The most effective boards have highly knowledgeable directors, the information they need to make decisions and, most important, the power to act.
Powerful forces are redefining the roles and activities of corporate boards — among them are the volume of M&As, the focus by institutional investors on the role of governance in underperforming and failing companies and the accelerating rate of turnover among CEOs that is placing enormous pressure on boards to take a more active role in succession planning. These forces are only likely to increase in strength over the next few years.
In response, corporate boards in the United States have been experimenting with new governance initiatives. Several have become widespread practices among the largest U.S.companies. Many boards are now composed primarily of outside directors and have a profile that is more representative of society as a whole; they operate according to written guidelines, meet regularly in executive sessions without inside directors, and conduct formal appraisals of the CEO. But have these changes resulted in more-effective boards?
Indeed, as measured by comparative financial data, our research shows that some of them have, and new ideas still largely in the proposal stage may lead to further progress. Looking ahead, greater concern for multiple stakeholders may some day have a major impact on board practices and structure (and thus effectiveness). Regardless of these actual and potential changes, we believe that boards must have three key ingredients in order to be effective: knowledgeable members, up-to-date company information and the power to counterbalance the CEO. (For a complete look at the research and data that support our conclusions, see the book “Corporate Boards: New Strategies for Adding Value at the Top,” by Conger, Lawler and Finegold.) As board practices continue to evolve, these ingredients will remain central to the recipe for effectiveness.
The Sources of Effectiveness
The first step in creating a board that adds value to the company is selecting directors who have breadth and depth of knowledge about the industry and its competitive challenges. In a world dominated by complex technologies and rapidly shifting markets, that is crucial. It’s important to recognize, too, that the right knowledge has to be a key focus in selecting directors; companies don’t have the time to develop it in their directors.