High-performing boards driven by four pillars
KUWAIT: Company board performance is under the spotlight more than ever before. Media coverage of recent governance failures highlight that the effectiveness of boards can at times be strongly tested, and this test may unfold under the scrutiny of shareholders, customers, media and the public.
While no company wants to ever face such highly disruptive events, sometimes even the smallest organization will need to tackle emerging issues that require strong leadership from the chairman and his board.
Board members in the Gulf are becoming more aware of the necessity to enhance their knowledge, skills and capabilities in order to build better boards. This is evidenced in a study carried out by the GCC Board Directors Institute (BDI) earlier this year, where less than one-third of the board members surveyed believe boards in the Gulf are effective.
But what makes an effective board? The Institute has conducted extensive research into the facets of board performance, and has found that four specific key areas are conducive to highly effective boards.
First, the role of the chairman is crucial in driving board performance. Broadly speaking, the chairman ensures that the board performs effectively and supports the business and strategy of the company. The characteristics of a good chairman centre on the ability to work well with people, gain consensus, and be ‘brave’ enough to do what is right for the organization. A good chairman has the responsibility to challenge and support management, frame the discussions in a manner that enables the board to address key issues and formulate proper resolutions. In times of crisis, a strong chairman does not lose sight of the company’s purpose and continues to lead the board effectively, deals with disruptive, unforeseen events and protects the organization’s long-term interest above all else.
Second, succession planning for senior management roles is pivotal for the longterm success of all companies alike - whether they are publicly listed, state-owned, family owned or privately held. Over 40% of BDI’s survey respondents revealed that their organizations did not have a succession plan in place. Highly effective boards develop and continuously revise the plan. To ensure a successful transition, implementation of the succession plan can begin as early as three years prior to the transition in question. In the most effective CEO replacement plans, the CEO also plays a key role in selecting, grooming and onboarding his/her successor. Ongoing succession planning helps the board to remain aligned on the development of the senior management team and the specific needs of the organization. A solid plan leads to a smooth transition which contributes to sound governance, mitigates risk, and fosters the trust of shareholders and stakeholders.
The third pillar for high-performing boards is risk management. According to the Institute’s survey of GCC board members, 44 percent of respondents identified audit and risk management as being an area where they would like to see more expertise. In addition, more than a third of respondents disagreed when asked if all their colleagues had a clear understanding of the top five risks facing their company. A paper by PwC summarizes the responsibilities of a board in relation to risk well, and states that the board is responsible for understanding company management’s approach to risk appetite and also for having substantive discussions about it as part of strategy and risk oversight. According to PwC, it is this active involvement of the board in risk discussions that is pivotal to a company’s adequate approach to risk taking and management and which will ensure a company’s success in the long-run.
Strategy is the fourth driver of high-performing boards. Many organizations spend time reflecting on past-performance, when looking forward is essential in driving future growth. Over half of respondents in the BDI survey agreed that all members of the board made a significant contribution to strategy development and strategy-related discussions. These same discussions ensure that the board is fully engaged with the strategy of the company, and allow boards to play a role in understanding and shaping company direction in partnership with management. Boards then must hold management to account in delivering on that strategy.
The board performance recipe counts several essential ingredients, but four are indispensable to highly effective boards: role of the chairman, succession planning, risk management and strategy. Ultimately they will enable the company to successfully navigate emerging issues, sustain organizational performance and longevity, and overcome intense difficulties, both in or out of the public spotlight.
• Nathalie Potvin is Executive Director, GCC Board Directors Institute. The GCC Board Directors Institute is holding its annual Mastering the Boardroom program in Riyadh on 24-25 November.