Kezia Farnham

Senior Manager

Board effectiveness: Factors, KPIs, and management best practices

Board effectiveness is crucial for not only the performance of your organization, but its long-term success. Considering only 30% of executives rate their boards’ performance as excellent or good, many organizations expect more from their boards to deliver effective board management.

Effective board management is a path toward winning stakeholder support while ethically and efficiently achieving key corporate goals. But what exactly does it mean for a board to be effective and how can this be measured? In this blog, we’ll uncover how to measure board effectiveness, how to be an effective board member, and the strategies you can implement to achieve effective board management.

This blog will include:

• What is board effectiveness?
• The 4 pillars of board effectiveness
• How to effectively manage a board
• Key factors influencing board effectiveness
• How to measure board effectiveness
• Challenges to achieving board effectiveness
• How to improve board effectiveness

What is board effectiveness?

Put simply, board effectiveness is a term used to describe how well a board of directors fulfills its day-to-day responsibilities across an organization. An effective board of directors provides direction and support to its organization, manages and mitigates risk and helps a business achieve its goals. But board effectiveness is more than just how well each member performs individually — it’s about how they function together as one unit. Board effectiveness is therefore crucial for both organizational success and stakeholder confidence, to foster sustainable growth across the business.

An effective board can communicate and collaborate internally and externally to set the organization’s strategic direction, and take action to get there. They:

• Know they have a responsibility to the organization and its stakeholders and take that responsibility seriously
• Are willing to put personal issues aside to act as a team, steering the organization toward success using empathy and integrity
• Leverage the right tools at the right time so they have the insights they need to make informed decisions

When boards are effective, they lead by example, galvanizing the entire organization to achieve its goals without compromising values like integrity and ethics.

The 4 pillars of board effectiveness

What makes a good board of directors will vary between industries and sectors, but can be measured by four key components which we’ll explore below.

People

The effectiveness of a board relies on its members. While a board may comprise talented and experienced individuals, they could lack the knowledge to perform their responsibilities as board members. An effective board of directors should educate its board members and have performance and knowledge standards to abide by. Evaluations should then be carried out to ensure board members meet these standards. Including people of different ages, races, and genders brings different skills and experiences to the boardroom. This helps make the board more effective.

Information

Boards are most successful with real-time insights about their organization and business landscape. This pillar addresses how information is collected and presented to the board, and the communication strategies the board uses to gain information from managers. A well-structured information architecture ensures the board receives the right insights, data and analysis to make informed decisions.

Policies

Directors must set and follow a clear governance model to ensure their actions are ethical, compliant and aligned with the organization’s direction. This pillar also includes following correct rules of procedure, and ensuring that board activities align with ethical standards and any necessary legal requirements.

Culture

This pillar relates to the relationships, interactions and behaviors between board members. Effective board management cultivates a culture of open communication, trust and safety to challenge the status quo. The culture pillar encourages diverse perspectives and collaboration while minimizing conflicting or potential power imbalances.

How to effectively manage a board

Managing a board is a delicate balance of people and leadership skills. It cultivates various personalities and communication styles while highlighting the value of each director’s unique skills.

Effective board management requires:

1. Finding the right chairperson: The Harvard Law School Forum found that successful directors more often report that their chairperson also overperforms, including giving constructive feedback and facilitating productive discussions. Effective board management can’t happen without a highly effective chairperson. Their role is to ensure board effectiveness by leading the board and its activities. They set the agenda and ensure that important topics and issues are covered, encourage participation from all members equally and ensure debates are constructive and fair.
2. Clearly defining roles and responsibilities: Each director should understand what they’re responsible for, and that responsibility should be distinct from other directors. This reduces conflict between directors and increases accountability.
3. Providing thorough onboarding and training: Directors should also have the tools to see out those responsibilities, whether training on emerging technologies or explaining board policies and procedures.
4. Buying into the company strategy: Boards need to know the company's governance and strategy and also believe in it. Chairpeople should provide any information directors need to understand the strategy and be willing to put their expertise behind it.
5. Creating committees: Part of effective board management is delegation. Committees help use board time and resources more wisely, dividing its responsibilities and ensuring different objectives are met without overburdening every director. This allows specialized groups to focus on specific areas such as finance or risk management to ensure each area is examined thoroughly by those with the right expertise.
6. Engaging with stakeholders: Directors can’t lead the organization in a bubble. Instead, they should engage with primary stakeholders, determine what matters to them and be responsive to those needs whenever possible — and clearly explain when those needs can’t be met.
7. Holding regular board evaluations: Chairpeople should take time to evaluate each board member. Evaluations are a critical tool to highlight which areas directors can improve and which areas they can continue to impress.

