As part of their legal and fiduciary duties, which include setting policy with the best interest of shareholders in mind, corporate boards are increasingly given the task of dealing with volatility—be it from worldwide economic turbulence, cyberattacks, activist investors, or competitive disruptions. Directors aren't fully confident that they have what it takes to tackle the challenges, manage risks, and focus on long-term strategic goals, according to surveys the Stanford Graduate School of Business and the National Association of Corporate Directors (NACD) conducted with more than 800 participants in 2016.
The average survey participant worried about not getting enough director training and education in the past 12 months, about reviewing management information that lacked quality before last year's board meetings, and about at least one fellow board member who they think is ineffective and should be removed.
"In this highly competitive, disruptive, and innovative world that we find ourselves in today, boards have to be extremely nimble," said Steven Walker, managing director of the NACD's board advisory services. "I think the biggest area that needs improvement is boards having the courage and the confidence to conduct 360 [degree] self and peer evaluations."
Boards that evaluate themselves once a year and conduct peer evaluations every two to three years ensure that directors' skills are aligned with the needs of the board, that underperforming directors are given a chance to improve, and that the board and management work together effectively, Walker said. (See the sidebar, "How to Improve Board Performance," for experts' recommendations to help boards operate more effectively.)
Directors agree evaluations are key instruments to ensure the right board composition, but only 41% of the more than 600 respondents in the NACD survey said their boards assess individual members.
Participants in the Stanford survey generally believed their boards have the skills needed to advise and oversee their companies. They particularly rated highly board members' financial skills, management and industry experience, and audit and accounting knowledge.
About half of the participants (55%) said their companies evaluated individual directors, but just 36% thought their companies do a very good job of accurately assessing the performance of individual directors.
Participants in the Stanford and NACD surveys said boards also fall short in these areas:
- Level of trust. Only two-thirds (68%) of board members in the Stanford survey say they have a high level of trust in their fellow directors or in management.
- Regard for other directors. The average board member believes that at least one fellow director is not effective and should be removed from the board. Only 48% of board members in the Stanford survey would keep all current directors on the board.
- Communication. Only 23% of board members in the Stanford survey rate their board very effective at giving direct feedback to fellow directors. Fifty-three percent said directors do not express their honest opinions in the presence of management.
- Board restructuring. Thirty-five percent of boards represented in the Stanford survey do not have a process for removing ineffective directors. The 65% of companies that do have a process use a variety of approaches. Directors deemed ineffective may be asked to resign or receive a poor performance rating from their peers. But the process is often haphazard. About half of directors (48%) favor term limits to facilitate turnover.
- Skills and experience. Directors in the Stanford survey give themselves low marks for technical knowledge (47%) and experience with cybersecurity (18%) and social media (16%). The lack of cybersecurity experience is also reflected in the low confidence many directors of publicly traded companies have in their companies' cyber defenses. Only 42% of the respondents in the NACD survey feel confident or very confident that the company is properly secured against a cyberattack.
- Education. A majority of directors (56%) serving on boards of public companies said their board spent too little time on director education and training over the past 12 months, the NACD survey found. Individual directors spent an average 18.5 hours on education and training in 2016, down slightly from 18.7 hours in 2015.
- Diversity. Many boards of public companies expanded director search criteria or changed the composition of their nominating committee in 2016 to improve diversity on the board, but more work remains to be done, according to the NACD survey. On average, women occupy 16% to 24% of the seats, and racial and ethnic minorities 4% to 13%.
- Director turnover. Only 57% of directors in the Stanford survey strongly agree their board is effective in bringing new talent onboard to update the mix of skills. Forty-two percent regularly rotate directors to refresh committees, and 23% have a formal succession plan for committee chairs. One-third of directors (34%) rate their board very positively on planning for director turnover.
How to improve board performance
To make boards work better and more efficiently, Gordon Barrie, ACMA, CGMA, a U.K. executive coach and consultant; the authors of the Stanford University study; and NACD board advisory services recommend the following:
Assess each director's position on critical issues
Questions to ask include the following: How effective do you think the board and board committees are? Do composition, structures, processes, agendas, and materials allow the board to meet strategic needs of the enterprise? How well do the board and management communicate? Is the board leadership effective? Is a board succession process established?
Detailed findings of the assessment should be combined in a report, along with recommended actions. Also, the board should decide how to monitor any actions taken and measure their effectiveness.
Assist directors in their improvement efforts
Develop a skills-and-experience matrix to help the board and the nominating governance committee assess directors' skill sets and pinpoint areas that need improvement. Put together board education plans and coaching plans for individual directors. Schedule feedback sessions to let directors know whether they are doing well or falling off.
Bring in outside experts to challenge the board to be proactive, study the competition, and foster innovation. Also, consider adding to the board a capable CIO who can optimize the commercial management of IT and cybersecurity.
Periodically reevaluate and refresh the board
Create an independent process to periodically reevaluate and refresh the board. Identify a point person on the board who is accountable for managing the process and following through on recommendations.
In addition to annual self-assessments and peer evaluations every two to three years, the NACD's board advisory services suggests directors ask themselves after every meeting whether the board followed the agenda, accomplished the goals it set in the executive session before the meeting, and spent enough time discussing strategy and risk oversight.
Plan for board succession
Develop a succession plan that includes processes for removing underperforming directors and refreshing the board when changes in corporate strategy require different skills and experiences on the board.
A version of this article was originally published at fm-magazine.com, April 4, 2017.
Sabine Vollmer is a JofA senior editor. To comment on this article or to suggest an idea for another article, contact her at Sabine.Vollmer@aicpa-cima.com or 919-402-2304.
- "Overcoming Barriers to Effective Board Oversight," FM, Dec. 1, 2016
- "8 Best Practices for Aligning Strategy, Planning, and Risk," FM, May 25, 2015
- "Ingredients of an Effective Audit Committee," JofA, Nov. 14, 2014, journalofaccountancy.com
- Measuring and Improving the Performance of Corporate Boards (white paper), aicpa.org (member login required)
- Corporate Governance Track (Modules 7—10) (#165347, online access; #GT-SMA-GRMG, group training)
For more information or to make a purchase, go to aicpastore.com or call the Institute at 888-777-7077.