Board Effectiveness: What Works Best

Over the past decade there has been a greater focus on the boardroom and increased pressure on board members. New areas such as technology, both in companies’ strategy and potential IT risks; crisis management and reputational risk, including how organizations handle crises and how they communicate with stakeholders; and an overall increase in boardroom-shareholder engagement have made the role more demanding. These changes alongside scrutiny from shareholders, regulators, and other stakeholders, after the economic crisis that started in 2008 have made the job of the board more challenging than ever.

In the second edition of Board Effectiveness: What Works Best, authored by PwC and published by The Institute of Internal Auditors (IIA) Research Foundation, directors and governance specialists share insights on lessons learned from around the globe, including recent developments and regulations that affect boards of directors. Board Effectiveness helps directors navigate the increasingly complicated and challenging environment they face.

Board Effectiveness: What works best, 2nd edition, is intended to be a practical guide, providing information and best practices on topics that are most relevant to help boards enhance their performance and effectiveness.

Key topics covered in this edition:

Strategy and Implementation

Strategy sets the direction for a company and impacts virtually everything the company does. The right strategy is the starting point for success. The board has a vital role to play in overseeing management’s development of the strategy and its implementation. But this is a challenging area because it requires directors to thoroughly understand the company, the industry, emerging trends and risks, and management’s assumptions. Equipped with the right information and time, directors can engage in robust discussion that allows them to contribute to management’s proposed strategic plan. Ideally, their involvement will help the company adopt the plan most likely to enhance shareholder value. This chapter highlights leading practices for effective board oversight of strategy development and implementation.

Risk and Crisis Management

Today’s companies face a vast array of risks — both known and unexpected. Some risks turn into crises that have significant implications for operations or even a company’s future. Given this setting, it’s a challenge for boards to get comfortable that risk is addressed appropriately — but it’s a critical responsibility. Boards frequently delegate elements of risk oversight to committees — most commonly to the audit committee. But ultimately the responsibility for risk oversight resides with the full board, and each director should understand the key risks facing the company. This chapter helps boards better understand the changing landscape of risk oversight, management’s role in managing risk, and effective ways to oversee the process. It also includes insights on how boards can most effectively discharge their responsibilities when a crisis strikes.

Corporate Ethics

Compliance with laws and regulations is critical. But directors recognize it is only the starting point in creating a culture of ethical behavior. The right tone at the top, reinforced by business unit managers throughout the company, is vital to ensure these values cascade to all employees. This chapter provides insights that can help boards understand how tone at the top is set and the role they can play in overseeing company culture, especially in times of change or crisis. The chapter also emphasizes the importance of directors demonstrating ethical behavior.

Monitoring Company Performance

Boards use many data points to monitor company performance — including traditional financial metrics and nonfinancial metrics, along with peer and industry information. Knowing what metrics are most effective in helping directors to understand performance and see early indicators of trouble is challenging. Astute directors also know it is important to raise concerns based on a gut feeling — even if their concerns prove to be unfounded. This chapter shares insights on selecting the right metrics, setting and monitoring targets, and effectively sifting through information sources.

Transformational Transactions

At some stage, a company will go through a potentially transformative transaction. This could be an acquisition, divestiture, or other business alliance such as a joint venture. The stakes for the company are high in terms of investment, reputation, and whether the deal ultimately contributes to the success of the company’s overall strategy. Given the significant potential impact of a deal on shareholder value, boards have a key role in working with company executives to set the stage for successful transactions and maximize their value. This chapter provides insight as to how boards can do this effectively, and outlines key considerations for the different stages and different types of transactions.

Management Evaluation, Compensation, and Succession

Executive compensation may be the board responsibility most scrutinized by investors, the media, and other stakeholders. Stakeholders have extensive visibility into executive remuneration levels, but perhaps more limited understanding of the complexity directors face as they try to get it “right.” Boards must balance many factors in reaching compensation decisions — attracting and retaining top talent while encouraging behaviors that will achieve long-term shareholder value. This chapter provides insights on effective evaluation and compensation processes and the importance of director independence in making these sensitive decisions. It also deals with the issue of CEO succession — whether planned or unplanned — and offers advice for boards to consider as they deal with this important issue.

Communicating with Stakeholders

Disclosure requirements — for financial statements, proxy filings, and other regulatory filings — have become more voluminous and complex and are under greater scrutiny. Stakeholders have also been asking for more information, beyond what companies are required to provide, to really help them understand performance and risks. These factors alone make the board’s role more challenging. In addition, new technologies are changing how companies communicate with stakeholders and how stakeholders and company critics exchange information. This chapter describes how boards can best discharge their oversight responsibilities to ensure that communications are transparent, accurate, and reliable, while balancing stakeholders’ demands for more information.

Board Dynamics

Composition and leadership are critical in supporting a board’s ability to carry out its responsibilities effectively. Boards need the right combination of skills and experience — and to be alert to the fact that the “right” combination changes over time. They also need a leader who will ensure the board effectively discharges its responsibilities and a process that engages directors most productively. This chapter discusses considerations for board composition and leadership, effective board processes, and training and education.

 

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