Enhance board effectiveness to acquire a competitive advantage

Source– The post is based on the article “Enhance board effectiveness to acquire a competitive advantage” published in the “mint” on 4th September 2023.

Syllabus: GS4 – Corporate governance

Relevance- Issues related to board of company

News– The article explains the the essential element to boost the effectiveness of the board of a company

What are some facts about the board of a company?

It pertains to the individuals who have been ‘chosen to oversee a company on behalf of its shareholders.’

Traditionally, boards have primarily emphasized conformity with regulations and rules. Recently, they have also emphasized transparency and the principles of corporate governance.

What are the ingredients that are critical for enhancing the effectiveness of a company’s board?

Familiarity with the Context: It is essential that they possess a good understanding of the business context.

Implementing a structured induction plan for board members is crucial. The operational team should provide them information about the company’s purpose, strategy, and values.

It is vital for the board to gain insights into the company’s performance in comparison to its competitors and engage with industry experts.

This process equips board members with the necessary background information for company discussions and decisions. It enables them to apply their expertise within the appropriate business context.

Clarity of Roles: The board’s role, beyond the regulatory responsibilities, encompasses owning the corporate strategy, risk oversight, succession planning, and guiding the management.

It is imperative to establish a deliberate and limited overlap between the board and management roles. It should be clearly defined.

The effective practice  involves creating role descriptions, identifying areas of overlap, and then establishing clear agreements within the board, CEO and management team. This process should be revisited annually.

The selection of the right team, starting with the CEO, is likely the most pivotal function of the board.

Composition of the Board: Alongside role clarity, the composition of the board is a pivotal factor in determining its effectiveness.

A diverse and relevant blend of skills, experiences, and perspectives significantly enhances the decision-making process.

The initial step involves clearly identifying the capabilities and experiences required by the company. Subsequently, establishing a distinct board-member value proposition is crucial.

Board composition should be viewed holistically, as a team with complementary individual capabilities that can function effectively when working together.

Conduct of Meetings: The practical aspects of conducting board meetings play a significant role in enhancing board effectiveness.

Considerations include the frequency of board meetings, time allocation during these meetings, and the quality of board discussions.
There is a need to ensure that the same voices don’t dominate every time, and the management team feels challenged and motivated, rather than criticized and demoralized.

Some effective practices include involving all CXOs in board meetings, shorter presentations, conducting structured briefings by committees to the entire board, and delivering periodic updates on business performance to the board between meetings.