Corporate governance

Five principles of good governance – effectiveness

In the second part of our Art of Governance series, we explore good governance through the principle of effectiveness as demonstrated by the board

The art of good governance

Effective leadership at board level is in the spotlight following Teresa May's comments: both before becoming Prime Minister and more recently at the G20 summit, she suggested a lack of diversity undermines the board's successful evolution in response to a changing environment.

Companies need boards to function effectively. Board members provide executives with a different perspective and direction drawing on their wider external experiences. The most effective boards meet regulatory requirements and provide sound strategic counsel.

In light of the FRC revising their Guidance on Board Effectiveness and our new Prime Minister addressing the same topic in her leadership speech, we explore some perspectives on what makes an effective board.

Delivering board effectiveness

Truly effective boards need directors who can work as a group, clearly define their role and mission, as well as fulfilling individual roles, such as overseeing succession planning, acquisitions and capital allocation.

The board must consider the existing board performance and what they must do to deliver on strategy. High performing boards have clarity on these matters.

High performing boards need to objectively evaluate their own composition, recognise their weaknesses - from poor team dynamics to gaps in experience and knowledge, eg technology; and make and implement a plan for the future. Early findings from Grant Thornton's Corporate Governance Review (for release this Autumn) find that 75% of FTSE 350 companies report on succession planning, but only 3% provide detailed assessment of their succession plans.

Academics speak of a board continuum covering foundational, developed, advanced, and strategic boards. Foundational boards play safe, exhibiting basic levels of compliance and are unwilling to make tough decisions or take strong positions. Strategic boards are insightful and high performing, where directors take appropriate risk to make significant contributions that have a lasting impact on enterprise value.

This approach may be too simple due to each individual director's significant impact on the dynamics of the board and considering a board as a cohesive, single entity can be misleading.

Effectiveness and governance – seven key factors to consider

The principle of effectiveness relates to the collective skills and expertise of an organisation to meet its purpose and/or strategy.

Influencing factors:

  • Does the board have an appropriate environment, diverse mix of skills, experience and independence to ensure there is robust but effective challenge and stewardship of the organisation's purpose and strategy?
  • Does the organisational design support and/or enable strategic decision making?
  • Do people understand their roles and responsibilities? Are individual directors formally evaluated in terms of their performance on an annual basis?
  • Does the chair create an open and inclusive environment at meetings where all are encouraged to contribute? Is the chair's performance appraised by their directors?
  • Are management boards clear on their roles and responsibilities? Is management information timely and clear?
  • Does the board have clear and timely access to information to assess both the performance of the business and its management of strategic risks?
  • Does the board provide independent challenge and plan for its succession? Is diversity and training of the boardroom considered in its planning?

There are wider issues that modern boards cannot afford to ignore: the pensions crisis, sustainability, social responsibility, risk management and business ethics. The chair's role is to establish and run an effective board which is only achievable by combining the right mix of skill, experience and perspective.

Recruiting and developing directors who can add to the gene pool as the business evolves is the secret to building a high-performing and fully functioning board. Which explains why succession planning and the role of the nominations committee is rising up their agenda.

Once a company has an effective board, the directors then need to be held to account, which we will explore in the next installation of the Art of Governance.

For further information on our corporate governance research, visit Governance Matters.