In the spotlight: Board today, crew tomorrow

Rules beyond regulation

 

The public is increasingly sensitive to the effectiveness of boards of directors as an organisation’s supreme management and oversight body – especially the responsibility they bear when things go wrong. But the demands directors have to meet go way beyond mere corporate governance guidelines. High-performing boards now have to master the art of interaction and adding value by drawing on diverse beliefs and points of view.

Every year there’s one key event designed to get the adrenalin of board directors, executives and investors going: the presentation of the annual results at the AGM. More recently, the publication of zRating’s board of directors rankings in autumn has had a very similar effect. Covering more than 170 listed Swiss companies, zRating provides an objective and accurate assessment of directors’ corporate governance efforts. The importance of the rating shows that it’s not just what a board decides that is relevant, but how – something that was given relatively little attention in the past, but is increasingly seen as a key factor in board effectiveness.


The power of the team

A high-performing board of directors discusses all issues relevant to the business comprehensively from a wide range of perspectives – to the benefit of the company rather than the benefit of the board members. For this to happen, the board chairman

  • has to make sure that a range of opinions, a diversity of mindsets and approaches are represented
  • that the chair upholds a high level of decisionmaking competence and that the board is prepared to take timely decisions and stick to them
  • that all opinions are heard democratically, regardless of the person expressing them or their position
  • that groupthink doesn’t emerge (see box).

Groupthink: misdirected energy

Groupthink refers to a social process where a group of competent people makes poorer or less practical decisions because each person adjusts their opinion to the expected group opinion or the view of a dominant member (the so-called HiPPO: Highest Paid Person in the Office). This way the group can come up with compromises or actions that individual members would have rejected if left to their own devices. Groupthink underlies most crises and bad decisions: it deflects the momentum of the team and leads to the wrong choices.

The new corporate governance

An efficient management body has to do more than just comply with the guidelines laid down by law. It requires a new type of approach that capitalises on the potential of the diversity within the board for the benefit of the organisation (see Bruno Rossi’s article on Diverse forms of diversity). Besides nominal diversity, it’s also important for women to be elected onto influential board committees. Unfortunately, this is still rare.[1] That’s why we talk of a new corporate governance.

A diverse board has feelers it can put out in all directions to get a sense of what’s going on in terms of the market and target audiences, management and senior staff, employees and talent, products and services, developments and trends, technologies and tools, and opportunities and threats. This means that directors can’t withdraw to their ivory tower or delegate their responsibility for the company to the board chair and his or her deputy. Every member bears a high degree of personal responsibility.

For example, the issue of corporate and leadership culture is now squarely at the centre of attention, not least because of the #metoo debate. As PwC’s 2018 Annual Corporate Directors Survey shows, culture is becoming an increasingly pressing (and in some cases explosive) item on the board agenda. But an abstract debate on culture isn’t enough. All members of the board need to thoroughly inform themselves about how culture really manifests and is practised within the organisation, and what corrective measures might be necessary. The new corporate governance therefore has to be firmly established within the organisation, and the board has to recognise its role as the supreme corporate body – and act accordingly.

[1] A recent study shows, for example, that only 21% of NCCs and 18% of ACs of Fortune 500 companies are led by women (Kimberly A Whitler and Deborah A Henretta, ‘Why the influence of women on boards still lags’, MIT Sloan Management Review, Spring 2018)

Dynamic balance

There’s a unique ambivalence in the relationship between the board of directors and executive management. On the one hand, the board of directors is the company’s supreme body of oversight and control, and as such it monitors the operational activities of executive management. On the other hand, it has to actively cooperate with the management to jointly find solutions that will take the company successfully through good and bad times. For this to happen, it’s vital to have a good climate of trust where both sides work together as partners.

This balance isn’t static by any means, nor is it easy to maintain. Depending on the individuals involved, the economic situation and the direction the business is going in, the board of directors and management will operate more or less remotely from each other depending on the situation.

