Board effectiveness reviews - the key to good corporate governance

Nick Watkins 30 June 2016 Category: Articles

“Every company should be headed by an effective board which is collectively responsible for the long-term success of the company”*.   The key word here is “effective”.  But what does this mean in practice, and what steps need to be taken in order to achieve an effective board and to ensure each individual director plays their part?  

The primary responsibility of the board of directors is to provide leadership to the company with the objective of creating long-term stakeholder value.   The practical way that the board performs this task day-to-day is by exercising its function to make decisions on behalf of the company and by ensuring subsequent implementation of such decisions via board oversight of executive management, and the company’s external agents and delegates. 

Whilst a robust oversight and risk management framework is clearly critical to good corporate governance, the effectiveness of the process by which a board considers and makes decisions is arguably even more so, as the quality of decisions made is likely to have a direct correlation to the company’s ultimate success and profitability (or lack thereof, as the case may be).   Key to achieving an effective board is therefore having an effective decision-making function.  If applied consistently, the core principles of corporate governance are all designed to play a part in strengthening this.  For example:-

  • Appointing a chairman who leads by example, facilitates discussion and fosters relationships based on mutual respect and open dialogue
  • Ensuring that the composition of the board and its committees reflect an appropriate diversity of skills, experience, approach and mind-set, both generally and taking into account the particular nature and profile of the company’s business
  • Appointing one or more non-executive directors, with the capacity and skills to support and where necessary, challenge, the CEO and executive management of the business
  • Implementing a defined board succession plan, to ensure continuity of diversity and to balance experience with a regular refreshing of board positions  
  • Providing all directors, and in particular, non-executive directors, with a tailored induction programme and ongoing training to ensure that directors gain an adequate understanding of all areas of the company’s business activity, including the company’s business strategy, management structure, principal business risks and the management of such risks
  • Ensuring that agendas for board meetings and accompanying board materials are circulated sufficiently in advance of meetings to allow directors time to give proper consideration to the matters to be discussed
  • Ensuring that materials included in board packs are relevant, detailed (to the extent necessary to gain a proper overview of the proposal to be discussed and an understanding of the process used to arrive at such proposal) and well organised, with key issues highlighted as such
  • Ensuring that all potential conflicts are identified and managed appropriately
  • Ensuring that adequate time is allocated to board meetings and individual agenda items (taking into account their relative importance) and ensuring meetings are conducted with appropriate focus
  • Making available members of executive management, the wider operational team and/or external experts for attendance at board meetings to present on relevant topics and/or to answer questions on matters tabled for discussion
  • Arranging for periodic board reporting by committees, internal audit and risk management functions
  • Maintaining regular and transparent lines of communication with the company’s principal stakeholders, and ensuring that stakeholder views are effectively canvassed and reported to the board and taken into account in board deliberations where appropriate
  • Maintaining an accurate and up-to-date set of corporate records and minutes and ensuring that copies of all minutes are circulated to board / committee members in a timely fashion
  • Engaging an independent external consultant to perform periodic board effectiveness reviews, as a means of evaluating the performance of the board and its committees and identifying areas for improvement and further development

Whilst not exhaustive, adherence to the foregoing principles should assist with creating the conditions for more effective decision-making at board and committee level and as a consequence, a more effective board.  This will also reinforce board “substance” in cases where it is important to demonstrate that central management and control of the company is properly exercised in the company’s corporate domicile.       

The benefit of engaging an external consultant to perform a periodic board effectiveness review is to have a “fresh pair of eyes” review the current workings of the board, to raise directors’ awareness of how they are operating both individually and collectively and to provide an impartial assessment of the board’s effectiveness by reference to the principles set out above and other factors.  To facilitate open and honest discussion, such consultant should ideally be independent of, and have had no previous business dealings with, the company and not be subject to any conflict of interest.   

Altair has developed a bespoke board effectiveness evaluation programme utilising a confidential online questionnaire based approach and follow-up face-to-face interviews with individual directors.  With the diverse range of experience and background of its employees, Altair is well-equipped to perform reviews for all types of company, ranging from listed trading companies to private fund vehicles.  The team has recently completed a review for Jersey Electricity plc, which is listed on the London Stock Exchange. 

Altair is an independent provider of non-executive director and corporate governance services, based in Jersey, Channel Islands and is not affiliated to any professional firm, administrator or other service provider.   For more information, please contact Nick Watkins (nickwatkins@altair.je) or Julia Chapman (juliachapman@altair.je).

* UK Corporate Governance Code (September 2014), Section A1, "The Role of the Board"

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