Quality at the top: preparing boards for the future

February 2025  |  FEATURE | BOARDROOM INTELLIGENCE

Financier Worldwide Magazine

February 2025 Issue

Good governance supported by high quality decision making at the very top of organisations is central to their success. It drives commercial performance and fosters a culture of positive social impact and economic value creation. But boards can fall short – typically in the areas of risk oversight, strategy, integrity, and selection and support of the chief executive and other senior executives.

For directors, expectations and responsibilities seem to increase almost every day. Boards must be cognisant of the bigger picture as the global economy continues to shift and technology plays a greater role in governance.

Making boards more effective is crucial to improving governance. In a world of geopolitical conflict, division, and social and economic uncertainty, boards need to adapt governance practices to anticipate and confront the challenges that lie ahead, and steer their organisations with clarity.

It is critical that global leaders advance their understanding of how boardroom performance can drive organisational performance, and improve outcomes for stakeholders.

An effective board ensures the company is properly governed, strategically positioned and can make informed decisions that create long-term value for shareholders. To achieve these goals, the board must manage the organisation at a strategic level and lead it through adversity.

Strategic oversight, whereby the board defines long-term objectives, undertakes performance monitoring and changes direction where necessary to meet business goals, is central to the board’s mission. It should also create a culture of accountability, diversity and ethical leadership.

Disruption and challenges

Today, there is an emphasis on better boardroom performance, marked by higher levels of external scrutiny. But companies are contending with significant challenges arising from macroeconomic uncertainty, geopolitical tension, regulatory unpredictability, political polarisation, culture wars, cyber security threats, the climate crisis and resultant energy transition, and the growth of generative artificial intelligence (AI).

Going forward, AI could have the most impact on company value. According to PwC’s 2024 Annual Global CEO Survey, 70 percent of CEOs said they expected generative AI (GenAI) to “significantly change the way their company creates, delivers, and captures value in the next three years”.

As GenAI capabilities develop, board members will need to understand its potential, as well as its pitfalls. This may include appointing technical experts with knowledge of AI. When rolling out GenAI across a business, the board will need to provide oversight that balances the expected upside with appropriate guardrails. This includes incorporating GenAI into the company’s risk management strategy and creating responsible use policies.

Regular assessments

To respond to AI and other challenges, companies should futureproof their boards to cope with emerging threats and opportunities. Boards must actively engage as strategic partners to management and deploy their best judgment to help set priorities and balance competing interests and goals.

Boards are expected to navigate choppy waters, but too often are ill-equipped to meet the challenges. Their effectiveness, which has a significant impact on an organisation over the long term, is an area of concern. To be effective, boards must be carefully curated and crafted to comprise a group with the requisite backgrounds and skill sets.

Boards need the right people, with the right skills, in the right positions, within the right structure. They need to be assessed for any competency gaps in their composition. In this way, board assessment processes are a means to drive and effect change.

The assessment process should leave no stone unturned. Key areas to consider include fulfilment of duties, adherence to governance principles, contributions, engagement and attendance. Strengths and weaknesses should be identified and addressed with clear, actionable recommendations and plans for improvement.

Assessments should be conducted to evaluate not only the performance of individual directors, but also of the collective group. By creating a culture of continuous improvement, supported by regular assessments, companies can track progress, adapt to market changes and maintain board effectiveness.

The assessment itself is a structured evaluation aimed at reviewing the performance, processes and overall effectiveness of a board of directors. It ensures the board is operating at its peak efficiency, and is aligned with the organisation’s wider goals and strategic objectives. An assessment may also highlight transparency and governance practices, as well as target continuous improvement, to cement the success of the board and the organisation’s health.

A board assessment generally begins by setting out the assessment methodologies, including peer reviews, personnel interviews and questionnaires. Typically, a lead assessor is assigned to oversee the process, which could be the chair of the board or an external, expert consultant. Prior to commencement, the company and the lead assessor should identify key topics, such as board composition, diversity and skills, quality of meetings, and succession planning. The assessment is then carried out by collecting data via the chosen methods, with particular importance attached to honesty and preserving the confidentiality of responses.

Once the assessment has been completed, the results should be analysed and strengths, weaknesses and areas for improvement highlighted. Results are then reported back to the board, with recommended action plans and proposed changes to enhance the board’s effectiveness. By adopting this comprehensive approach, a board can evolve and adapt to the shifting needs of its organisation.

Too often, however, assessment processes are overlooked. According to PwC’s 2024 Annual Corporate Directors Survey, though many directors are critical of their peers, they often do not use the board assessment process to initiate changes. While 49 percent of corporate directors surveyed felt someone on their board should be replaced, 42 percent indicated their board did not make changes following their last assessment. This needs to change.

