the institute for employment studies

Getting to the heart of the people issues: how to carry out an effective board review

Peter Reilly

Agenda

WhyWhatHowWhoof board effectiveness reviews

Why review?

Because we have to?Because others are doing it?Because we want to avoid corporate failure?

Corporate governance is one means to curb harmful short-termism and excessive risk-taking – EU Green Paper

Corporate governance weaknesses in remuneration, risk management, board practices and the exercise of shareholder rights had played an important role in the development of the financial crisis and that such weaknesses extended to companies more generally. - OECD Review

Why: fear of board failureCauses of board failure include:

Lack of good/ timely operating and strategic information leading to inefficient meetings and uniformed decisions.

Too many insiders/friends on the Board. CEO not committed to the Board process or to implementing Board

recommendations. Lack of strategic focus and inability to anticipate the future. Too much meeting time spent on reporting and not enough time on

addressing critical issues. Inability to align with shareholders or deliver their desired results. Board meetings that are not respectful and collegial. Infrequent or irregular Board meetings. Experience & skills on the Board do not match business’ strategic drivers. Low levels of preparedness for meetings by management or the Board.

The Board Group

An example of board failure

HIH (an Australian insurance company) heading for a fall

The signs were there

A due diligence report described HIH as a:

company which has not yet made a complete transition from an entrepreneurially-run company influenced strongly by senior management and from which senior management

benefits significantly, to that of an ASX listed companyrun primarily in the interests of shareholders

An example of board failure

HIH (an Australian insurance company) heading for a fall

A company characterised by mismanagement and poor business decision making and execution●business analysis● risk management●sloppy, ill informed decision making ●performance/financial tracking●absence of endorsed strategy●dominant CEO and weak Chair/ineffective Board

Why: managing a board is not easy

“ The challenge should not be underrated. To run a corporate board successfully is extremely demanding. Constraints on time and knowledge combine with the need to maintain mutual respect and openness between a cast of strong, able and busy directors dealing with each other across the different demands of executive and non-executive roles. To achieve good governance requires continuing and high quality effort.” Source: FRC code

“It is much harder to be a director nowthan it was ten years ago. Increasedaccountability and scrutiny, multiplemedia and stakeholder pressures and

shareholder activism are all contributing

to making the job a lot more onerousand risky.” Heidrick & Struggles

Why: managing a board is not easy

Why review?

Because we have to? Because others are doing it? Because we want to avoid corporate failure?

Corporate governance is one means to curb harmful short-termism and excessive risk-taking – EU Green PaperCorporate governance weaknesses in remuneration, risk management, board practices and the exercise of shareholder rights had played an important role in the development of the financial crisis and that such weaknesses extended to companies more generally. - OECD Review

Because we have a problem to solve?Because it will offer protection from

(media) attack?Because it will enable improved

performance?

Why: board reviews enhance performance

Although there are cases of flattering evaluations, interviews with chairmen indicate

that “when conducted in a robust professional manner,

board evaluation can be an effective tool to improve board performance. It provides an

opportunity for board members to set collective and individual

goals and subsequently measure their performance against them in a constructive and reflective manner. In addition, the use of

an external facilitator can improve board evaluation by

bringing an objective perspective and sharing best practices from other

organisations.” OECD, 2011

Why: board reviews enhance performance

“Provided they are undertaken in earnest, board evaluations—of the board, its committees, and

individual directors — can be a highly useful tool to improve

board performance …A skilled facilitator can helpto surface significant people and behavioural

issues that may otherwise remain hiddenand unaddressed”. Wong, 2009

The What: directors’ idea of factors affecting board effectivenessComposition of the board 77%Effective chair 50%Challenge 41%Collegial environment 29%Exec/non-exec relationship 23%Time commitment 15%Effective executive 15%Defined roles 15%Size of board 11%Appropriate levels of information 11%

Eversheds Board Report, 2010

What: the FRC code

The governance principles ofLeadershipEffectivenessAccountabilityRemunerationRelations with Shareholders

What else….?

recruitment, training and succession

People on boardAverage age = 58 years 60% UK nationals88% malemajority ex CEOsAverage time on board = 5.2 years

“There is a tendency to selectcandidates who have long experience

and high seniority as opposed tocandidates who have less experience,but who can add value through their

objectivity and energy” Heidrick & Struggles

What else….?

recruitment, training and successionmeeting preparation and managementuse/effectiveness of sub committees transparencyboard member role engagementrisk assessmentmanaging proprietythe team

Team effectiveness

Environment Support and challengeOpenness

Behaviour Respectful of different skillsUtilisation of strengths

Capability Group interaction skillsIndividual competence and strengths

Beliefs UsefulnessAchievabilityMutual respect

Purpose Shared purposeRole clarity

Dysfunctional teams

Absence of trust

Fear of conflict

Lack of commitment

Avoidance ofaccountability

Inattentionto results

Source: Patrick Lencioni

What else….?

recruitment, training and succession meeting preparation and management use/effectiveness of sub committees transparency board member role engagement risk assessment managing propriety the team relationships within Board and with executive the culture monitoring and review, including ‘comply or

explain’

People are the basis of it all: good and ill

Organisation

Shareholders

Other Stakeholder

s

How to do a review?

Method●questionnaire●interview ●document review●observation

Board observation and content analysis What you talk about

● finance, operations, people etc?● past, present, future?● data, reports?

What type of content● giving information? ● offering opinion?● challenging?● suggesting action?

How do you talk● positive, neutral, supportive tone?

Overall and for individuals

Board talk before a development intervention

Board talk after a development intervention

How to do a review?

Method●questionnaire●interview ●observation●document/data review

composition – skills - and recruitment

Board composition

Code: mix of talentskills – functional/behaviouralbackground and behaviours of individualsrelevant sector expertise and

independenceNEDs and executives

Diversity of composition

McKinsey’s 2007 and 2010 Women Matters reports● higher gender representation is associated with

better financial and performance operating results

EU Green Paper: diversity“Diversity in the members’ profiles and backgrounds gives

the board a range of values, views and sets of competencies. It can lead to a wider pool of expertise. Different leadership

experiences, national or regional backgrounds or gender can provide effective means to tackle ‘group-think’

and generate new ideas. More diversity leads to more discussion, more monitoring and more challenges in the boardroom.

It potentially results in better decisions…”

How to do a review?

Method●questionnaire●interview ●observation●document/data review

skills, recruitment, process

ContentStyle

Style of review

Challenge (against complacency)SupportFacilitated

Getting at hidden depths

assumptions

How to do a review?

Method● questionnaire● interview ● observation● document/data review

skills, recruitment, process ContentStyleBenchmarking

Who does the review: questions to ask

Tailored and fit for purpose?Evidence based?Independent?Trustworthy?Will they work with team yet challenge

them?Aware of behavioural aspects?

(not just procedural)Cost effective?

The IES approach

… thank you

Further information contact:

www.employment-studies.co.uk

peter.reilly@employment-studies.co.uk

… thank you