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E-MailFrank Kurre is a Managing Director at Protiviti, Mark Rogers is Founder and CEO at BoardProspects, and Michael Tae is Co-President at Broadridge Investor Communication Solutions. This post is based on their Protiviti memorandum.
The relationship between the board and the management team is vital to the success of any company or organization, and like every relationship, there are areas of strong alignment, as well as points of divergence.
This is a principle well understood in the corporate governance community, but as longtime advisers to boards and management teams, our organizations (Protiviti, Broadridge and BoardProspects) sought to quantify these alignments and disagreements.
Based on our survey of more than 1,000 directors and C-level executives, respondents reported a meaningful perception gap between how the Board views its performance and risk preparedness and how management teams view these same critical areas. Taken together, the areas of agreement and the points of difference provide reminders and insights on how boards and the C-suite can accomplish more together.
What We Found
There are many areas of agreement—most importantly, on the board’s top priority. Over half (55%) of the respondents, both directors and management, rated strategy setting and execution as the top priority of the board and 85% rated it among the top three priorities. Risk Management Oversight, CEO and Management Succession Planning, Digital Transformation and Integration of Emerging Technologies, Innovation and R&D, and Hiring and Talent Management are other board priorities noted by respondents. Overall, the greatest priority is the focus on strategy.
There is good news on the board’s focus and meeting dynamics. A vast majority of all respondents Agree or Strongly Agree that board members provide input into and approve corporate strategy and major policy decisions; that they represent the interests of shareholders and appropriate stakeholders; that they place the interests of the company ahead of their own interests; and that they devote sufficient time to fulfilling their responsibilities.
Both board and C-suite respondents view key business fundamentals as top challenges to growth. Overall, the directors and C-suite executives surveyed identified the following challenges as posing the greatest threats to their organization’s growth during the next three years:
- Talent — recruiting, retention, and upskilling
- Access to capital and/or liquidity
- New and emerging technologies
- Central bank monetary policy, inflation and rising labor costs driving economic uncertainty, and
- Rapid change from disruptive innovation.
However, board members are more apt to say their performance in certain areas is better than C-suite executives believe it is. Differences in board performance assessments are most pronounced in three areas:
- The board’s effectiveness in discharging its fiduciary duties and setting the tone for encouraging candor in communications;
- Addressing in a constructive manner board members who fall short of expectations; and
- The board’s functioning in a governance capacity (i.e., not stepping into the role of management).
Directors and executives differ in their assessments of organizational resilience. C-suite respondents (61%) are less likely to agree that their organization’s strategic planning process facilitates organizational agility and the ability to pivot in response to market developments than board respondents (75%). This divergence in views suggests that some board members may not be as attuned to changing market realities as they think they are.
Directors and C-suite executives want more attention directed to unexpected surprises and disruptive innovation. This includes Crisis Management, Cybersecurity and Data Privacy, and Digital Transformation and Integration of Emerging Tech. Their ratings in the areas needing more attention are comparable.
But the C-suite identified other areas requiring more board emphasis. Hiring and Talent Management, Corporate Culture, and Environmental, Social and Governance (ESG) considerations’ are seen as areas requiring more boardroom attention, yet on these areas there was also the highest disparity between C-suite executives and active directors.
Notable variations by industry exist with regard to the top area reported as not receiving sufficient attention in the boardroom. For example, within Financial Services, one in four respondents point to innovation, including research and development, which makes sense for an industry coping with fintechs and “born digital” competitors.
Healthcare industry respondents see corporate culture as the top area (29%), whereas just 15% of Financial Services respondents see this as an issue. The attrition experienced in the Healthcare industry makes culture a strategic imperative.
One in four Manufacturing and Distribution industry group respondents indicated that digital transformation and integration of emerging technologies was the top area requiring more attention (which reflects the so-called “Industry 4.0” transition)
As for Energy and Utilities industry group respondents, ESG is perceived by only 8% as not receiving sufficient board time and attention (roughly half of the response from other industry groups), reflecting increased attention on this topic by energy and utilities boards over recent years.
A higher percentage of respondents from the Consumer Products and Services (CPS) industry group (17%) believe the top area is strategic planning and execution, compared with 6%-12% of respondents from other industry groups—a finding that reflects the reality that these companies face extensive business model disruption in years to come.
Key Takeaways for Boards
Based on the results of our survey, we outline the following reminders and insights in how boards and their management teams can accomplish more together, divided into three categories:
1. Inculcate Mutual Accountability to Improve Board Performance
A. Address underperforming directors. 58% of directors and only 36% of C-suite leaders agree that board members falling short of expectations are addressed in a constructive manner, suggesting a need for improvement in evaluating or offboarding underperforming directors.
Constructive engagement to improve performance is the goal, which could include assessing overboarding issues or other commitments that impair a director’s board service.