Key factors influencing board effectiveness

Several key factors influence your board effectiveness, including:

• Board composition: Your board's effectiveness relies heavily on its members' knowledge, skills, and experience.Aim to have a mix of skills at the table, from industry knowledge to risk management expertise, to ensure the board can oversee the organization effectively. You may also benefit from having independent or non-executive directors on the board, to deliver an outsider’s perspective. Independent directors have no financial ties to the company other than compensation for their time, so can often provide a fresh, unbiased perspective. Dr. Dambisa Moyo, an acclaimed global economist and author, says "I think that the issue of developing or thinking about the strategy in the first place is something where a lot of board members around the table can provide insights and perspectives from their own day-to-day work."
• Diversity: Diversity is key when it comes to board effectiveness. You should aim to have a diverse board of directors, across gender, age, ethnicity and professional background, to encourage diverse, innovative ideas. However, this should never be treated as a check-box exercise. "I don't want to be in a boardroom where I'm simply there because of my race or gender. I want to be there because I have a PHD from oxford or I spent almost 10 years at goldman sachs and can add real value on questions of risk, strategy, investment or compensation,” says Dr. Moyo. "We don't want to lose the high-talented majority of men in our efforts. It's important that the message is absolutely clear— in order for us as organizations to compete and win, we need talent. The talent comes from everywhere and anywhere."
• Board dynamics and culture: When board members trust each other and work collaboratively, they’re more likely to engage in constructive conversations and make better decisions.
• Processes: Having a clear information architecture, so your board can easily access data and reports, will improve board effectiveness. This allows your board to access the information they need quickly and simply, so they can focus on issues they need to solve.

How to measure board effectiveness

The key to measuring board effectiveness is through a self-evaluation process. You can use this assessment to measure issues such as competency, the productivity of your board meetings, communication and recruitment.

First, your board should evaluate their role against the managers’ role, to ensure they’re effectively mentoring and supporting them, rather than micromanaging them. Board self-evaluations should help you assess whether your board has the necessary industry-specific skills to fulfill its responsibilities. Other considerations include reviewing the board’s agendas, the frequency of board meetings and how often they exchange information with managers.

Many of these issues can be effectively reviewed and addressed through digitization. Directors should ensure that the board budgets for technological governance solutions and implements them successfully. Diligent could provide the digital solutions you’re looking for to help you measure your board effectiveness. Diligent Boards can help you make board meetings more efficient and give you a simple way to do your evaluations quickly and well.

Challenges to achieving board effectiveness

The management of the board often falls to the board chairperson. They must unite the perspectives of as many as 30 different directors, which carries significant responsibility. However, the challenge of galvanizing directors who are leaders in their field is just one of the many speed bumps on the road to effective board management.

