Change is underway in corporate boardrooms. Boards are becoming more proactive in addressing the rapidly shifting external environment, and they are focusing more sharply on driving value creation agendas with their management teams. Rather than sitting back on their heels and playing defense while activists, potential suitors, governance groups, regulatory agencies and other parties take aim, high-performing boards are going on the offensive and shifting their governance structure, operating practices and cultural norms to accelerate value capture.
High-performing boards excel in three key areas. Most importantly, they help build high-performing companies—those enterprises that generate and then sustain a value creation advantage over their competitors. They also recognize potential brand and reputational risk and pay close attention to the company’s social and environmental responsibilities, while in parallel setting high standards for corporate governance leadership.
I launched a research initiative in 2010 to answer the question of which governance attributes and practices define these high-performing boards. The study eventually involved the participation of more than 150 U.S. and European board leaders from both public and private companies, including private equity portfolio investments. The goal was to identify the central elements that differentiated high-performing boards from those that struggled during, and then immediately following, the 2008 global recession. Activist investors seemed to be making the same assessment, as they ramped up their attacks on complacent boards in the U.S. starting in 2010, targeting larger market-cap companies. Small groups of board leaders were engaged in candid and confidential discussions on what had worked well, and what had a negative impact on board performance. Most apparent in these discussions was the critical role board leaders played not only in driving the board’s own performance through the turbulent times, but also in creating an environment that promoted high-performance from the CEO and the senior leadership team.
When distilling the research findings into key board performance drivers, as shown in Figure 1, it is evident that structural attributes such as board size, the range of expertise among members, and committee design significantly impact board performance. Operationally, the established expectations for individual director contribution, and the core practice of building an annual board meeting agenda cadence linked directly to the most important value creation decisions, prove to have a strong influence on the quality of the board’s work. Culturally, the ways in which directors interact with each other and respect their peers’ contributions, and how the board engages with the CEO and senior team, set the tone for making difficult trade-offs that will ultimately drive long-term value creation. In addition, maintaining an open and transparent relationship between the board and management will ensure that unplanned events and external shocks are rapidly addressed—a capability that is increasingly important in our 24/7 globally connected world.
The transition to a high-performing board is a bespoke process tailored to fit the unique structural, operational and cultural factors that impact company performance. The starting point is a rigorous self-assessment, followed by a reset of performance expectations to ensure that the board’s work is fully aligned with the future success of the company, as shown in Figure 2.
Embedding high-performing team attributes into the board improvement process is the next priority. As discussed in Teams at the Top and The Wisdom of Teams1, high-performing teams comprise a small number of people with complementary skills who are committed to a common purpose, set of performance goals and approach for which they hold themselves mutually accountable. Board members who do real work together either in established or ad hoc committees, on special management-led initiatives, or as part of a CEO succession or strategy development process, tend to move more rapidly into a high-performing team mode, especially when the board has a culture of mutual accountability.
High-performing board leaders also leverage self-assessment insights to unlock specific full-board and committee improvements that align the most important enterprise value creation priorities with the board’s own development plan. The objective is to closely link the board’s capabilities and work practices with the company’s near-term value capture agenda, with provision for regular external board engagement and ongoing shareholder communications.
From my experience, transitioning to a high-performing board only occurs when the board leader has full ownership of the process. With success, the board not only becomes a strategic asset for the CEO and the leadership team, but also a competitive weapon for the company. Directors should not feel they are constantly “on the hot seat,” buffeted from all sides by outside forces for which they are unprepared, but instead are driving the value creation agenda with the CEO and, in effect, taking the ammunition away from activist investors.
1. Teams at the Top, Jon R. Katzenbach, Harvard Business Review Press, 1998. The Wisdom of Teams, Jon R. Katzenbach and Douglas K. Smith, Harvard Business Review Press, 1993.