When board directors arrive at a board meeting having done their due diligence in preparing for the meeting, getting through the mechanics of a basic board agenda is fairly swift and easy. It should be. Boards need to take care of a certain number of routine matters at their board meetings as a matter of decorum. However, board directors should spend the bulk of their meetings dealing with more difficult decisions.
Boards need to give their discussions and decisions related to volatile issues such as global economic uncertainty, cyberattacks, corporate fraud, activist investors and competitive disruptions much more time and consideration than routine matters.
According to the 2016 surveys of over 800 board directors at the Stanford Graduate School of Business and the U.S. National Association of Corporate Directors (NACD), board directors feel they lack adequate confidence to tackle the challenges, manage the risks and focus on long-term strategic goals. The 2018 McKinsey report attributes that lack of confidence more to board processes than to board dynamics and interpersonal relationships.
Board Director Deficiencies That Lead to Ineffective Board Processes
The Stanford and NACD surveys highlighted eight distinct areas of board director deficiencies that lead to ineffective board processes. To improve the effectiveness of board processes, boards will need to conduct regular, fair and accurate self-assessments and analyze the results. The results should indicate how they can take advantage of electronic board governance tools, trainings and other initiatives to improve board performance on processes. The survey identified the following areas of board deficiencies:
Level of Trust
Difficult discussions and debates require high levels of trust among board directors. The Stanford survey indicated that only about 68% of board directors felt they had a high level of trust in their fellow directors or in management.
Regard for Other Directors
Less than half (about 48%) of board directors from the Stanford survey said they’d want to keep all the current directors on the board if they were given a choice. On average, board directors could think of at least one of their fellow directors who wasn’t performing to capacity and should be removed from the board.
The apparent lack of trust among board directors extends to communications between board directors. A trivial 23% of the Stanford survey respondents declared that their boards were effective when giving direct feedback to their peers on the board. Even more distressing is that 53% of board directors claimed they weren’t willing to express their honest opinions if any of the senior managers were present.
According to the Stanford survey, about half of the board directors (48%) said that they were in favor of term limits as a means of refreshing the board. About 65% of board directors who responded to the Stanford survey noted that they have some sort of process for removing ineffective board directors, but there was no consistency in their approaches. About 35% of the board directors stated that they didn’t have a process for removing ineffective board directors.
Skills and Experience
Only 32% of the NACD survey respondents indicated that they felt confident or very confident that their company would be secure against a cyberattack. Directors in the Stanford survey also scored themselves low in technical areas. About 47% of the directors said that they would rate themselves low for technical knowledge, about 18% rated themselves low for cybersecurity knowledge and about 16% of directors knew little about social media.
The directors who responded to the NACD survey indicated that about 56% felt that their boards spent too little time on director education over the last year, which closely mirrors data from the McKinsey survey. Individual directors on the NACD survey claimed that they spent about 18.5 hours on education in a year’s time.
Many boards of public companies are re-strategizing on how to incorporate more racial and ethnic minorities and women on their boards. The NACD indicated that women occupied 16–24% of their board seats and 4–13% of board seats were occupied by racial and ethnic minorities.
The Stanford survey showed that only 57% of board directors strongly agreed that their board brought new talent and the right mix of skills to the board and just over a third thought their boards planned well for director turnover. About 23% of board directors stated that they had a formal succession plan for their committee chairs.
Governance Cloud by Diligent Promotes Improving Board Processes for Effective Governance
The McKinsey, Stanford and NACD surveys provide information about the targeted areas that boards can work on to improve their processes and that will ultimately result in increased profitability and enhanced governance. These issues may have been difficult to overcome in the past. Technology is the catalyst that can take average-performing boards to excellent-performing boards.
Governance Cloud by Diligent is a suite of governance tools that supports board directors in improving their processes and how they approach their board duties. Governance Cloud was designed to be a fully integrated board management system with tools that improve efficiency for meeting minutes, secure messaging, entity management, D&O questionnaires, board evaluations, virtual data rooms, voting and resolutions, and more. Diligent continues to innovate solutions based on the changing governance standards and each company’s needs. Governance Cloud supports the philosophy of a total enterprise governance management (EGM) approach to governance, which enables corporations to govern at the highest level while delivering long-term success and sustainability.
Let’s review the primary weaknesses that board directors self-reported:
- Level of Trust
- Regard for Other Directors
- Board Restructuring
- Skills and Experience
- Director Turnover
Now we can implement the tools provided by Governance Cloud to assist directors in improving their performance. Board self-evaluations by Diligent are an online tool that boards can use to improve board education and director turnover, and add diversity, skills and experience. Obtaining an objective view of performance shows the board which areas they should pursue for board development. The Stanford survey indicated that only 55% of boards performed self-evaluations, which may be because manual processes are too time-consuming and cumbersome. Digital board evaluations change all that because the tool makes it so easy to conduct evaluations.
Diligent Messenger is a secure software solution for secure communication and collaboration between board directors and others on a limited basis. Virtual data rooms make it possible for boards and committees to have discussions and collaborations within a secure, confidential platform, which should improve communications, build trust and enhance relationships between board directors.
Boards that implement the digital tools that comprise Governance Cloud will ensure that their board directors’ skills and abilities align with the needs of the board and the strategic plans of the company.