The biggest challenges to board effectiveness include:

1. Trust: Directors need to trust each other. They must respect each others’ expertise and experience and meaningfully engage with the rest of the board’s point of view to find the best solution for any obstacles the organization faces. Creating that culture of respect isn’t always easy.
2. Information access: Boards don’t always have the information they need to make the best decisions. When they struggle to connect with company leadership and get insight into finances, risk, cybersecurity and more, they have to work with an incomplete picture of the corporation.
3. Lack of training: According to a PwC survey, only half of executives think their board adequately understands emerging technology and cybersecurity, among other issues. Directors who lack that knowledge will struggle to lead their organization into the future.
4. Diversity: Boards thrive on diversity, yet many organizations still struggle to recruit and appoint diverse candidates. Without diversity, boards won’t have all the skills and experiences they need to navigate the rapidly evolving business landscape.
5. Transparency: Many boards communicate clearly in the boardroom, but once they leave, their communication channels close. This makes it challenging to stay ahead of issues that may develop faster than board meetings can keep up with.

How to improve board effectiveness

As boards strive to be their most effective, they’ll likely encounter practices that work and practices that don’t. The following practices can lead to effective board management:

1. Take board composition seriously: The directors on your board matter. While boards of generations past were fairly homogenous, modern boards should be as diverse as their customers and employees. Diversity ensures not only that stakeholders can see themselves on the board, but also that the board will have a variety of skills and backgrounds to draw from as risks emerge.
2. Think of management as leadership: Effective board management isn’t the same as managing people in other roles. Directors are, after all, leaders in their field. How do you lead leaders? Show them the path forward and give them the tools to walk it rather than closely managing how they fulfill their responsibilities.
3. Engage other perspectives: Boardrooms can create a vacuum that biases decision-making. Effective boards will seek diverse perspectives, including employees, customers, shareholders and community members. The more ] boards understand and respond to these perspectives, the more effective they will be.
4. Sequence your decisions: Boards have many decisions to make. Set clear expectations with your executives and leadership about when those decisions will be made so they have adequate time to provide the board with the necessary intel. This clarity creates accountability on both sides, which can build trust in the board.
5. Encourage board turnover: Watching board members move on may sound antithetical to effective board management. However, boards should evolve along with the industry, which means making room for directors with different areas of expertise and business backgrounds. History with the organization is valuable, but there must also be a balance with fresh ideas.
6. Create a collaborative culture: Directors should see themselves as collaborators. Chairpeople who can create a culture where helping one director means helping all directors will have a team ready to tackle any challenge, even those that divide director opinions.
7. Inspire continuous learning: Boards should strive to learn about any issue that could impact company performance, whether that’s emerging technology like artificial intelligence or geopolitical crises like the Israel-Palestine War. A culture of learning keeps directors sharp and ensures they have an up-to-date perspective on the organization’s landscape.
8. Enhance efficiency and decision-making with technology: Leverage technology to help streamline tasks could save the board significant time, so they can focus on strategic decisions rather than administrative tasks. Using digital solutions like Diligent Boards can help the board make quicker, more informed decisions, as they’ll have the information they need at their fingertips.
9. Use AI-driven strategies to enhance board effectiveness: Those who use AI are 90% more likely to report higher levels of productivity than those who don’t. You can use AI-powered analysis to understand complex data across siloed governance, risk and compliance functions. This can ensure comprehensive decision-making based on internal and external risk factors. You could also use AI-powered risk and data analytics to improve decision-making and expand resource capabilities through automation. Alternatively, boards can use AI to create tailored summaries that highlight critical information, to encourage data-driven decision-making.
10. Streamline information access: You can implement systems to give the board straightforward, streamlined access to the information they need. This can boost productivity by ensuring all board members can easily access and retrieve the documents they need without delays. You should also consider features that notify board members when materials have been received and reviewed, to maintain accountability.
11. Adapt to change: Embrace change by using tools that offer flexibility, so you can adapt to any sudden changes or unexpected scenarios. Your board management software should support easy modifications to keep members updated in real time, to foster a dynamic and responsive governance environment.

Effective boards need effective tools

Board effectiveness is all about uniting a group of directors to do their best work. But it’s also about creating the structures to support them. Board management software enhances collaboration, centralizes information on issues ranging from risk to compliance and creates the accountability and transparency that make great boards great.

But how do you know which software can keep up with your board? Download our software buyer’s guide to learn what features to look for in a technology solution that can improve your board’s performance.