A board of directors is more than just a legal formality that meets four times a year. When used to its full potential, a well-designed board can help you grow your business, serve your shareholders and maximize the effectiveness of your management team.
High-Quality Boards Lead to Better Performance
The guidance and expertise offered by a high-quality board can lead to better decision-making, which in turn can lead to better long-term performance. A McKinsey Global Survey of more than 1,100 directors evaluated the link between the quality of board operations and a company's effectiveness and financial performance. The survey results suggest that boards with better dynamics and processes, as well as those that execute core activities more effectively, report stronger financial performance at the companies they serve.1
According to the survey, the keys to a creating a high-quality board include:
- Ensuring that members have a diverse set of skills and backgrounds that are relevant to the needs of the business
- Providing members with training that helps them understand both their responsibilities and the nature of the business
- Engaging members regularly and keeping them apprised of what is going on in the business so that they can make informed decision
Seek Out Different Perspectives
Ideally, your board should include members with a variety of expertise and backgrounds in order to foster productive board discussions and unique perspectives on the business.
A well-designed board should include at least a few independent board members with experience relevant to your industry, and a few that come from completely different industries who might offer an alternative approach to issues rather than the "industry norm."
For a family-owned business, consider having at a least one family member on the board who can represent the family's legacy and long-term vision for the company.
Don't overlook gender diversity. More than 90% of S&P 500 companies have at least one woman on their board, but BNY Mellon Wealth Management research indicates that women represent only 19% of all board seats. Our analysis found that companies where women made up at least 30% of the board of directors saw higher returns on invested capital and other measures of business success.
If you are looking to add members to your board or to fill a vacancy, there are several ways to source quality board candidates. Industry organizations and recruiting firms can be helpful in identifying potential board members.You should also leverage your own professional network, including your lawyers, accountants and financial advisors, as they may have other clients who are interested in participating on boards.
Consider drafting a formal set of board member qualifications that you can include in your corporate governance documents. This will help provide transparency to board members, management and shareholders on how the company's board members are selected. Qualifications may include business and industry experience, financial acumen and experience serving on other boards.
The Value of an Outside Opinion
I have seen firsthand the benefits that an outside perspective can provide to a board.
A decades-old manufacturing company I was advising needed to replace a retiring board member. While it would have been easy to select someone who was already intimately familiar with the company and its industry — say, a member of the family who owned the company or someone with experience in manufacturing — the CEO, with guidance from the board, chose instead to fill the open seat with someone who worked as a Chief Financial Officer for a company in a completely unrelated industry.
After sitting through a few board meetings, the new board member recommended that the company's management team overhaul its financial reporting to provide more concise, organized financial information that would allow the board to better understand the company's financial performance and make more informed decisions on budgets and long-term planning. The new board member also proposed that the company create a new senior finance position to spearhead this effort. Working with senior management and the board, the new board member helped to frame the responsibilities and qualifications for the position, used her network to identify potential candidates, and assisted with the interview process.
Once hired, the new senior finance executive helped to redesign the company's financial reporting and worked with the CEO to develop a long-term, strategic plan for the company that included specific financial metrics and milestones. The resulting improvements in financial reporting and performance could be directly attributed to the value added by the independent board member's outside perspective and expertise.
Keep Your Board Engaged
Getting the most out of your board of directors requires that you keep them engaged and informed.
It is important that board members focus on their most important responsibilities, which include, but are not limited to:
- Providing guidance and feedback on the company's long-term strategic plan
- Reviewing the financial performance of the business
- Reviewing and approving the company's annual budget
- Reviewing with counsel any legal issues involving the company
- Reviewing the company's organizational structure, talent needs, succession planning and the hiring of key executives
The day-to-day responsibilities of running the company should be left to the management team.
That said, it is also important that the company's management team understands when and how the board can be helpful. Be proactive and keep your board informed about what is going on at the company. Don't wait for your regularly scheduled board meetings to share information that you believe the board would want to know sooner or issues that would benefit from the board's input.
In addition to regularly scheduled quarterly board meetings, it may be helpful for the board to schedule an all-day offsite every year or two, where the agenda is entirely devoted to reviewing the company's long-term strategic plan with members of senior management.
Board members should be periodically reminded of their duties as fiduciaries of the company and its shareholders, including the duty to exercise care in their decision-making and to remain free from conflicts of interest with the company. Consider asking the company's legal counsel to conduct an annual training session with the board to remind members of these duties.
Your Board is a Resource — Use It
A high-quality board of directors with a range of talents and experience can be a powerful resource for your company. Taking steps to ensure your board is well-designed, well-informed and properly engaged will reap significant benefits for your company's shareholders and management team.