Defining & Maximizing the Board’s Role in a Successful Company
In recent years, there has been an increased focus on good governance and its role in creating value for shareholders. While good governance has many definitions and perspectives, its ultimate test is whether the company can fulfill its strategic mission.
To accomplish this goal, the board must understand its role, have the right foundation and structure, and have the necessary tools to maximize its effectiveness. While boards vary in the ways they go about these tasks, insight is available to help each one on the journey toward success.
Defining the Role of the Board of Directors
For the most part, boards still spend most of their time focusing on quarterly reports, audit reviews, budgets, and compliance. However, many argue that boards should be focusing on the future direction of the business.
Because boards need to look further out than anyone else, they must develop agendas that balance past mistakes and present issues with sufficient airtime for more strategic, forward-looking activities.
This is challenging because of volatile and unpredictable markets, high CEO turnover, and shifting compliance regulations. However, the problem can be solved with well-defined board roles, a better understanding of the external landscape, and using strategy as context for every decision.
Good succession planning is also vital, as boards should consider candidates based on future strategic direction and provide professional development opportunities to potential internal candidates.
Changing the Board’s Agenda
One other approach is changing the board’s agenda. High-performing boards not only have more work days but also focus on strategy more than lower-performing boards.
This means devoting extra time to activities like:
- Assessing whether strategy stays ahead of trends
- Evaluating resource allocation
- Adjusting strategies based on changing conditions.
Effective boards ask key questions, such as:
- Do we understand industry dynamics?
- Have we debated with senior managers long enough before landing on a specific strategy?
- Have we discussed the ins and outs of all possible strategic methods?
The board’s focus on strategy should also spill over into M&A transactions, as a forward-focused board is in the best position to challenge senior management on strategic fit, pro forma financial statements, and ultimate risk and reward.
Keeping a Pulse on New Tech
As daunting as it may sound, technology is yet another space requiring strategic engagement from the board. Directors need to have the technical know-how to recognize cybersecurity risks, see breakthrough digital initiatives on the horizon, and understand how those initiatives can upend business models.
Because technologies change so frequently, the board must increase the frequency of its strategic discussions to match the speed of digital shifts.
In addition to increasing their digital quotient through the addition of digitally tuned directors, boards should also involve the IT team, focusing on the following questions to understand how technology impacts business strategy:
- To what degree does technology facilitate core business activities?
- What value does the business get from its top IT projects?
- How long does IT take to develop and deploy new features and functionality?
- How efficiently does IT roll out new technologies and achieve desired outcomes?
- What skills and talent does IT need to achieve desired outcomes?
The final frontier of strategy that modern boards should play a role in is marketing initiatives. This can be done in various ways, such as incorporating customer engagement into meeting agendas, considering candidates with public sector experience, and ensuring the board is updated on marketing innovation occurring within the company.
Building the Right Foundation & Structure
A good governance structure starts with those at the helm of the board. Many boards follow the common structure of having a lead or presiding director separate from the CEO to facilitate the board’s work. However, many also struggle to understand what the role entails. As a result, they grapple with what makes a good board leader.
Ideally, the leader should:
- Partner with the CEO on strategy issues and stakeholder communication
- Set board agendas
- Help recruit new directors
- Assess business risk
- Chair executive sessions and meetings
- Act as a liaison between the board and management
It’s important that this person adds value during board deliberations, has chemistry and compatibility with the CEO, and has time to do the job. However, boards must also realize that although the board leader is important, the composition of the rest of the board is equally vital to the company’s success.
All directors should be chosen based on the board’s overall strategy and their proven ability to execute similar strategies in a different environment. They should also have a collaborative mindset and be invested in the company’s long-term success on a deep, personal level.
To protect their authority and independence from management, board members should have professional stature greater than or equal to that of the CEO so as to garner respect. They must also be willing to adhere to term limits so they can remain detached and objective.
Ensuring Maximum Board Effectiveness
Research indicates that the most effective boards have two main characteristics:
- They spend more time working.
- They put strategy front and center.
Additionally, they operate with the following actions:
- Adjust strategy on a continuous basis
- Improve their performance management skills
- Build a strong culture of trust and respect
- Balance trust with challenging discourse
- Evaluate themselves regularly
- Appoint effective chairpeople
Ultimately, an effective board needs directors who make the most of their time, especially if there are term limits.
A few ways directors can accomplish this goal include:
- Touching base with the CEO every week or two between meetings
- Collaborating on strategy as it’s being formed and tested
- Cultivating talent by recruiting and mentoring executives in the company
- Becoming an active participant in particular company initiatives
- Being willing to think like an activist investor and ask the tough questions
When board members truly value the company and want what is best for it, they’ll put in the necessary work to make effective leadership a reality.
Creating Effective Boards Requires a Change in Perspective
Good governance doesn’t happen on its own. Boards need to have a well-defined role, a keen understanding of the overall business landscape, and a willingness to engage with strategy and use it as a basis for every decision.
These commitments, coupled with the willingness to build an environment that fosters trust and collaboration, make for an effective board that can create value for all stakeholders.
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