Board effectiveness depends on a number of factors, but the most important are board dynamics, board structure and board diversity, including depth in the props skillsets, according to a note by the Australian Institute of Company Directors (AICD). Monitoring and assessing board performance leads to an ability to improve in all these areas.
These views are confirmed by a recent study which compares the effectiveness of boards in Japan with those in Australia. The study shows that the Australian boards tend to have superior dynamics. “But Australian directors clearly focus on being as opposed to other stakeholders, despite the fact that the director states that they are not responsible for their performance.
Another study of boards at the New Zealand stock exchange provides further confirmation. The study laid particular stress on board dynamics: “The pool of social capital for their firm that is contributed collectively represents the pool of social capital that it collects towards executing the governance function. As a strategic resource, the board is responsible for developing and selecting creative options in advancement of the firm. “A mix of director characteristics has a positive effect on board performance, the study concludes.
The AICD study points to the barriers that can hold board performance back.
“The factors which can hinder board effectiveness include:
- An adversarial atmosphere in the boardroom or an unmotivated board with a tendency to group-think;
- Skill deficits or lack of independence on the board;
- A poor relationship with the CEO and senior management which can impede information flow;
- Conflicts of interest or factional interests on the board, perhaps due to a dominant shareholder;
- Poor chairmanship – a chair who is too weak, too autocratic or too close to the CEO. “
Attention to board dynamics, board structure and board diversity wants to improve performance, as the studies all concur.
Board dynamics should support discussion and debate
The ability of board members to work together constructively and to seek breadth in the viewpoints under consideration is essential to effective board performance.
“A boardroom culture of mutual respect, honesty and openness that encourages constructive debate, a culture that is shaped by a common purpose and a strategic clarity, and one that is informed by dialogue with the CEO and senior management to the AICD.
Healthy board dynamics leads to better decision-making, as board members are not afraid to weigh in with their opinions and ideas. There is always a tendency for boards to group think, slavishly following the lead of a specific director or the CEO. Effective boards have members who think for themselves.
Board structure must include efficient processes
Effective board structure and processes with clear mandates, well-managed information flow and a good company secretary who supports the board as well as a manager and advisor on governance.
There is a growing emphasis on the responsibilities of the chair. The chairman ensures that the different views are heard, and arrays of ideas are brought to a conclusion. According to the New Zealand study, the effectiveness of the board is in fact decided, and dependent on, the efficacy of this position.
With the agenda of board members growing rapidly, the importance of effective committees has increased as well. “Committees can assist in sharing the board’s workload and making more effective use of directors’ time. The overall evaluation process is based on a decision-making process, “according to the AICD.
The company secretary’s role has grown to become a member of the executive committee and is responsible for the governance of the company. Working with the general counsel, the company secretary can make strategic decision-making by providing the necessary insights and background that board members need. With big data becoming an essential strategic tool, the company secretary can bring the information gleaned from the data to the boardroom table.
Board diversity is the key to effective performance
Behind all the work discussed above, which is sufficiently diverse to create a viable exchange of ideas. There are still not enough international members, and not enough technical skills on Australian and New Zealand boards – the ‘male, pale and stale’ paradigm still holds true, according to the most recent statistics .
Designing a workable board matrix, and then taking pains with recruitment of new members is an essential step in achieving an effective board. The AICD proposes that proposes that balance is framed around the disciplined diversity of thinking and
the mitigation of inherent biases.
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