Board effectiveness

What is board effectiveness?

Board effectiveness refers to how well a board of directors fulfils its responsibilities. These responsibilities are set out in company law and supplemented by corporate governance codes and guidelines, which vary by country and sector.

Beyond compliance with relevant laws and regulations, board effectiveness also relates to how well a board performs its supervisory and steering roles.

The board’s supervisory role is focused on monitoring the delivery of short-term performance. When performing this role, directors are seeking assurance and managing risk. They are concerned with the organisation’s near-term outlook and whether the business will deliver its operational and financial goals.

The board’s steering role is focused on enabling sustainable, long-term value creation. The board is in steering mode when considering strategy and making significant investment decisions. When fulfilling this role, directors must be strategic, forward-looking, and consider a wide range of external factors, so that they can shape management's thinking and make high-quality decisions in alignment with the organisation’s purpose and values.

The most effective boards excel in both roles to deliver short-term goals and long-term vision.

Why does board effectiveness matter?

Boards impact the key drivers of organisational performance, from CEO succession planning and financial strategy to sustainability and culture. By setting the organisation’s strategy and goals, they define the parameters within which decisions are made throughout the organisation. This shapes how resources are allocated and outcomes are achieved far beyond the boardroom. They also ensure the organisation maintains its license to operate by proactively monitoring and responding to risks and complying with relevant laws and regulations.

Many academic studies have explored the link between effective boards and successful organisations. The most powerful reminder of the importance of board effectiveness, however, comes from a different source: the government-led inquiries and lawsuits that follow in the wake of corporate scandals. Their conclusions, and the evidence that emerges through them, highlight the importance of an engaged and effective board in preventing corporate failure, with boards having been implicated in high-profile collapses from Enron and Blockbuster in the US to Carillion and BHS in the UK.

As the Institute of Directors found in their analysis of the UK Post Office scandal, “the root causes were failures in human decision-making, organisational culture and business ethics. Post Office governance – and specifically the board of directors – proved unequal to the task of addressing these issues.”

What are the main pillars of board effectiveness?

Boards need to have strong foundations in three areas to ensure they operate safely and responsibly: individuals, infrastructure, and information.

Individuals

Having the right people around the table, and ensuring those people behave in the right way — as individuals and as a group — is essential. Boards with diverse skills, relevant experience, and a culture of collaboration are more likely to be able to navigate complexity, think creatively, and make high-quality decisions.

Infrastructure

Having appropriate policies, tools, and processes in place creates a strong framework for ethical and compliant decision-making. It also ensures board operations are efficient, so that the board delivers satisfactory value-add in return for the resources required to support it.

Information

Accurate, timely, and well-presented information ensures directors understand the drivers of performance while enabling them to think creatively and make high-quality decisions. They need information that covers the relevant topics in appropriate detail to enhance their knowledge and stimulate productive discussions.

What do top-quartile boards do differently?

Done well, these three pillars (individuals, infrastructure, and information) provide a strong backbone for the board. The most successful boards don't stop there, however. They go further, contributing meaningfully to value creation in the organisation by strengthening two additional pillars: impact and innovation.

We call these five pillars the '5 I's of board effectiveness', and our team of board reviewers use them to guide their approach to board assessments.

What are the key factors affecting board effectiveness?

A wide range of factors can impact board effectiveness. That is, in part, because boards are not homogeneous; the average public company board has between 9 and 11 directors, all of whom bring a different set of skills, experiences, and personality traits into the group.

• Composition: The board’s performance will be heavily influenced by its size and shape — for example, the number of members, balance of executive and non-executive members, and the knowledge, expertise, and backgrounds of individuals. A more diverse group will analyse situations from a wider range of angles and bring more ideas to the table, and this ultimately drives better outcomes.
• Culture: A collaborative, open-minded culture that encourages challenge, debate, and the expression of ideas will enable the organisation to tap into the knowledge and expertise of board members. It will also support the board in understanding performance and shaping robust decisions. Research shows that simply giving people “permission to debate” drives better outcomes.
• Mandate: It’s important that the board is clear on its roles and responsibilities, and that the wider organisation understands its role too. This focus and alignment ensures directors can engage with the right issues in the right way, at the right time, and that its performance can be more easily assessed.
• This focus and alignment ensures directors can engage with the right issues in the right way, at the right time, and that its performance can be more easily assessed.
• Strategy: The organisation’s strategy shapes what is required from the board. If the business is pursuing an M&A strategy, its board will need a different set of skills and experiences to shape and execute this strategy compared with a turnaround or restructuring situation, for example.

What are the common challenges affecting board effectiveness?

Only 30% of executives rate their board “good” or “excellent”. Meanwhile, 62% of CEOs want to replace one or more of their directors. This research by PwC suggests there is significant room for improvement in how boards operate and that some of the factors listed above can be difficult to influence without appropriate tools and resources.

Common challenges include a lack of diversity, inadequate training, crowded meeting agendas, and limited access to timely information. These issues can hinder the board’s ability to address complex issues and make timely and informed decisions.

For example, research by Board Intelligence shows that only 48% of directors get value from their board papers and the average agenda item gets only 21 minutes of discussion time.

By offering targeted education and professional development opportunities, taking a strategic approach to agenda planning, and providing best practice report-writing guidance to management, boards can overcome these obstacles and improve their performance.

How do you measure board effectiveness?

Measuring board effectiveness generates valuable insights that can help to improve the board’s performance and enhance its contribution to organisational success.

Through regular board evaluations, whether self-assessments or facilitated external board performance reviews, boards can identify their strengths and weaknesses and benchmark their performance against best practice and regulatory standards. This allows the chair and company secretary to identify gaps and take proactive steps to improve the board’s effectiveness. Technology tools can also gather and analyse data on board processes, activity, and impact, to help the board develop a continuous improvement mindset.

According to research conducted by Board Intelligence in December 2024, only 17% of executives believe their boards are set up to harness the AI opportunity. To navigate new challenges and risks and exploit emerging opportunities, boards need to regularly reflect on their performance. By identifying gaps, boards can take proactive steps to stay ahead of industry demands and deliver forward-looking guidance that helps their organisations to thrive in the long term.