Corporate governance: Board Effectiveness – Rising To New Challenges

Maybe defining today’s economic environment as “interesting” somewhat understates the dramatic impacts of the past 18 months. Nevertheless, what is interesting are the results of Deloitte’s survey of more than 200 directors from New Zealand and Australia in late 2008, set amidst this shake-up, shake-down, shake-out: whichever way you choose to describe it.
Questions revolved around the impact of the recession, the role of board, talent and succession and, of course, remuneration and risk.
Some of the key findings follow, but even if you don’t get past this opening paragraph, my overarching feeling is that things have changed in the minds of directors… and that change is likely to stay – at least for the foreseeable future.

The “R” word

Don’t mention the “R” word… well, okay, there’s no option but to discuss the impact it is having, and discuss it more frequently. That is at least part of the overall mood of those in the boardrooms we spoke to.
The survey results show that directors are focused on ensuring businesses keep running, and come out of the recession running better.
This should not be that surprising, given directors’ responsibilities to the company and shareholders. Nevertheless, in these difficult times, combination of factors has led directors to be even more involved in regularly reviewing the company’s strategic direction and looking at results of how the business is going, although they report it is still challenge to ensure these two objectives are clearly aligned.
Directors noted that the frequency of strategic planning sessions had gone from once year to every three months in some cases, aligning better with the speed of economic change. Almost all (95 percent) directors agreed that their board regularly reviewed corporate strategy, and similar proportion (90 percent) said they received relevant information in their board packs.
However, from our discussions, many said the right information had not emerged on its own accord. Rather, they had been through process to ensure they were getting information tailored and relevant to the board, rather than replicating the information provided to management. This is an ongoing area of focus, and many said there was fine balance between enough and too much information. Throughout my career I have seen both extremes, and can appreciate that getting it right is fine balancing act.
Directors still question whether their organisation has sufficient ability to identify and assess the impact of global trends which could impact their business. This has been brought into focus by the credit crisis – but the real question to be asked is: “Would this have been identified two or three years ago by management teams?” Of course, looking back is much easier, and so it seems this question will remain on the table for next time.

Succeeding in succession?

Even where boards feel they are achieving the goal of matching corporate strategy with results, there is risk this could be short-lived. New Zealand has an ongoing issue relating to succession planning for both management and boards. Almost one-third of directors could not say their organisation had an effective succession plan for the CEO and senior management, with the New Zealand findings echoing those of our neighbours across the Tasman. Nearly 40 percent said the same for board succession. It would appear that more thought needs to be directed into this area. The majority of directors thought they needed to do more on their own learning and development, so this related area is also one which clearly needs some focus.
There are also issues with mentoring talent for the future, and on the other side of the coin, dealing with underperforming board members.
A phrase I heard recently goes something like “even turkeys can fly in strong wind”. Recession has highlighted perhaps what many board members already knew – some are not performing. In New Zealand, over 40 percent of board members surveyed thought that processes for removing those who were no longer contributing needed more work, quite contrast to Australia where the number was 15 percent.
Succeeding in succession? In short, probably not, at least not right now.

The thorny issue of reward

Attracting talent to both management and the board room is difficult at the best of times. Packages in New Zealand are less attractive than those overseas, particularly in the US, UK and Australia.
Directors think they have very difficult task in balancing medium and long-term rewards for performance with cash packages. Executives have fallen out with long-term incentive schemes, and in the current environment increasing cash pay is difficult. It’s probably also somewhat ironic that payouts today from long-term incentive programmes ending year or so ago attract attention because current results are not good.
Almost third of directors feel their own rewards do not match the personal risk they take in their role and value they deliver. The damage to personal brand can be pretty devastating.

So what? What does all this mean?

Well, in my view, the mood of the boardroom has changed in times which are probably unparalleled in any of current board members’ experience. This is likely to stay, at least until the next generation, wherever they come from. In the short to medium term, boards are doing exactly what you would expect to keep the business running and to position it to be winner in the future upturn. In the longer term, resolving the risk and reward balance and addressing the talent pipeline are likely to be the focus.

Brett Tomkins is partner in the audit practice at Deloitte. [email protected]

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