Recruitment and succession planning

During recruitment and succession planning, organisations need to ensure they bring in people who possess the desired skills but also share the board’s values, vision and commitment. Diversity generates further diversity as directors experience its value.

In a tight and challenging recruitment landscape, organisations should create clear expectations and guidelines with director recruitment firms.

There are also cultural issues in play, with a shift toward appointing board members from different backgrounds, cultures and experiences. In 2023, 67 percent of new directors were diverse (defined as women, underrepresented minorities or LGBTQ+) compared to just 38 percent in 2013, according to the US Spencer Stuart Board Index.

Greater diversity in the boardroom is set to continue. Moving beyond the existing ‘old boys’ networks is an integral part of this process. Indeed, EY found that the percentage of S&P 1500 boards with three or more women increased from 35 percent in 2019 to 68 percent in 2023.

Leading boards are discovering that having diverse perspectives in the boardroom is positive for decision making and effectiveness. It also appeals to stakeholders, including investors. According to a January 2024 EY Centre for Board Matters review of the publicly available proxy voting guidelines of the world’s 20 largest asset managers, diversity is considered in 88 percent of director voting policies. When boards fail to meet those expectations, nominating and governance committee members may face opposition to their re-election.

There are also regulatory imperatives pushing diversity. Boards are becoming more representative and inclusive in response to various regulations issued by regulatory bodies as well as stock exchanges in various jurisdictions. The NASDAQ implemented listing standards requiring listed companies to either include at least one female director and one director from an underrepresented group on their boards or disclose their failure to do so. Although that rule has been invalidated by the US Court of Appeals for the Fifth Circuit, it had already had a substantial impact on board diversity practices. Likewise, the European Union has introduced legislation which will require big firms to make sure that at least 40 percent of their non-executive board members are women by 2026.

A driving force behind these legislative developments is the desire to address the underrepresentation of women and minorities in corporate leadership. By setting explicit diversity targets, spurring companies to widen their search for board candidates and increasing the variety of perspectives and experiences within boards’ decision-making processes, the intention is to not only serve the principles of fairness and equality, but also enhance the overall effectiveness and innovation of boards.

Culture, technology and training

Beyond just assembling a strong board, attention must also be paid to developing the right culture. A boardroom culture that invites listening ultimately leads to better decisions.

Investing in training also helps equip board members to deal with the biggest challenges of the day. Training sessions may cover aspects such as change management, emotional intelligence and boardroom technology.

Boardroom training adequately prepares boards to take on their governance role. It improves the efficiency and effectiveness of board members to manage complicated business situations and enables them to make informed, value-generating decisions. Investing in boardroom training should result in better-performing boards that can achieve goals and handle challenges along the way.

Additionally, boardroom technology solutions can provide tools to streamline day to day tasks, and improve more complex governance processes. It is revolutionising the way boards of directors operate, making meetings more efficient, secure and collaborative. Digital tools can enhance governance practices, streamline decision making and adapt to business complexities. Digital board portals, for instance, offer boards a secure platform for accessing meeting materials, agendas and documents from any location, fostering real-time updates and seamless communication. Virtual meetings, enabled by advanced videoconferencing technology, offer the flexibility of remote participation.

Advanced data analytics tools have also become increasingly common. These tools provide boards with a number of crucial insights into company performance, market trends and risk factors. Their proliferation has greatly supported data-driven, strategic decision making.

At the same time, cyber security measures have also become central to boardroom technology offerings. In an increasingly fraught business landscape, safeguarding sensitive information and preventing data breaches and unauthorised access has never been more important. Boards are more reliant on robust cyber security tools than ever before.

Also important for board effectiveness is building a stronger relationship between the board and C-suite. Nurturing this bond can be central to effective governance, strategic decision making, robust risk management and organisational performance. Bridging any negative gaps between the board and executives can be challenging, but honest discussions to address differences will help foster a closer, more symbiotic relationship. A strong relationship creates clear lines of communication, effective decision making, robust risk management, and strategic alignment and mutual trust between key individuals.

From an accountability perspective, the board also needs to hold C-suite executives accountable for their actions and decisions, thereby maintaining high standards of governance. Crisis management, too, will become more effective, facilitating a swift, coordinated response to an emerging threat or incident.

Creating pathways

Companies are facing a polarised, divisive climate. Resulting economic and political pressures will continue to exert themselves upon directors. Issues such as regulation, ESG, diversity, shareholder activism, cyber security and the energy transition will remain in the spotlight.

To create pathways to long-term value for stakeholders, boards will need to be more engaged with their companies. By preparing for tomorrow, they can ready themselves to succeed today.

© Financier Worldwide

BY

Richard Summerfield