B. Emphasize director preparedness and engagement. The board’s charter and/or corporate governance guidelines should establish criteria for director performance that set forth clear expectations for meeting preparedness and engagement as well as criteria for overboarding. If management perceives issues with preparedness and engagement, the CEO should inform the board chair or lead director and a plan should be developed to improve in these areas. The board chair or lead director should counsel the appropriate directors.
Preparation is a two-way street. Management can avoid information overload by being more selective and timely in submitting pre-meeting materials to the board. The board should also clarify its expectations of management regarding the materials it receives. This can be achieved through planning board meeting agendas, encouraging concise, crisp executive summaries, and providing post-meeting feedback to management on the quality of meeting materials.
C. Engage directors in shaping the board agenda. When planning for future meetings, the board chair or lead director should consider involving board members in setting the agenda. Recommendations could be solicited in executive session. Such involvement would elevate the level of director engagement.
D. Self-assess board performance. At least annually, the board should conduct a robust self-assessment of the performance of the full board, each board committee and each individual member of the board to determine whether they are functioning effectively. The self-assessment process should be conducted on a confidential, anonymous basis and ensure that the board and each committee are staffed and appropriately led, individual board members are effective in fulfilling their fiduciary obligations, and the oversight processes in place are contributing value.
The process should encourage candor and be rooted in trust and transparency with an eye toward continuous improvement. The process should include an evaluation of composition and onboarding criteria. Informal feedback from the CEO and other senior executives as to how the board can best contribute value can provide useful insights to the process.
2. Collaborate on Addressing Obstacles to Organizational Growth
A. Address obstacles to organizational growth. In addition to the five obstacles to organizational growth noted above, the survey noted that digital transformation and organizational culture were two of the areas requiring more board attention. The question arises as to whether the board’s activities are sufficiently focused on the opportunities and risks that matter most.
Regarding talent acquisition and retention, the survey suggests a need for focused strategic conversations regarding the shortage of talent and skilled labor. The board should evaluate and advise on investments needed to upgrade the organization’s talent and human capital management so that they are aligned with market realities and the company’s overall strategy. Succession planning and leadership development activities also warrant more stringent stress-testing from boards.
Underpinning the focus on talent management, the board should devote sufficient time to corporate culture in recruitment, reskilling, retention and innovation. The board has an important role to play in setting the tone for building a fit-for-purpose culture in a rapidly changing environment. A trust-based, diverse and inclusive culture fostered by the CEO and leadership team is essential in today’s day and age.
The board should be satisfied that it is well-positioned to challenge conventional thinking and assist management in transforming customer experiences and disrupting long-established value chains. In today’s technology-driven markets, it is disrupt or be disrupted.
Disruption occurs in many ways—new business models, rapid product innovation, changing customer value propositions and disintermediation of distribution channels. Companies can either lead the way or be swept away.
B. Periodically evaluate composition and onboarding criteria. The above strategic conversations require comfort with emerging and maturing technologies and their application in imaginative ways to drive disruptive innovation and rethink and transform the organization’s strategy and business model continuously.
Our survey results suggest that skill and experience, industry knowledge, technology savviness, knowledge of other industries, and gender diversity are the primary attributes for evaluating new director candidates. While not rated as highly, racial diversity and board tenure were “second tier” attributes. We do not view this finding as suggesting a one-size-fits-all approach, but it nonetheless points to a need to assess whether the currency, experience and diversity of thinking in the boardroom are sufficient.
Recommended changes should be incorporated into a board composition skills matrix (or its equivalent) summarizing the skills and expertise that the board needs to oversee the organization effectively. Changes to the board composition skills matrix (or its equivalent) should be mapped by the governance or nominating committee (or its equivalent) against the skills possessed by each board member. Any gaps should be considered when evaluating new director candidates.
3. Increase Focus on Agility and Resilience
A. Sharpen focus on crisis management. As the coming year unfolds, new and existing geopolitical, economic, environmental, social and cyber-related crises could arise and/or worsen. In addition, the results of national elections occurring in many countries during 2024 can lead to disruptive impacts extending beyond the voting countries’ borders.
B. Don’t forget cybersecurity issues. The ever-changing cyber threat landscape and growing geopolitical tensions are likely the reasons why our survey identified cybersecurity as requiring additional board attention.
C. Ensure the board is aligned with management on organizational resilience. The divergence between board members and C-suite leaders in their assessments of the organization’s preparedness for certain risks suggests that directors seek to understand the concerns of their company’s senior leaders, particularly if there are requests for investments to meet expectations.
If the board’s assessment of key risks is significantly more favorable than management’s, a disconnect in boardroom conversations may result. If a request for resources appears excessive, directors should ask management for a stronger articulation of the market opportunity or emerging risk and the expected value or reputation/brand preservation provided. Directors should also receive periodic risk updates from management so that there is clarity between both groups regarding the magnitude of the organization’s potential risks.
