From good to great boards
By Adrian Chan
The Business Times, 21 November 2016
Last week’s article (“Assembling a good board”, BT 21 November 2016) examined how to go about constructing a good board, a job that may possibly be the most mission critical factor in the long term success or failure of a company.
But that should only be the start. How the board functions and works, and how individual board members adjust to board culture, is equally important for it to be a truly good board.
Every board, even good ones, should work towards becoming great. In that sense, great boards are always a work-in-progress. Among the measures that great boards continually work on are:
- Understanding the life cycle of the business to ensure that the board is fit for purpose.
- Progressively renewing the board.
- Effective board and director assessments.
Fit for purpose
No single board can be the right fit for every company and situation all of the time. Boards should be “fit for purpose” - meaning that the directors collectively represent the best mix to take a specific company forward at a specific point of time.
This requires that the board first understands the business cycle and strategic goals of the company.
Where, for example, is the company in its life-cycle? Is it in the seed or start-up phase, where the challenge is to secure market acceptance and ensure the viability of the business structure? Or is it in the growth phase, where the focus is the taking of market share? Perhaps it is in the rapid expansion phase, where growth is into new markets, territories, distribution channels or business models? Or is the company in the mature phase, where the business has stabilised? Might it now be in crisis mode, where the very survival of the company is at stake?
As a company moves through these separate phases, the risks and challenges it faces will be different. The board, led by the chairman, decides the direction in which the company is headed, both in the medium to long term. In turn, this enables a clear and definitive vision and mission to be set, as well as the company’s subsequent strategic goals.
These considerations present different demands on boards and their composition. For example, a young, start-up company should have a board that is lean, and filled with directors who are used to multi-tasking. They need to be comfortable with risk-taking and be focused on ensuring that the company’s business model is nimble and adaptive enough to survive the buffeting forces of a volatile, fickle market-place.
On the other hand, a company in the rapid expansion phase may need a board of mature, experienced directors who are well versed in navigating international waters and geographies, and who can tap into an extensive network of contacts for the company’s benefit.
A really good board is one that is not just suited for the company at its particular phase of development, it is also never static. The pace of change in this volatile and unpredictable world is accelerating and business cycles are compressing. A board member who is a right fit for the company today, may not be so in a few years with a change in circumstances.
Refreshing the board should be a carefully planned process over the medium to long-term. Preferably, it should be planned on a staggered basis to avoid the instability and uncertainty that comes when a large number of directors leaves or joins the board at any one time. Progressive renewal calls for new members to come on to provide the needed fresh perspectives while ensuring a continuity of directors with a deep understanding of the company.
The chairman of the company should work hand in hand with the chairman of the nominating committee to conduct an annual review of the expertise and knowledge the company needs to expand and grow to the next level.
To that end, good boards always have potential board candidates on their recruitment radar. They invest time to cultivate these contacts. The process is continual and proactive.
Board and director evaluation
In a way, board renewal is related and linked to the evaluation of the board and its directors. Effective board evaluations can help the nominating committee to discern the weak links on the board, and to more precisely fill the skills gaps. At the same time, they can help the directors individually and collectively reflect on how they can improve the functioning of the board and boardroom dynamics to be a great board.
Board and director evaluations are hard to do objectively because they involve a great deal of self-assessment. It is for this reason that the UK Corporate Governance Code requires all FTSE 350 companies to have their board evaluations externally facilitated at least every three years.
To recap, there really can never be one perfect board for all seasons. The ideal board is one that continually evolves as the company grows and its circumstances change. Directors should, therefore, always take the long-term view, and plan for their own succession.
Adrian Chan is the Deputy Chairman of the Advocacy and Research Committee of the Singapore Institute of Directors.