Investors care deeply about how well a company board is functioning. Getting this aspect of governance right makes it more likely that material risks and opportunities will be well managed. It follows that an effective board is best placed to secure a company’s long-term success.
Yet it remains difficult to assess board effectiveness. Disclosure on the measurable aspects of boards, such as board size, the age and tenure of directors, and the level of meeting attendance, is improving in some markets. While we welcome these developments, the set of standardised data points provided in company disclosures offer a limited picture of a board’s functionality. Ticking all the “good governance” boxes does not necessarily translate into good governance.
Engagement between investors and board directors provides a valuable opportunity to more deeply assess how well a board is functioning. This paper highlights the factors that we consider to be most important in determining board effectiveness. Our insights have been informed by engagement with directors from a wide range of sectors, markets and structures of corporate control.
The paper focuses on the human, relational, and behavioural aspects of a board, which are difficult to capture through a data point. There is increasing pressure on boards to get their approach right, given the high degree of scrutiny from regulators and the public, and the evolving corporate context. A board can interpret and apply the five guiding principles outlined in this paper according to a company’s particular requirements, with the ultimate goal of enhancing board effectiveness.