The definition of board effectiveness has shifted dramatically over the past decade. In the aftermath of the global financial crisis and numerous corporate scandals, a director now confronts not only complex oversight accountability, but also personal risk and liability. Clearly, this is a job not for the faint of heart.
As the supply of courageous board candidates dwindles, global companies are in need of battle-tested directors more than ever — board members who fully understand and can actively engage in virtually all aspects of an enterprise’s operations. To be truly effective, a board needs directors who can work as a group to clearly define their role and mission, and in specialized individual roles, such as succession planning, acquisitions and capital allocation.
In this context, it’s become rather easy today to identify the weakest boards. Typically, such boards comprise directors who act distant and detached — traits anathema to a business environment that demands transparency and accountability.
My colleagues and I recently studied what makes some boards more effective than others. We found that boards tend to progress from good-to-great along a four-phase continuum: 1) foundational, 2) developed, 3) advanced, and 4) strategic. Essential to creating a high-performance board is agreement and alignment, at the outset, on where the board actually stands in this continuum and where it needs to be.
The continuum essentially represents a corporate hierarchy of needs, akin to the famous personal-development hierarchy created by psychologist Abraham Maslow. In the corporate model, you equate a “foundational board,” which provides basic compliance oversight, to basic survival needs such as food and shelter in the human hierarchy. Similarly, a “strategic board,” which provides prescient forward-looking insights to form a company’s foundational strategy, is fully actualized and high-performing.
Foundational — survival — boards focus on compliance; they play it safe. These are the weak performers in the corporate food chain, with directors who are unwilling to take strong positions, make tough decisions, or play proactive operational roles. Strategic — actualized, in Maslow’s terms — boards underpin high-performance companies, where directors take appropriate risk to make significant contributions and lasting impact on enterprise value.
So how can weak boards advance along the effectiveness continuum if they find themselves clinging to survival basics? In our study, we found five elements — “disrupters” — that tend to hinder the progression of boards toward self-actualization and high performance:
Lack of clarity on the roles of individual directors and the board as a whole. Role ambiguity slows decision-making and causes unnecessary director conflicts.
Poor process management hinders effective board preparation, meeting management, and communications. This results in indecisiveness and a lack of urgency on critical challenges facing the organization.
Lack of alignment and agreement on company strategy causes disinterest among board members, who then simply default to tackling regulatory and compliance issues. Poor strategic alignment also hampers a board’s ability to prioritize issues and set their near-term agendas. This often causes board disruption and sends damaging signals to financial markets.
Poor team dynamics fracture boards and lead to power struggles. Like any effective working group, a board should be comprised of professional peers who respect and work well with each other.
Board composition is a serious impediment, if not done right. Today’s challenges require new perspectives and skills. But boards often lack the ability to objectively evaluate their makeup to determine if they have the right people and skills at the table.
I’ve seen my fair share of effective boards and dysfunctional ones. The worst cases nearly always exhibit at least one of the disruptors described above.
Classic dysfunctional examples include organizations where the company founder dominates board discussions and stifles all attempts to change and modernize the company or alter the composition of the board (i.e., poor team dynamics). In other cases, highly compensated boards literally run a company into the ground by churning through CEO after CEO (lack of strategic alignment). Other weak-performing boards focus on recruiting “big-name” directors — typically high-profile CEOs — who are simply too distracted by operational and financial issues facing their own companies to make any significant contribution (poor board composition).
In stark contrast, I’ve worked with board chairs who had the foresight and courage to spin off a successful division to help that now-standalone unit focus its resources on building its brand and market presence. In these instances, short-term personal gains were cast aside in favor of the long-term viability and health of the division — and the corporate entity.
The board of an international restaurant chain, for instance, played a leading role in reducing the company’s overall risk profile. Specifically, a director personally spearheaded the development and adoption of an advanced enterprise resource planning system, working hand-in-hand with internal staff. Another high-performing board immersed itself into a global financial services firm’s complex financing activities, as it successfully navigated a financial crisis. These directors went well beyond basic compliance to provide true strategic counsel.
To add such strategic value, high-performing boards must be “talent-centric.” At its most basic level, this manifests itself in a board’s composition and diversity level. An enterprise must attract directors who can provide valuable, strategic input, while building a board that can draw on the diversity of its members’ expertise and backgrounds — across geographies, gender, race, and experience — to create a whole that’s literally greater than the sum of its parts.
Strategic directors also commit to performing at their full potential and have the courage and self-confidence to raise and address any personal developmental needs. They also must be able to give constructive feedback to other directors to enhance the personal effectiveness of their board colleagues. A number of talent-development tools are available to help, including individual director and board assessments that gauge learning agility (the ability to learn from past experience and manage amid uncertainty) and other valuable traits and skills.
Effective corporate governance is more complex and challenging than ever. Companies need boards to help them meet regulatory compliance basics. But the most effective boards are those that easily check that box, while also delivering solid strategic counsel and direction. Recruiting and developing directors who go well beyond basic needs is the secret to building a high-performing, fully actualized board.
Republished from Harvard Business Review. For more, visit HBR.org.