1. the institute for employment studies Getting to the heart of the people issues: how to carry out an effective board review Peter Reilly

2. Agenda Why What How Who of board effectiveness reviews

3. Why review? Because we have to? Because others are doing it? Because we want to avoid corporate failure? Corporate governance is one means to curb harmful short- termism and excessive risk-taking – EU Green Paper Corporate governance weaknesses in remuneration, risk management, board practices and the exercise of shareholder rights had played an important role in the development of the financial crisis and that such weaknesses extended to companies more generally. - OECD Review

4. Why: fear of board failure Causes of board failure include: Lack of good/ timely operating and strategic information leading to inefficient meetings and uniformed decisions. Too many insiders/friends on the Board. CEO not committed to the Board process or to implementing Board recommendations. Lack of strategic focus and inability to anticipate the future. Too much meeting time spent on reporting and not enough time on addressing critical issues. Inability to align with shareholders or deliver their desired results. Board meetings that are not respectful and collegial. Infrequent or irregular Board meetings. Experience & skills on the Board do not match business’ strategic drivers. Low levels of preparedness for meetings by management or the Board. The Board Group

5. An example of board failure HIH (an Australian insurance company) heading for a fall

6. The signs were there A due diligence report described HIH as a: company which has not yet made a complete transition from an entrepreneurially-run company influenced strongly by senior management and from which senior management benefits significantly, to that of an ASX listed company run primarily in the interests of shareholders

7. An example of board failure HIH (an Australian insurance company) heading for a fall A company characterised by mismanagement and poor business decision making and execution ● business analysis ● risk management ● sloppy, ill informed decision making ● performance/financial tracking ● absence of endorsed strategy ● dominant CEO and weak Chair/ineffective Board

8. Why: managing a board is not easy “ The challenge should not be underrated. To run a corporate board successfully is extremely demanding. Constraints on time and knowledge combine with the need to maintain mutual respect and openness between a cast of strong, able and busy directors dealing with each other across the different demands of executive and non-executive roles. To achieve good governance requires continuing and high quality effort.” Source: FRC code

9. “It is much harder to be a director now than it was ten years ago. Increased accountability and scrutiny, multiple media and stakeholder pressures and shareholder activism are all contributing to making the job a lot more onerous and risky.” Heidrick & Struggles Why: managing a board is not easy

10. Why review? Because we have to? Because others are doing it? Because we want to avoid corporate failure? Corporate governance is one means to curb harmful short-termism and excessive risk-taking – EU Green Paper Corporate governance weaknesses in remuneration, risk management, board practices and the exercise of shareholder rights had played an important role in the development of the financial crisis and that such weaknesses extended to companies more generally. - OECD Review Because we have a problem to solve? Because it will offer protection from (media) attack? Because it will enable improved performance?

11. Why: board reviews enhance performance Although there are cases of flattering evaluations, interviews with chairmen indicate that “when conducted in a robust professional manner, board evaluation can be an effective tool to improve board performance. It provides an opportunity for board members to set collective and individual goals and subsequently measure their performance against them in a constructive and reflective manner. In addition, the use of an external facilitator can improve board evaluation by bringing an objective perspective and sharing best practices from other organisations.” OECD, 2011

12. Why: board reviews enhance performance “Provided they are undertaken in earnest, board evaluations—of the board, its committees, and individual directors — can be a highly useful tool to improve board performance …A skilled facilitator can help to surface significant people and behavioural issues that may otherwise remain hidden and unaddressed”. Wong, 2009

13. The What: directors’ idea of factors affecting board effectiveness Composition of the board77% Effective chair50% Challenge41% Collegial environment29% Exec/non-exec relationship23% Time commitment15% Effective executive15% Defined roles15% Size of board11% Appropriate levels of information11% Eversheds Board Report, 2010

14. What: the FRC code The governance principles of Leadership Effectiveness Accountability Remuneration Relations with Shareholders

15. What else….? recruitment, training and succession

16. People on board Average age = 58 years 60% UK nationals 88% male majority ex CEOs Average time on board = 5.2 years “There is a tendency to select candidates who have long experience and high seniority as opposed to candidates who have less experience, but who can add value through their objectivity and energy” Heidrick & Struggles

17. What else….? recruitment, training and succession meeting preparation and management use/effectiveness of sub committees transparency board member role engagement risk assessment managing propriety the team

18. Team effectiveness EnvironmentSupport and challenge Openness BehaviourRespectful of different skills Utilisation of strengths CapabilityGroup interaction skills Individual competence and strengths BeliefsUsefulness Achievability Mutual respect PurposeShared purpose Role clarity

19. Dysfunctional teams Absence of trust Fear of conflict Lack of commitment Avoidance of accountability Inattention to results Source: Patrick Lencioni

20. What else….? recruitment, training and succession meeting preparation and management use/effectiveness of sub committees transparency board member role engagement risk assessment managing propriety the team relationships within Board and with executive the culture monitoring and review, including ‘comply or explain’

21. People are the basis of it all: good and ill Organisation Shareholders Other Stakeholders

22. How to do a review? Method ● questionnaire ● interview ● document review ● observation

23. Board observation and content analysis What you talk about ● finance, operations, people etc? ● past, present, future? ● data, reports? What type of content ● giving information? ● offering opinion? ● challenging? ● suggesting action? How do you talk ● positive, neutral, supportive tone? Overall and for individuals

24. Board talk before a development intervention

25. Board talk after a development intervention

26. How to do a review? Method ● questionnaire ● interview ● observation ● document/data review  composition – skills - and recruitment

27. Board composition Code: mix of talent skills – functional/behavioural background and behaviours of individuals relevant sector expertise and independence NEDs and executives

28. Diversity of composition McKinsey’s 2007 and 2010 Women Matters reports ● higher gender representation is associated with better financial and performance operating results EU Green Paper: diversity “ Diversity in the members’ profiles and backgrounds gives the board a range of values, views and sets of competencies. It can lead to a wider pool of expertise. Different leadership experiences, national or regional backgrounds or gender can provide effective means to tackle ‘group-think’ and generate new ideas. More diversity leads to more discussion, more monitoring and more challenges in the boardroom. It potentially results in better decisions…”

29. How to do a review? Method ● questionnaire ● interview ● observation ● document/data review  skills, recruitment, process Content Style

30. Style of review Challenge (against complacency) Support Facilitated

31. Getting at hidden depths assumptions

32. How to do a review? Method ● questionnaire ● interview ● observation ● document/data review  skills, recruitment, process Content Style Benchmarking

33. Who does the review: questions to ask Tailored and fit for purpose? Evidence based? Independent? Trustworthy? Will they work with team yet challenge them? Aware of behavioural aspects? (not just procedural) Cost effective?

34. The IES approach

35. … thank you Further information contact: www.employment-studies.co.uk peter.reilly@employment-studies.co.uk … thank you