The board of directors is an executive body that supervises the company’s activities and defines its short- and long-term strategic development. McKinsey reveals that 3 in 4 investors consider board effectiveness at least as important as the company’s financial performance when evaluating its potential for investments.
Source: Deloitte
The overall board performance relies on the performance of individual board members. In this article, you will learn what being an effective board member means, how to develop key board member responsibilities, and how to build a high-performing board.
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Visit WebsiteThe effective qualities of a board member
The skills of exceptional board members may vary depending on the industry and specific business goals. However, there are qualities of a good board member you should possess regardless of your specialization.
Strategic thinking
A strategic mindset is focused on analyzing the vital factors that influence the company’s success in the long run. It helps board members see the big picture and develop a step-by-step plan to achieve the organization’s goals, acting in its best interests.
One of the strategic thinking methods is Wootton and Horne approach, that combines three key activities:
Source: effectivegovernance.com.au
Leadership
A lead director should have all key competencies of an effective board member to lead and influence individuals. A good leader sets the direction for others and supports the outcomes through influence.
Financial knowledge
A board member should be able to read financial statements. It is vital for making grounded decisions for the financial health of your organization and ensuring effective resource usage. At the annual board of directors meeting, four key financial statements are usually reviewed:
- Balance sheet
- Income financial statements
- Statement of changes in cash flow
- Statement of changes in equity
In addition to the ability to read financial statements, board members should also possess solid knowledge of tax requirements and tax annual reports.
Strong communication skills
The board’s performance depends on teamwork and communication between the board members. Effective, professional, confident, and calm communication, constructive discussions with other board members are key to effective decision-making.
Risk management board
Managing risks is one of the primary responsibilities of effective board members. Board members ensure that actual and potential risks are managed according to the company’s strategic priorities.
The ability to identify, assess, prioritize organizational risks, and take appropriate action to address them are among the vital characteristics of an effective board member.
According to the recent CEO and board risk management survey from Deloitte, the top threats for today’s organizations include:
- New disruptive technologies and innovations
- Cyber incidents/events
- Eroding trust n brand and reputation
- Weak or unhealthy organizational culture
Source: Deloitte
Board member guide for navigating conflicts
Conflicts in the boardroom appear constantly. Potential sources for conflicts and challenges among the board members include:
- Varying views on the goal and strategies of the organization
- Personal attitudes and behaviors of board members
- Personal relationships between fellow board members
- Risk and crisis management decisions
- Unclear roles of each board member
- Involvement third parties (for instance, shareholders’ family members)
Most of these conflicts and challenges can be addressed by following the company’s code of conduct — a set of strict rules and values that every board member needs to comply with. As a rule, this document is signed when the directors onboard new board members. Another vital factor for addressing conflicts is setting the right tone for the board culture. Transparency, openness, and accountability are the traits it should embrace.
Adhering to the board’s code of ethics helps mitigate the conflicts between board members. Objectivity, accountability, honesty, and transparency are the key to resolving boardroom issues, including conflicts of interest.
Source: acnc.gov.au
Active board members often have multiple affiliations, both personal and professional. Sometimes they may conflict with your organization’s interests and cause so-called ‘conflicts of interest’. They create tension in the boardroom and require effective resolution.
With open conversations, disclosing all affiliations when onboarding new directors, you give the ability to carry out proper due diligence and let the board committee prepare an appropriate plan to handle such conflicts.
Effective board member tips for building a strong board
Building a high-performing corporate board is challenged with numerous high-profile failures and outside threats. Effective board governance becomes critical, and the directors must be more engaged in strategy, risk management, talent recruitment, M&A, digital strategy, and marketing.
Learn how to maximize the board’s performance with a ready-made board effectiveness checklist with tips on board roles and responsibilities, annual board self-evaluations, and a board effectiveness system ready-to-use.
Source: Gartner.com
Essentials to build a strong board
McKinsey’s CEO Guide to Boards outlines four essentials for building a stronger board of directors:
- Broaden scope. The board composition must include directors with diversified competencies and experience to engage more deeply on strategy, modern boardroom technology, brands, and M&A.
- Deepen commitment. Investing more energy and setting up a dynamic agenda to ensure adequate time investment into the aspects critical for the organization’s development and well-being.
- Clarify responsibilities. Assign clear responsibilities for each board member according to the organization’s strategic goals and to individual directors’ expertise.
- Build trust. A boardroom culture should be built on trust and respect for transparent board work and effective decision-making.
Board composition and diversity
Typically, a board consists of 9-12 board members with 4-5 in-person board meetings during a year. In post-pandemic hybrid operations, a virtual board of directors meeting format became common for numerous boards.
Source: Deloitte
An effective board must include the following competencies:
- Specific industry experience
- Business leadership
- Accounting and finance
- Digital and technology
- IT and cyber
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94% of boards also look to increase board diversity:
- 61% of boards plan to increase gender diversity
- 48% want to exceed race and ethnicity diversity
- 43% are for diversifying professional skills and experience of board members.
Diverse boards are essential for more effective decision-making, risk management, and guidance. Diversity drives organizational performance and inspires innovation. For this reason, great boards are always maximally diverse.
Board education
Board members should be motivated for performance excellence. Training and development opportunities play a crucial role in strengthening the board members skills, acquiring new competencies, and keeping up-to-date with the volatile market conditions.
Source:Deloitte
To help board members raise their knowledge, it would be helpful to invite renowned experts to paperless board meetings and engage board members to attend relevant conferences, workshops, and other public events to absorb the latest industry innovations and stay up-to-date in the market.
Continuous training and development opportunities should become a part of board member responsibilities to ensure progressive expertise evolvement.
Conclusion
Being an effective board member is bringing meaningful input to managing the board performance. To fulfill these responsibilities effectively, board members should possess strategic thinking, leadership, solid financial knowledge, risk management, and communication skills.
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What are the competencies of an effective board member?
Great board directors should possess professional experience, including industry-specific knowledge and practical expertise, risk management capabilities, financial acumen, strong leadership, and strategic thinking qualities. Outstanding communication and teamwork capabilities are also essential for becoming a more effective board member.
Who makes up a great board of directors?
As a rule, the board of directors includes a company insider, such as a chief executive officer, and numerous outside or independent directors with expertise relevant to the company’s interests and goals (financial, accounting, business leadership, M&A, strategy, technology, IT, security, etc.). A typical board consists of 9-12 directors with diversified expertise.
What are the pillars of building a strong board?
A strong board must include directors with a diversified set of relevant competencies and have in-depth commitment to lead the organization towards its wellbeing and development. All board members should be clear with their basic responsibilities and strongly focus on their fulfillment. It is also essential to build a boardroom culture on trust, transparency, and strong ethics.