There is no doubt, the Enron and Worldcom scandals over a decade ago left their mark. In the intervening years, greater attention than ever before has been paid to the regulations, standards and initiatives of corporate governance of which Sarbanes Oxley and the OECD’s ”Principles of Corporate Governance” are amongst the best known. Corporate Governance is now a firm fixture in the mainstream media and consciousness. Yet is this increased focus on compliance stultifying truly effective board behaviour?
Heidrick & Struggles, the search and leadership firm, has been analysing the composition and behaviour of Europe’s 400 biggest listed companies since 1999. Its latest corporate governance report, Towards Dynamic Governance 2014, now calls for a radical change in board behaviour. They argue it is time for boards to embrace a new era of agile dynamic governance.
Towards Dynamic Governance is built from qualitative – a survey of over 230 board members across Europe, and quantitative research, and confirms that the mentality of the board is integral to the culture and performance of the business. An agile and resilient board imparts this spirit to the whole company. And while compliance is unavoidable, first-class governance encompasses a much broader range of components. The report identifies six key characteristics of dynamic governance.
Deep business knowledge
Every member of the board should understand the commercial DNA of the company. Without such an understanding, board members fail to hold the executive management to account. One interviewee told Heidrick & Struggles that a board member should possess an ‘inspect, don’t expect’ mentality. Non-executive directors must put effort into getting to know the company; they must be familiar with the workings of the company and the line between non-executives and executives must be upheld.
Diversity of thought
A dynamic, outward-looking board should reflect the diversity of the external environment. If that environment is not male, pale and stale, then the board certainly should not be either. A board with diverse skills and experience will be more adaptable.
Yet while 63% of board members in Towards Dynamic Governance 2014 rated a diverse gender and nationality mix as being important for board effectiveness, the proportion of women on European boards remains low at 17%. And while there has been progress in some areas – the proportion of non-national directors on boards is 30%, up from 23% in 2009 – many boards still have much work to do. Attracting and selecting diverse candidates is essential, but the process should be meritocratic, not diversity for diversity’s sake.
The chairman needs to have a productive and supportive relationship with both the board and the CEO. The chairman must be familiar enough with the everyday functioning of the company that he or she can ask the right questions of management, but they must not interfere. Providing dynamic leadership demands time and it is encouraging that the amount of time given by directors to board service has increased from an average of 155 hours per year in 2003 to 215 in 2013.
Strategic alignment and execution
Research has found that 85% of UK board directors cannot pinpoint or agree between themselves how their own firm is differentiated from its competitors. Heidrick & Struggles also found that chairmen and CEOs often don’t agree on how the company is or should be performing. And yet the board should be able to explain the agreed strategy so that stakeholders rally around it.
For a strategy to be successfully nurtured through to execution, there needs to be consistency of personnel. Towards Dynamic Governance 2014 found that the average number of years spent on a board is increasing. Directors now spend around 7% longer on boards than they did in 2011.
The challenge for boards is to maintain strategic momentum in the face of low board turnover. The Heidrick & Struggles Board Monitor, which tracks board trends in the Fortune 500, found that the number of new directors appointed over the last four years averages at 317, a turnover rate of only 6%.
Capacity to adapt
In order to make informed decisions, boards must keep pace with rapid market and strategic changes. They need to strike a balance between resilience and flexibility and do their best to future-proof the company.
63% of board members feel that their board is ‘satisfactory’ in innovating and adapting. Towards Dynamic Governance 2014 found that businesses with a skill for adaptation typically have a thorough understanding of their core capabilities and innovate by investing in new skills.
At the core of effective governance is the need to identify and develop talent. Boards must take a long view and plan for the future. 92% of respondents told Heidrick & Struggles that engagement in succession planning was important to them. This consensus is encouraging. Unfortunately, only 55% considered their own board’s performance to be satisfactory.
An earlier study by Heidrick & Struggles and Stanford University found that on average, boards spend only two hours per year on CEO succession planning. Considering the complexity and sensitivity of such discussions, this suggests many boards are failing to adequately plan for the future.
Performance evaluation will help boards to maintain their dynamism. Heidrick & Struggles found that 70% of companies undertake an annual board performance evaluation and only 16% never do. Appraising behaviour should go hand in hand with identifying and nurturing talent; together they ensure that the board remains vital and progressive.
For some boards, change may be a daunting prospect, but a dynamic board is the keystone for success in an evolving business world. Corporate scandals have naturally resulted in more stringent regulation but that should not mean the board forgets how to challenge and adapt. Increased scrutiny should galvanise boards to evolve, and they should change because they want to be better, not simply because they are under pressure to conform.
Will Moynahan, Managing Partner, London, Heidrick & Struggles