Better Boards: Who Evaluates the Evaluators?

Better Boards: Who Evaluates the Evaluators?

by
Professor Randall S. Peterson and Christine de Largy

Academic Director of London Business School's Leadership Institute; Largy is UK chair of Harvey Nash's Board Practice

Boards play a critical role in guiding and evaluating the executive team and their strategy. But who is responsible for guiding and evaluating the board itself? New research suggests many boards are ‘marking their own homework’.

Research conducted by Harvey Nash, in association with London Business School’s Leadership Institute indicates that almost half of boards (49 per cent) have not had an external evaluation in the last two years, and over a quarter of boards have never had an external evaluation. This figure rises to 45 per cent for Asia.

Boards that don’t operate well together cannot monitor their business effectively and may make mistakes that negatively impact results, miss critical opportunities, erode organisational reputation, and/or trigger phenomena that can have negative impact on the world at large.

Properly conducted board evaluations can bring tremendous benefits and improve performance, which is why regular, formal evaluations, which delve deeply into culture and expertise, are now recommended by many governing and advisory bodies across the world.

Rigorous and regular evaluation though, is only the start of the journey toward better boards.

Effective boards need to embrace many perspectives in order to anticipate change, be agile in response to change, and work together effectively to manage change. Our research suggests that boards are struggling to achieve those varied perspectives. Here are three reasons why.

1. Board appointments still made within closed networks

Companies are not always casting their net wide enough to appoint the best candidate, with just over half of all respondents (53 per cent) saying new non-executives appointed are already known to the organisation. This is especially true for the APAC region where 69 per cent of all appointments went to a known candidate and only 33 per cent were subsequently formally assessed (in comparison the UK formally assessed 67 per cent of known candidates).

More than a third of all chairs questioned were either dissatisfied, or neither satisfied or dissatisfied, with the board appointment talent pool. External search firms can be a highly effective way of accessing a wider talent pool, yet many boards are still choosing to leverage only their contacts within limited, closed networks.

2. Groupthink

An effective board requires new perspectives and skills to meet the challenges of the 21st Century business, from market instability and digital disruption to global competition. Board members and chairs particularly, should expect to be challenged in their thinking and be open to alternative viewpoints.

Having a diverse board, which includes varied dynamics and different, constructive, personal behaviours, is one way to introduce new perspectives and ensure an effective group function. And yet worryingly, 51 per cent of board members do not feel addressing diversity on their board is a concern.

When it comes to widening boardroom diversity, gender balance has been pushed into second place behind functional expertise – expanding the skills and knowledge of the board beyond the traditional stalking grounds of finance and strategy.

Term limits, the length of time a board member is expected to serve, differ across the globe. However the consensus is that independence is impaired with length of service and the introduction of new perspectives and skills to the board are essential. Limits to the number of boards a plural can serve on are essential, as the responsibility of corporate governance is time consuming and requires focused dedication.

3. Critical gaps in induction and succession planning

Almost nine in ten respondents report that when being appointed their assessment process could have been more rigorous. Subsequently this often results in a poor induction process.

Every new board member should undergo a formal on-boarding process. They should be provided with a clear definition of the role from the organisation’s point of view, and they should understand what on-going development can be expected.  Most importantly though, they should also understand what their unique contribution to the board will be, and be able to articulate it. Research by Dan Cable, Professor of Organisational Behaviour, London Business School, shows that a clear understanding what your individual contribution to the organisation will be is critical to the very best on-boarding.

Succession planning should be an on-going process. Boards should be continually reviewing their composition through evaluation and forecasting future skills gaps, at least three to five years ahead.

Toward a better standard of boardroom governance

To create better boards in the era of disruption, we need to hold ourselves accountable to the highest board governance standards. Unsurprisingly listed companies lead the way (two-thirds commit to regular evaluation), followed by the closely scrutinised Charity sector.

Only half of all family-owned businesses have completed a board evaluation. This corroborates the low-levels of take-up in Asia Pacific where many companies are family or privately owned. Asian companies have been broadly criticized for their board governance structures, often dominated by top-down family influence. Many of the senior patriarchs leading these companies are now passing the reins to the next generation, making it imperative that modern, stringent governance standards are implemented.

Our research suggests significantly more uptake of best practice is needed to raise board governance standards worldwide. There are pockets of good practice, but to really transform the boardroom and ensure every board reaches its fullest potential, good practice needs to become standard practice. And the potential rewards are high. Well-functioning, diverse boards collaborating effectively can create real and lasting value, for organisations and society at large.

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