We have asked directors, executives, management a thousand times the same question, and invariably the opinions are quite diverse. But it is not really surprising that such a diversity of views emerges, as this truly reflects the challenging and increasing complexity of corporates; the ever evolving and onerous governance that the board has to shoulder as well as the diversity of the background of the board members. On a large range of various views on what leads to a good board, these diverse views point down to 3 key areas; Structure, Capability and Purpose (SCP) of the Board. An inherently good board may have its performance diminished if it takes it eyes off on any of these areas or fails to recognise the interplay of the SCP matrix.
The size of the board has a significant impact on the focus of the board. It is common to equate diversity with a large board as well as a way to manage the complexity of the corporate through a larger number of members with varying industry or functional specialisation. There is no empirical evidence to support that a larger board leads to a better performance as most global board are between 7 to 14 members** (SG:10, Germany/France:14, Peru:7) and specifically for US S&P, 10.8** while that for the average non-profit board, the median is 13*. Some may hold the belief that a large board ensure effectiveness through diversity of a wider participation and distribution of power. However, a large board may breed the concentration of power within factions and allows the executive team to transverse amongst the various factions, diminishing the effectiveness of the board. A smaller board will allow the board members to involve deeper into the strategic issues and it is less likely for a board member to idle on his job going unnoticed. The key to the perfect board number is not when you can no longer add any more members but rather when you could no longer take any away.
Board Meeting frequency has an impact on the efficiency of the Board and a Board that meets too often may not necessarily be good. There is always a constant struggle for most board to find a balance to meet given the various diversity and commitment of board members and yet have quality time to discuss on strategic issues. A better alternative is to arrange for longer duration but fewer meetings to allow sufficient time for meaningful discussion of the board on strategic issues. Most boards have an yearly meeting of 7** (median 7, average 8) and empirical evidence has supported a meeting frequency of not more than 8**.
There is a ever increasing argument for more committees (eg Audit, Investment, Nominating, Human resources, Finance, IT, Risk, executive) with the understanding that the allocation of specific work to specific group of board members with specific skillsets helps drives board effectiveness. It may be better to consider what are really the issues and do these issues warrant the creation of a separate committee? Empirical evidence shows that in fact the number of committees has decreased from 6.6* (1994) to 4.5* (2017). The use of executive committee (a smaller committee with selected board members typically used to perform certain functions on behalf of the board) should be used sparingly as this tends to create an inner cabinet within board which may lead to the perception for those not in the inner cabinet to be rubber stamping members. The option to explore the use of a temporary committee versus a standing committee; when certain issues require focused attention. There should be clear sunset clauses on the dissolution of temporary committee to avoid the rollover of temporary to permanency.
The most common serving duration for board members is a two, three-year term*. The tenure should reflect a sufficient length of time that is not too short considering the board workload, required meeting and time each year. A tenure that is shorter than the duration between board decision making to implementation diminishes the board capacity to perform its tasks and also board accountability. A longer than desired term restricts the board ability to refresh and succession as well as creating an element of independence impairment due to the long association with the corporate – the fallacy of “group-think”.
The collective skill mix of the board determine its capability and the dynamics of the board projects this capability. It is therefore important that there is optimal balance of the skill mix at the experience and functional level (diversity in knowledge) coupled with diversity across age, gender#, nationality, ethnicity to ensure diversity in perspectives. Dynamics of the board (or some may termed it as the board culture) is how the members interact, allocate the work amongst the members, discuss and deal with board issues as a team. High performing board reflects wide diversity of opinions and allows rigorous but meaningful discussion amongst the member. But once a decision is made, all members will align and moves as a cohesive block. It must actively seek to build consensus and manage divisions that threaten cohesion. Board capability is not a “as at” concept but a flow process. So a high performing board now means little if it does not have a mechanism to assess, track, review and recalibrate its skill mix , number of member and diversity in perspectives. Board self-appraisal and individual directors appraisal both internal (board member, management) or external is a good starting point. Most if not all CEO and management are subjected to frequent and rigorous appraisal by the board or sub-committee. As such, board and its individual members are no exception.
The purpose of the Board must be clear amongst all the board member and to the management. Most boards will strive to get the optimal balance of its value creating vs value protecting role and manage its time on strategic vs governance issues. Board that get itself too deep into the details that would otherwise best left to management, runs the risk of losing its strategic focus and more importantly, compromised its governance oversight by delving and enmeshing into the work of the executives, mixing the role of “gatekeeper” vs “doer”.
Interplay of S-C-P
The interplay of the S-C-P is such that it is a matrix influence of each of the three components, each influences the other 2 components directly and all three components react amongst itself, creating a constant evolving system that is in a flowing state along the life of the corporate.
A good Structure is an important foundation in the SCP matrix in driving the board performance. However, good people sitting at the board table helps to compensate for bad structure but the opposite is certainty not true. A bad structure (S) limits the capability of the board (C) and it may also blurs the lines of management vs board (P), obscuring the main purpose of the Board. This in turn, impacts the structure, as the sustainability of the current number of member or the skills mix is no longer tenable, with good directors slowly exiting the board; triggering challenging succession forward; resulting heavier workload (and perhaps longer tenure) on remaining directors and increasing board meeting frequency and hours but not necessarily effective. And the chain effects go on and on.
The intricacy of the interplay requires a consideration not just on the quality of each SCP components individually but also its comparative strength or weakness. As ultimately, a board is a collective team that thrives on culture (P), behaviours (C) and processes (S) in accepting and resolving challenges or diversity in views to be effective. You are only as good as your weakest link.
*based on BoardSource, “Leading with intent 2017”.
**based on US Spencer Stuart index 2018
#average female board member 24% based on US Spencer Stuart index 2018