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The Diligent team
GRC trends and insights

How to measure board effectiveness

August 29, 2019
0 min read
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Among other things, the lack of transparency has led to the current pressure that boards are feeling to improve their governance practices. Investors often feel that boards and managers are intentionally, or unintentionally, keeping them in the dark. Investors haven't felt secure in their investments because they're not getting enough information and they're not getting information that they consider to be of value to them. Most of their interactions with shareholders focus on quarterly results, which aren't always a true reflection of financial performance, particularly long-term performance. There are distinct types of changes boards can make to measure board effectiveness.

Many boards tend to leave governance issues entirely up to the company secretary and overlook their own responsibilities regarding governance practices.

To fulfill their responsibilities, board directors should be concerned about board effectiveness, finding ways to measure it, and being diligent about transparency with investors. One of the many things board directors tend to overlook is the great assistance that digitization can provide them in their endeavors.

Boards Pressed to Prove Greater Responsibility, Transparency and Self-Awareness

In some countries and in some markets, there are mandates for boards to perform self-evaluations. Everywhere else, self-evaluations are optional, and they're considered best practices.

Investors and regulators have been interested in several issues related to board composition, including gender diversity, racial and ethnic diversity, specializations, cybersecurity and professional experience. These concerns should prompt boards to get back to governance basics. A good place to start is by asking the hard questions that lead to a fresh assessment of the board's role in governance.

Assessing the Board's Role in Governance

There was never a more important time for boards to assess issues like roles, competencies, board meeting productivity, communication and recruitment. Board self-assessments can be somewhat subjective. To counter that problem, boards should make a commitment to being genuine and honest in their answers and be willing to supplement the results of their evaluations so they can measure the results as accurately as possible.

First, boards should evaluate their role against the managers' roles to ensure that they're providing oversight and mentorship rather than micromanaging them. If the board takes management into their own hands, they're overstepping their boundaries and there is no oversight over them.

The process of succession planning should ensure that the board continually has the right competencies. Board self-evaluations provide a good initial indication of whether the board has the necessary industry-specific skills and universal skills to give proper attention to the company. Another thing that boards can do is to identify a current board director who has expertise with corporate governance to lead the board in this area, rather than leave it to the company secretary or consultation with the owners.

As the needs of the corporate marketplace shift, the board should be strong enough and independent enough to be willing to replace board members as needed for the good of the company.

Another important issue that boards should concern themselves with is the frequency of their board meetings. Do they hold enough board meetings? Do they have enough time to discuss strategy? Is the board taking too much time to discuss items that could be better vetted prior to the board meeting? If not, the board should assess whether it needs to take some issues off the table and delegate them to committees. The board should establish basic committees for audit, executives, risk management and cybersecurity, and ensure that each one is effective in its work.

A review of the board's agendas is a good way to measure board effectiveness. If the same items are appearing on the agenda with no resolution, it may be an indication that the board lacks the necessary expertise to deal with the issue.

Boards should explore the frequency of information exchanges with managers. Is it too often or too infrequent? Do they speak in person or by some other means? Do they have set times for discussions and updates prior to board meetings? Perhaps the most important question is how secure the communications by email are.

The effectiveness of the board chair is an indication of overall board effectiveness. A good facilitator prioritizes agenda items, manages meetings well, encourages full participation, allows for respectful discussion on dissenting opinions and represents the company professionally. If any board director believes the board isn't effective in some area, it probably isn't.

Quality board director recruitment and succession planning are also good ways to measure board effectiveness. Succession planning should be robust, and there should be a clear process for it.

On the whole, many of these issues can be effectively addressed or improved by taking advantage of digitization. One or more board directors should take the lead on educating the board about options for digital solutions to strengthen governance processes. As a follow-up measure, the directors need to ensure that the board budgets for technological governance solutions and implements them. Taking this step provides a clear way for boards to demonstrate to investors their commitment to strengthening governance practices.

Modern Governance Practices Rely on Digital Board Management Solutions

Today's boards don't have to look too far to find ways to measure board effectiveness. Technology provides the answers boards need with Diligent Boards, Diligent Messenger, Diligent Evaluations, Governance Cloud and Diligent Nominations.

Diligent Boards is the digital solution to creating efficiency in board meeting management. It cuts down on meeting preparation and planning by many hours and sometimes days or weeks.

Communications between board managers and directors are often sensitive, containing confidential trade secrets. It's vital for boards to have a tool like Diligent Messenger that they can count on for secure communication while messages are sitting and when they're in transit. A program for secure file-sharing assures boards that their collaborations aren't at risk of being hacked.

An assessment of board effectiveness begins with board evaluations. Diligent's Evaluations tool gives boards a streamlined process for doing thorough evaluations in record time. The program also allows them to use the previous year's results as a steppingstone to plan the next year's evaluation tools.

For quality succession planning to occur, boards need the results of their self-evaluations. Diligent Nominations takes this data a step further and allows boards to benchmark their performance against the performance of their competitors' boards. The Nominations tool gives boards the data and analytics to do a thorough search process of over 125,000 candidates for board service or to fill executive roles.

Measuring board effectiveness is a modern problem that can easily be solved by using Diligent Corporation's suite of modern digital board governance solutions.


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