A recent article in the Journal of Accountancy, "Building a More Effective Board," points out problems with many boards of directors.
This was their overall conclusion:
Directors aren't fully confident that they have what it takes to tackle the challenges, manage risks, and focus on long-term strategic goals, according to surveys the Stanford Graduate School of Business and the National Association of Corporate Directors (NACD) conducted with more than 800 participants in 2016.
Here are some conclusions of concern:
- Only two-thirds (68 percent) of board members … say they have a high level of trust in their fellow directors or in management.
- The average board member believes that at least one fellow director is not effective and should be removed from the board.
- Fifty-three percent said directors do not express their honest opinions in the presence of management.
When you add concerns raised in other surveys, such as directors not fully understanding the organization's strategies and related risks, or not feeling that they receive the quality information they need when they need it, it is clear that this is something that should worry practitioners, regulators, and stakeholders.
But what needs to be done?
The author of the article correctly suggests that boards need to have periodic (IMHO, at least annual) self-assessments that not only address the board and its committees, but individual directors.
That is not enough.
The board needs to have the strength, led by the chairman or lead independent director, to fire non-performing directors. Too few can do that.
It's not a matter of process, as the article asserts. It's a matter of courage, the ability to tell a friend that they need to leave the board.
I also think it should not be the CEO that sacks a director. That confuses who reports to whom. The CEO should not be able to get rid of a director that stands up to him. It should only be the board as a whole that can dismiss a director.
Another issue for me is that the board seems unwilling or unable to act if and when they have a problem like those discussed above.
Whose fault is it if the board doesn't have full trust and confidence in management but does little about it?
Whose fault is it if the board doesn't get the information it needs about strategies, risks, or performance — especially if that state continues?
Whose fault is it if the directors don't get the training they need?
Whose fault is it if the board is ineffective in their oversight?
It's their own fault if they fail to use their authority to demand and ensure change.
The chairman or lead independent director should own the responsibility for the effectiveness of the board.
Can a risk practitioner do anything about this? In practice, it would be rare. But if the chief risk officer reports directly to the board and is independent of management, perhaps he could diplomatically raise any issues with the lead independent director and provide advice on solutions.
Can an internal auditor do anything? Yes, I believe so.
For a start, the chief audit executive (CAE) can work with the board or governance committee to ensure a robust self-assessment process. He or she can also help individual committees, such as the audit committee, with their self-assessment.
The CAE can also assist with director education. See this earlier post about my work with the audit committee at Tosco Corp.
Finally, if the CAE can see issues with the board's effectiveness, I believe he or she should have a confidential discussion with at least the chair of the audit committee, probably with the CEO, and perhaps with the lead independent director.
What do you think?
Can you share any stories where board effectiveness has been improved by actions taken by practitioners?
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