Enhancing Board Effectiveness – five factors to consider

Enhancing Board Effectiveness – five factors to consider

As stakeholder expectations and scrutiny of Board effectiveness increase, there are five key factors which Boards across the sector should consider.

Expectations with respect to Board effectiveness continue to evolve based on a number of drivers. This includes Central Bank of Ireland (‘CBI’) guidance, regulatory findings issued directly to firms, various corporate governance codes and standards and, in some instances, as a result of Boards’ self-evaluation processes. Consequently, firms are seeking to enhance their Board governance and look to good practice across the financial services sector. This is a trend expected to permeate throughout the sector, including funds, management companies and their service providers.

In this article, we discuss five key factors organisations within the investment management sector should consider when assessing Board effectiveness.

Key factors to consider

An effective Board is one that ultimately understands its key responsibilities, is comprised of the right members, led by a strong chair and has the right dynamics in place. These factors are underpinned by robust governance structures and Board processes. Organisations and Boards need to review and challenge Board structures, processes and behaviours on an ongoing basis to consider if these are fit-for-purpose and truly promoting Board effectiveness.

For a Board hoping to enhance its overall effectiveness, the following areas are key factor for initial consideration:

  1. Role of the INED - INEDs have a responsibility to actively contribute to the Board’s overall success, bringing valuable insights and independent perspectives from their experience. In assessing independence of INEDs, the Board should focus on an individual’s ability to focus on the local entity and challenge the views of management without the presence of personal, professional or financial ties with the organisation or associated parties. The tenure of INEDs is also an important factor, with good practice indicating that a tenure beyond nine years deems an INED no longer independent. The CBI has previously raised concerns with ‘overboarding’ in the sector and INEDs having too large a portfolio of directorships and insufficient time to commit to them.
  2. Boardroom dynamics - A good Board should have effective boardroom dynamics which are characterised by the Board being open, cohesive and respectful, with the right balance of trust and challenge. Challenge is particularly important. There should be breadth and depth of challenge provided by all Board members and for this challenge to be evidenced in the meeting minutes. Board members should feel comfortable challenging a wide variety of issues and avoid developing “pet topics”. Challenge should not be perceived as a personal attack and instead understood to be an important feature of good governance. One or two Board members should not dominate boardroom discussions. Conversely, Board members should balance their responsibility to challenge and question with the Board’s role in encouraging, guiding and supporting executives in achieving the firm’s objectives. Where challenge has become too adversarial, Board members will note executives are less open, less willing to share ideas or innovation and are fearful speaking up.
  3. Chair’s leadership - The leadership style of the Chair is critical to Board effectiveness. The Chair has ultimate responsibility for ensuring the Board is effective in discharging its role. The Chair should take a leading role with respect to good governance practices on the Board, to include oversight of Board composition and succession planning, promotion of stakeholder engagement, Board process improvements and ongoing Board evaluation and development. Importantly the Chair should drive the Board agenda, ensuring a balanced focus on all responsibilities within the Board’s remit. In practice a number of Board’s struggle to ensure appropriate focus on topics such as strategy, culture and talent matters as regulation and compliance is often prioritised. A strong Chair will ensure that these topics get sufficient discussion at a Board level.
  4. Fit-for-purpose governance structure - Having a robust, underlying governance structure is a central component of Board effectiveness and overall good governance practices as it supports the flow of information, enabling effective decision-making at Board level. Boards should ensure that individual and collective responsibilities are clearly documented and communicated to relevant stakeholders. An effective Board should be supported by a fit-for-purpose Committee structure which has the correct number and type of Committees that aligns to the Board’s needs and key priorities. While Audit Committees remain the most common Board Committees within the investment management sector, more and more Boards are choosing to establish Board Risk Committees to allow for detailed oversight of the firm’s risk management governance and processes and Nomination Committees to oversee Board composition, evaluation, appointment and succession planning processes.
  5. Performance evaluation - As expectations in relation to Board effectiveness increase, so too should each Board’s approach to performance evaluation. Various codes and guidance require Boards to undertake an annual review of their own performance and that of their committees and individual directors. It is also good practice (and a requirement in some sectors) to supplement this with an external review every three years or where the Board or firm has experienced a period of significant change. The scope of Board performance evaluations should go beyond structures and process to tackle the softer aspects of Board effectiveness discussed in this article such as dynamics and behaviours. The output of the review should result in tangible actions and objectives which are subject to tracking and follow-up throughout the year. While Board performance evaluations are becoming more commonplace in the investment management sector, there is further work to do to enhance the process and action the outcomes.

Other factors to consider

In addition to the key factors highlighted in this article, the Board should consider the following additional good practices:

  • Outcome focused – the Board assures itself that key decisions have been implemented and have had the positive impact that was intended;
  • Skills and experience – the capabilities of the Board are continually reviewed to ensure there is a broad and diverse mix of skills and experience on the Board;
  • Highly engaged – the Board has a good understanding of its stakeholders and when making decisions, the impact and consequences on all stakeholders are considered;
  • Information – the information provided to the Board provides insight and analysis, as well as forward looking information.

Board effectiveness will continue to be a key area of focus in the investment management sector throughout 2020 and beyond. Good practice expectations in this area will continue to enhance as stakeholder scrutiny includes more and more companies across a wide scope of governance topics. Boards can no longer avoid prioritisation of a robust evaluation process and thoughtful consideration of its collective and individual effectiveness in discharging its key responsibilities.

Sinéad Barry, Manager, Deloitte

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