Four questions that will help improve the effectiveness of your Board
There are a number of structural factors or processes that can improve the effectiveness of an enterprise Board of Directors. These generally will focus upon how business is conducted and establishing both clearly-stated roles and responsibilities and a well-developed decision-making process.
It has been our experience that a firm can find out much about the effectiveness of its Board of Directors by asking itself four (4) elementary questions—and answering each:
- What is the role of Board in company decision-making and policy creation? While this may seem obvious, do not be so sure.
A firm should have policy documents and/or operating agreements that outline the role of the Board and its members regarding authority and the limits of its decision-making—and how such authority compares to (meshes with) that of the executive team. This encourages the Board not to delve into micromanagement as the role of the Board and its limits will be clearly delineated. There will be a clear line in the sand. Such outlines and agreements also assure that your EVP of Sales & Marketing (who may also serve as a Board member) knows that when the Board convenes they have a very different role to fill.
- Is it clear when the Board will convene and generally what subjects will be discussed at scheduled meetings?
The answer is a simple as determining whether you have an annual schedule of meetings and required subjects or action items to be considered at each. I serve on a Board as President where a four-annual-meeting schedule is published as policy and the preliminary agenda of each item is outlined at the beginning of the fiscal year. There is no confusion over when and what materials management must prepare for the Board to consider and approve such matters as operating budgets, capital investments and budgets or key-supplier agreements.
- Is your Board best organized to effectively utilize its resources and ultimately do its job?
I have recently interacted with a municipal Board with a very large annual budget and several hundred employees. It currently faces a series of very difficult and capital-intensive issues—the stove is pretty hot (and hotter by the week), and decisive action is required by midyear.
The president of this Board has chosen to historically conduct all business in a committee-of-the-whole format where all discussions, advisory input and deliberations are considered by the entire Board during scheduled meetings. This process has delivered little progress and the frequent Board meetings are absorbed with more random discussion and posturing than decision making. Why is this happening? Simply, the whole Board is not getting clear, well-thought-out and properly-vetted alternatives for consideration.
Another way for this Board to operate would be by using a committee structure. With such a structure the Board forms committees (like a Finance Committee) with the charter of considering specific (say finance-related) issues and bringing researched and reasoned recommendations to the whole Board for discussion and action. I have worked within a committee structure in the past and find that it can deliver pretty solid results. Should our municipal Board use a committee structure? I sure think so.
Is a committee-of-the-whole, or committee structure more effective and ultimately better for you? That depends. It is often a function of such factors as company size, complexity of issues to address and composition of the Board (i.e.-who are the directors and what are their preferences?). We also find that savvy companies and Boards often employ both approaches—depending on the circumstance. There may be no “right” answer to which is better, and it can vary with circumstance. Considering the above alternatives, does your Board organizational structure facilitate effective decision making? Or, are you bogged down like the Board I have described above?
- Does the Board have sufficient talent, expertise and experience to make decisions regarding the issues that it will be facing? This is the testy (yet crucial) overall competency and breadth-of-knowledge question.
The purpose of a Board is to focus the best minds a company can harness on addressing enterprise strategy, policy and operating issues. When assembling or assessing its Board, ownership and other stakeholders should carefully select directors who best match the complexity of enterprise operations and the future challenges the Board will face.
Considering the role and responsibility of the Board, private and public companies often require and seek experienced “outside directors” (independent of the company) to augment the expertise and experience of shareholder directors or the family. Outside directors are becoming more common in private companies every year, and generally appointing or electing outside directors is considered a best practice in larger or public firms. How do you select your directors today? Do you have or believe you need outside or independent directors?
Also do not forget that you can never “inventory” enough broad-ranging competence and experience on your Board to cover all of the issues you must tackle. Know your limits, and strongly consider retaining expert advisors for those areas and times where specific knowledge is required but once a year (or less frequently). This practice is quite common when considering such areas as investment policy, risk management and policy, executive pay, benefits or taxes. Can you name your Board’s retained expert advisors, other than your CPA?
Now that you have asked and answered each of the above four questions, what are your conclusions regarding the effectiveness of your Board and its operating practices?
While you are not looking for a “score” (say 0-10), clearly the more questions you can answer in the affirmative the better your Board likely works and the better its ability to make effective and tough decisions.
If you do not like some of the answers above, consider the following 2-step action plan—
- Communicate your findings (regarding the four above questions or other added benchmarks you select) to the whole Board; and
- Then, ask the Board to examine its organization and practices to determine what should be done to improve its effectiveness. Get outside help, if needed.
Some Boards form a committee or working group called a Governance Committee to focus attention upon improving the way the Board does business. Do you also need one? If you think so, do not be shy.
Wilkening & Company has assisted clients over the last 30 years improve governance processes and outcomes. Have a question or concerns, call or write us at (847) 823-5090, email@example.com.