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Board effectiveness in a changing business environment - Recent lessons on board evaluation

In this new article, Chris Hodge - Special Advisor on corporate governance, together with David Risser, Managing Director, draw from the lessons Nestor Advisors has learnt from the issues that have been raised most frequently during our recent board evaluations and reviews of a range of clients in different countries and sectors.

BOARD EFFECTIVENESS IN A CHANGING BUSINESS ENVIRONMENT - RECENT LESSONS ON BOARD EVALUATION

At Nestor Advisors we have learnt over many years of undertaking board evaluations and governance reviews that every board is unique. The issues and concerns that come to the fore during the process of discussion with board members will be heavily influenced by the company’s particular circumstances.

That said, when comparing the different evaluations we have carried out we find that some issues recur regularly. This is perhaps not surprising, as many boards face similar challenges. Some of these are perennial ones, such as how to make the best use of the board’s limited time. Others may be caused by a change in the business environment – the pandemic being an obvious example – or by regulator and investor expectations.

This article highlights some of the issues that have been raised most frequently during our recent evaluations and reviews of a range of clients in different countries and sectors.

VIRTUAL BOARDS

One of the most obvious impacts of the pandemic on boards was the difficulty of meeting in person. While our clients had found ways of working around these restrictions and some even reported benefits – for example, by uncoupling the timing of committee and board meetings, committees are able to provide the board with more considered advice – most of them reported some negative impacts.

One potential negative impact is on the cohesion of the board: it is more difficult for the Chair to ensure everyone is contributing and to ‘read the room’ when the board members are all in different rooms; and the lack of opportunities to engage outside of formal meetings can make it more difficult to build the levels of trust and openness between members that a board needs to be truly effective.

Another issue is that being physically distanced from the company can lead the board or some members to become more distanced in other ways, for example by feeling less connected to the company or having less insight into current issues facing the company or the views of management. Anecdotally some foreign-based directors told us they felt less involved than had previously been in case as a result of working from a distance.

It also seems that the quality of the information on which boards rely can be affected. We have noted that boards that meet virtually are more likely to receive a greater volume of descriptive information at the expense of more objective analysis of causes and consequences. This leaves boards more exposed to confirmation bias and can, in our view, lead to less robust decision-making. This is a cause for concern, and for that reason we are further revising the methodology we use for board evaluations to look at this aspect of the board’s effectiveness.

It seems likely that many boards will combine virtual and in-person meetings in the future. They will need to think carefully about the optimum balance between them. Based on what we have observed, two in-person meetings a year would seem to be the minimum required for a cohesive board.

STRATEGIC FOCUS

Managing the board’s time effectively has always been a challenge for many boards. It is arguably becoming even more difficult as the list of responsibilities and expectations that are placed on boards by regulators, investors and stakeholders grows – something we will return to later. One specific challenge is carving out enough time to pay proper attention to the company’s future direction and strategy.

This is far from being a new challenge, but it is one that has been exacerbated by the pandemic. Research carried out in the UK a few years ago found that over two-thirds of companies felt that the board agenda and papers were too focused on operational rather than strategic issues. Judging by what we have heard from our clients, the percentage would be even higher today.

Many boards had to become more hands-on and operational during the pandemic as a matter of necessity. Learning to let go again is not easy, particularly if you have board members for whom operational issues are their comfort zone. However, when conditions allow it needs to be done if boards are to be able to focus on the future challenges that they need to address.

When considering the appropriate format for board discussions of strategy, the lesson from our recent evaluations is that, wherever possible, this is better done in-person than online. This allows the board to have more in depth discussions and it is easier to have the sort of free-flowing conversation that enables board members to provide constructive challenge and to make the links between different aspects of the strategy.

SUSTAINABILITY

It is entirely understandable that the pandemic made many boards become more short-term in their focus, something that may continue given its impact on global economic and trading conditions which are now also being affected by the war in Ukraine. 

At exactly the same time, though, boards are under pressure to adopt a much longer-term focus on the company’s ability to generate sustainable value. As we reported in last month’s newsletter, pressure from regulators, investors and stakeholders to put environmental and human rights considerations at the heart of the company’s strategy and risk management is only going to increase further.

It is clear from our evaluations that boards are at different stages of that journey and that some are better prepared than others to grapple with how to adapt to a new environment and identify what these changes mean for legacy businesses.

In response, Nestor Advisors together with the sustainability team of its parent company Morrow Sodali, has strengthened its services to help boards address the governance of sustainability, including ESG board readiness assessments and training.

COMPOSITION AND SUCCESSION

One aspect of board effectiveness that has been directly affected by both the short-term pressures of the pandemic and current volatility and the longer-term sustainability challenges is board composition and succession planning.

Many boards are currently reviewing whether they have the skills and expertise that will enable them to address these future challenges, and in some cases they are concluding that they do not. It seems that the ability to help the board understand and address the changing business environment will become a more important criterion when selecting non-executive directors in the future.

Prompted by experience during the pandemic, another more prominent – and more basic – selection criterion is availability. Even the best qualified candidate will struggle to make an effective contribution if they are unable to participate fully in the work of the board. This is true in all cases but particularly important at times of stress when greater time commitment might be needed from all board members.

For many boards, the pandemic has also shone a light on the effectiveness of their current executive directors and senior management. Boards have had the chance to observe which ones were able to provide leadership, inspire confidence and rise to meet new challenges while under tremendous pressure - and which were not.

Having been through that experience, boards have drawn conclusions about the personal qualities and behaviors that they look for in their leadership team. These seem likely to be even more important considerations when selecting future leaders, and some boards will be adjusting both their short- and long-term succession plans as a result. Some boards have also concluded that they need to obtain greater visibility of senior management below CEO and executive committee in order to assess the strength of the pipeline.

While the most direct impacts of the pandemic may now be starting to recede, difficult global conditions mean that boards do not yet have the luxury of not having to worry about the company’s short-term survival. At the same time boards are being pressed to address its long-term sustainability.

These pressures mean that boards are being tested to the limit. Factor in the pace of change in the external environment that we are currently experiencing and it is clear that boards need to keep their effectiveness under regular review if they are to remain on top of their brief and provide the leadership their companies need.


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