Perfect administration, strong leadership

It’s always possible to do better. The question is how. A thorough, objective review of the board and its committees can help make their work more efficient and effective. Here it’s important to distinguish between a board assessment and a board evaluation. An assessment involves appraising the quality of individual members of the board. The PwC mentioned study reveals that almost half the directors polled would like to see a change in the personnel composition of the board. In a board evaluation, the board and its committees are reviewed as overall teams, with no appraisal of individual members. This article focuses on this type of board evaluation.

The following five-step approach is recommended for a comprehensive board evaluation:

1. Self-evaluation

A comprehensive evaluation of the board and management begins with a self-evaluation, preferably done online by way of an anonymous questionnaire. This looks into the behaviour and processes of the board and the audit, nominations and compensation committees. The questions address key aspects of the dynamics within the board of directors. This includes its strategy, functioning, capabilities and knowledge, its network of relationships, the dynamics and culture of meetings, its composition, the flow of information, the quality of preparation and the time devoted to it, board effectiveness and risk management. The questionnaire is designed to support the board in a process of self-reflection. It shows what aspects have to be looked at and monitored. If managed by an outside party, the self-evaluation of the board can be compared with an appropriate benchmark for a useful point of reference. You’ll find a standardised questionnaire and helpful tips for doing a self-evaluation here.

2. Individual interviews

On the basis of the questionnaire, more in-depth interviews are conducted with all members of the board and selected members of the management. The guidelines for this dialogue are tailored and geared to the specific situation. It’s an opportunity to look at sensitive issues or points of criticism that have been raised in more depth. This is the place for getting to the bottom of the reasons for any negative feedback in the questionnaire and working out whether these are individual issues or group phenomena. Face-to-face exchange is a good way of going into depth and reading between the lines.

3. Attending meetings

For another source of information allowing a clear picture of the board of directors, it’s worth having an external expert sit in on one or more of its meetings. Dynamics, behaviours and power relationships emerge most clearly in real-life leadership situations. Having an external specialist sit in adds an objective outside view to the board’s perception of itself. It’s not uncommon for there to be a gap between these two perceptions. Even just talking about such gaps can be a valuable enrichment for the board.

4. Report

The results of all these steps are processed and presented in a clear, comprehensive report. The main findings are broken down into different categories: size of the board, meetings, committees, chairman, effectiveness, composition, cooperation between board and management, stakeholder management, abilities and training, ethical principles, diversity, and risk and crisis management.

The report also contains a range of activities designed to help those heading the company to eliminate weaknesses and become more effective. Here specific topics are also addressed, including the necessity of getting more people with experience and knowledge in areas such as cyber-crime and digitalisation[1] on board.

Figure 1: The findings of the evaluation should cover a range of positive and critical points.

5. Best practice

The final report should provide best practice tools to facilitate concrete action in the main areas that need to be addressed. These tools bring together insights from research and a wealth of board practice from Switzerland and abroad, plus many years of experience in conducting board evaluations. The best practice section of the report suggests approaches and models that have worked in practice, and may include successful leadership models, regular surveys[1], boardroom apps and other practical aids. For example, best practice can help the board define its role in setting the strategic agenda[2], review its performance on a regular basis and hold more effective meetings.

[1] Executive Compensation & Corporate Governance, Insights 2018 (Part 3)

[2] Roger Martin, ‘The Board’s role in strategy’, HBR, 28 December 2018

Five-step process for the evaluation of the board of directors

Demanding but worthwhile

Evaluating the board and its committees is crucial to achieving continuous improvements in the strategic work done by directors. Ideally an evaluation should be done by an external specialist to keep the responses as open as possible and allow an unprejudiced assessment. The example of Sunrise (see the interview with Peter KurerChairman of Sunrise Communications AG: ‘Regular board evaluations are a key tool for good corporate governance.’) shows how a professionally managed evaluation can yield deep insights into the way a board functions and interacts and the value it adds.

Read more

You’ll find more information and tools related to this topic here:

  • PwC’s Boardroom Community App (in German): > more
  • Study: The evolving boardroom – PwC’s 2018 Annual Corporate Directors Survey:
    > more
  • Guide to conducting effective board assessments: > more

Contact us

Beat Rütsche

Beat Rütsche

Assurance Partner, PwC Switzerland

Tel: +41 58 792 7400