the institute for employment studies
Getting to the heart of the people issues: how to carry out an effective board review
Peter Reilly
Agenda
WhyWhatHowWhoof board effectiveness reviews
Why review?
Because we have to?Because others are doing it?Because we want to avoid corporate failure?
Corporate governance is one means to curb harmful short-termism and excessive risk-taking – EU Green Paper
Corporate governance weaknesses in remuneration, risk management, board practices and the exercise of shareholder rights had played an important role in the development of the financial crisis and that such weaknesses extended to companies more generally. - OECD Review
Why: fear of board failureCauses of board failure include:
Lack of good/ timely operating and strategic information leading to inefficient meetings and uniformed decisions.
Too many insiders/friends on the Board. CEO not committed to the Board process or to implementing Board
recommendations. Lack of strategic focus and inability to anticipate the future. Too much meeting time spent on reporting and not enough time on
addressing critical issues. Inability to align with shareholders or deliver their desired results. Board meetings that are not respectful and collegial. Infrequent or irregular Board meetings. Experience & skills on the Board do not match business’ strategic drivers. Low levels of preparedness for meetings by management or the Board.
The Board Group
An example of board failure
HIH (an Australian insurance company) heading for a fall
The signs were there
A due diligence report described HIH as a:
company which has not yet made a complete transition from an entrepreneurially-run company influenced strongly by senior management and from which senior management
benefits significantly, to that of an ASX listed companyrun primarily in the interests of shareholders
An example of board failure
HIH (an Australian insurance company) heading for a fall
A company characterised by mismanagement and poor business decision making and execution●business analysis● risk management●sloppy, ill informed decision making ●performance/financial tracking●absence of endorsed strategy●dominant CEO and weak Chair/ineffective Board
Why: managing a board is not easy
“ The challenge should not be underrated. To run a corporate board successfully is extremely demanding. Constraints on time and knowledge combine with the need to maintain mutual respect and openness between a cast of strong, able and busy directors dealing with each other across the different demands of executive and non-executive roles. To achieve good governance requires continuing and high quality effort.” Source: FRC code
“It is much harder to be a director nowthan it was ten years ago. Increasedaccountability and scrutiny, multiplemedia and stakeholder pressures and
shareholder activism are all contributing
to making the job a lot more onerousand risky.” Heidrick & Struggles
Why: managing a board is not easy
Why review?
Because we have to? Because others are doing it? Because we want to avoid corporate failure?
Corporate governance is one means to curb harmful short-termism and excessive risk-taking – EU Green PaperCorporate governance weaknesses in remuneration, risk management, board practices and the exercise of shareholder rights had played an important role in the development of the financial crisis and that such weaknesses extended to companies more generally. - OECD Review
Because we have a problem to solve?Because it will offer protection from
(media) attack?Because it will enable improved
performance?
Why: board reviews enhance performance
Although there are cases of flattering evaluations, interviews with chairmen indicate
that “when conducted in a robust professional manner,
board evaluation can be an effective tool to improve board performance. It provides an
opportunity for board members to set collective and individual
goals and subsequently measure their performance against them in a constructive and reflective manner. In addition, the use of
an external facilitator can improve board evaluation by
bringing an objective perspective and sharing best practices from other
organisations.” OECD, 2011
Why: board reviews enhance performance
“Provided they are undertaken in earnest, board evaluations—of the board, its committees, and
individual directors — can be a highly useful tool to improve
board performance …A skilled facilitator can helpto surface significant people and behavioural
issues that may otherwise remain hiddenand unaddressed”. Wong, 2009
The What: directors’ idea of factors affecting board effectivenessComposition of the board 77%Effective chair 50%Challenge 41%Collegial environment 29%Exec/non-exec relationship 23%Time commitment 15%Effective executive 15%Defined roles 15%Size of board 11%Appropriate levels of information 11%
Eversheds Board Report, 2010
What: the FRC code
The governance principles ofLeadershipEffectivenessAccountabilityRemunerationRelations with Shareholders
What else….?
recruitment, training and succession
People on boardAverage age = 58 years 60% UK nationals88% malemajority ex CEOsAverage time on board = 5.2 years
“There is a tendency to selectcandidates who have long experience
and high seniority as opposed tocandidates who have less experience,but who can add value through their
objectivity and energy” Heidrick & Struggles
What else….?
recruitment, training and successionmeeting preparation and managementuse/effectiveness of sub committees transparencyboard member role engagementrisk assessmentmanaging proprietythe team
Team effectiveness
Environment Support and challengeOpenness
Behaviour Respectful of different skillsUtilisation of strengths
Capability Group interaction skillsIndividual competence and strengths
Beliefs UsefulnessAchievabilityMutual respect
Purpose Shared purposeRole clarity
Dysfunctional teams
Absence of trust
Fear of conflict
Lack of commitment
Avoidance ofaccountability
Inattentionto results
Source: Patrick Lencioni
What else….?
recruitment, training and succession meeting preparation and management use/effectiveness of sub committees transparency board member role engagement risk assessment managing propriety the team relationships within Board and with executive the culture monitoring and review, including ‘comply or
explain’
People are the basis of it all: good and ill
Organisation
Shareholders
Other Stakeholder
s
How to do a review?
Method●questionnaire●interview ●document review●observation
Board observation and content analysis What you talk about
● finance, operations, people etc?● past, present, future?● data, reports?
What type of content● giving information? ● offering opinion?● challenging?● suggesting action?
How do you talk● positive, neutral, supportive tone?
Overall and for individuals
Board talk before a development intervention
Board talk after a development intervention
How to do a review?
Method●questionnaire●interview ●observation●document/data review
composition – skills - and recruitment
Board composition
Code: mix of talentskills – functional/behaviouralbackground and behaviours of individualsrelevant sector expertise and
independenceNEDs and executives
Diversity of composition
McKinsey’s 2007 and 2010 Women Matters reports● higher gender representation is associated with
better financial and performance operating results
EU Green Paper: diversity“Diversity in the members’ profiles and backgrounds gives
the board a range of values, views and sets of competencies. It can lead to a wider pool of expertise. Different leadership
experiences, national or regional backgrounds or gender can provide effective means to tackle ‘group-think’
and generate new ideas. More diversity leads to more discussion, more monitoring and more challenges in the boardroom.
It potentially results in better decisions…”
How to do a review?
Method●questionnaire●interview ●observation●document/data review
skills, recruitment, process
ContentStyle
Style of review
Challenge (against complacency)SupportFacilitated
Getting at hidden depths
assumptions
How to do a review?
Method● questionnaire● interview ● observation● document/data review
skills, recruitment, process ContentStyleBenchmarking
Who does the review: questions to ask
Tailored and fit for purpose?Evidence based?Independent?Trustworthy?Will they work with team yet challenge
them?Aware of behavioural aspects?
(not just procedural)Cost effective?
The IES approach