility for decisions, clear goals and understanding of board issues, quality of board discussions, and the leadership role of the chairperson.
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