These were among the key questions addressed by a major new report into boardroom performance, commissioned by Eversheds.
'The Board Report' analysed the performance of nearly 250 of the top companies in the UK, Continental Europe, the US, and Asia Pacific between January 2007 and December 2009. In addition to this quantitative research we also interviewed 50 directors chosen at random from the companies researched. We specifically chose this time frame to analyse the impact of one of the most trying times for business on board performance.
Our headline findings are that smaller, more independent and more diverse boards are more likely to be successful. We also looked at whether the financial crisis had redefined the role of the board, and subsequently, the roles of the people who make up the board. While over half of the directors interviewed (60%) thought that the substantive role of the director has not fundamentally changed as a result of the financial crisis, the focus has shifted onto how that role is performed. For example, one reason why directors believe smaller boards are more effective is because there is less likelihood of 'carrying' directors than may be the case with larger boards.
A common theme of our research is that big boards make it easier for ill-prepared directors to hide. The financial crisis has brought greater focus on the contribution of individual board directors. Many of those surveyed also believed that smaller boards resulted in a greater focus on the issues, better management from the Chair, quicker decision making and better overall dynamics between the board members. The majority of directors (63%) believe that the board is now multi-functional:
- Minders - overseeing management performance and guarding against the erosion of shareholder value at a strategic level
- Strategists - to test, challenge and agree the long-term strategy and support the management team in its day-to-day execution of the strategy
- Sounding board - a 'pool of experience' for management to draw upon if and when needed
- Hiring and firing - a responsibility to get the right management team in place
- Risk management - setting the company's strategic framework for risk.
The area of risk management raised a number of issues. Directors overwhelmingly agree that the board should be involved in risk management. A similar majority also believe that, despite recent commentary this is nothing new.
That said, risk is increasingly moving up the boardroom agenda, and the biggest development noticed by directors is that risk is now a significant part of their company's DNA. However, there is still considerable confusion about who inside the company should be responsible for risk.
While some directors thought that board involvement in risk was a sign of failed management, others thought that non-executives were solely responsible for risk. In order to tackle the area of risk and governance at board level, the following recommendations emerged:
- Ensure the company has an appropriate articulation of risk appetite
- Ensure proper systems are in place so the company can operate within that risk appetite
- Ensure the top 10 risks to the business are identified, and that each one is covered off by a member of the senior management.
One interesting finding concerns the role played by non-executive directors during the financial crisis. Many directors reported that there had been a 'power shift', with executive directors relying on the experience of non-executive directors more than previously. However, the general consensus seems to be that this also lead to a blurring of responsibilities and that this would not be a permanent change with many directors believing that the time has come for non-executive directors to 'pull back' and allow the executive management team to do their job. Even so, there was agreement that the role of the non-executive director has become more intense.
Today, the top two expectations of the non-executive director are to spend more time looking at the company's financials and gaining a thorough understanding of the company's business. The past two or three years have been a proving ground for many companies. It is important to learn from these difficult times and use the knowledge gained to make the most of the recovery as it strengthens through 2011 and into 2012. With this knowledge, boards of UK businesses and the roles of board members can be shaped to ensure that they prosper and are better placed to weather the impact of future downturns more effectively.
John Heaps is chairman at Eversheds
