Governance Perspective What five factors will enable boards to be effective in the Covid era?

The pandemic has put tremendous pressure on boards as they try to juggle future direction with oversight and accountability in these turbulent times. There is little prospect of this period of uncertainty ending soon as we start to extricate ourselves from the health emergency, that has become an economic crisis, and may yet herald significant social and political upheaval.

As a new year begins the spotlight is very much on boards. Most importantly, are they up to the task in hand? How fit are they for the future? Are they effective and can they move from self-protection and value preservation to a mindset of value creation that will successfully seize opportunities for their business?

There are five factors that will enable boards to deliver true value in this crisis:

1.      Role clarity

Role clarity is the heart of an effective board. While most directors are familiar with the need to adopt a ‘directors’ mindset’ and respect separation of the roles of the owners, management and board, few directors are familiar with the big, multimillion-pound question which is how the board will steward the creation of value by the company. This is a far more challenging question that will truly separate the wheat from the chaff in 2021. Those boards and directors that have clarity about how they will steward the creation of value and demonstrate this through their board and committee workplans, calendars, and be accountable for value creation in their board reviews will be exemplars.

2.      Board composition

The capacity and capability of the board should be tailored to add value to the company. In airline terms every board seat has a ‘cost per seat’ and every director and chairman should ensure that the contribution of each director exceeds their cost. Good boards are fit for the future, as viewed through the prism of the five drivers of diversity™: demographics, skills, experience, thinking styles and circles of influence. Boards need to constantly ask how fit is their board composition for the future? A good board balances past, present and future. The time for “Jurassic boards” populated with dinosaurs is over! Effective boards know that diversity does not come at the price of merit and that diversity without inclusion is simply a box ticking illusion. Effective boards are well equipped to deliver value in their four lines of sight – oversight, hindsight, insight and foresight.

3.      Effective board processes

Boards must have effective processes to ensure delivery on its past and present orientated roles, for example, oversight and accountability. This is just as important on its future focused value creation roles of strategy and policy. Some key board processes to focus on in 2021 include:

• Assurance: ensuring that things are as they are stated and that appropriate assurance, from unconflicted third parties and internally, is in place to ensure that the board is exceeding oversight expectations.
• Director specific: directors have seen recruitment, induction and engagement of new directors in a virtual world since March 2020. Many directors are sorely missing the ‘coffee, corridor and cab’ conversations that are lost in virtual meetings. Boards need to ensure that their director specific process of gap analysis, specification, selection, appointment, induction, review, succession planning and exit are not weakened by the move to virtual. There must be particular focus on the selection, induction and review processes to ensure that the board continues to be ‘fit for the future’.
• CEO specific: “leading light” CEOs have shined in the crisis while the weaknesses of CEOs who are “simply light” have been revealed. This is prompting increased board focus on robust, repeatable and objective approaches to CEO evaluation, performance, succession and transition.
• Risk and strategy: the pandemic revealed risk processes that were academic, impractical and in some cases simply unworkable. Too many boards were simply blind to critical business risks. This has prompted effective boards to challenge their understanding of risk and therefore their risk appetite. It has also demanded higher levels of board engagement in the inter-relation between risk, return and strategy in a COVID world.

4.      Relationships

Of the five drivers of board effectiveness, relationships and culture – the critical human factors – are commonly ignored by those that take a legalistic or process orientated approach. Effective boards ensure that their relationships support their role in stewarding the creation of value. The most important relationship in the governance system is between the CEO and the chairman, and in our experience one or the other will leave if this critical relationship is dysfunctional. However, the board must always look at the spectrum of its relationships and ensure relationships with management, between the board, with the company secretary and, in particular, with key stakeholders are effective and enable the success of the organisation.

5.      Culture

Many directors are struggling with culture. We see three populations on the boards that we work with:

• The Jurassics: they view culture as the latest fad which will pass like previous fads, for example, total quality management and mindfulness.
• The restless: they know that culture is important but just don’t understand or know what to do or how to deal with culture as a board.
• The effective enablers: directors that not only recognise the importance of culture but actively engage in shaping and directing it.

Which of these characterisations best describes your board?

Effective boards recognise that they are responsible as custodians of culture – keeping, protecting and nurturing the good things, the ‘assets’, in company culture. The second role of the board is to address where the culture is not appropriate and needs to change to meet current, let alone future expectations, and be ‘fit for the future’. Here the board serve as the “shapers” of the culture. Effective boards enact their role in culture by inspiring it, ensuring alignment, demonstrating authenticity by both reflecting and demonstrating the behaviours implicit in the culture, while guiding, encouraging and assuring themselves about it.

COVID has demanded three key success factors for effective boards – adaptability, courage and candour. Adaptability is the critical success factor for evolutionary success, and this is now demanded of our boards and businesses as we navigate the COVID age. It’s time for directors to be courageous in confronting reality, plus the need to adapt and evolve to ensure success. Finally, a culture of bad news coming more quickly to the board than good news is critical for candour, accountability, honesty and success.

Directors are familiar with the consequences of poor culture from misconduct in financial institutions through to the debacles where there was a major disconnect between the behaviour that was promised and what was actually delivered in organisations. This has led to governments around the world increasingly looking at legislating to make directors liable for company culture.

2021 will sort the wheat from the chaff. This will demand effective, high-performing boards and individual directors. Those boards that are weak in any one of the five drivers of board effectiveness will struggle. They will endanger the future long-term success and prosperity of the companies they lead. It is time for boards to urgently consider these five factors if they are serious about surviving, thriving and driving growth in these tumultuous times.

John Harte is an IoD Fellow and Managing Partner at Integrity Governance