Board effectiveness

What is board effectiveness?

Board effectiveness describes how well a board of directors meets its responsibilities. These responsibilities are defined in company law and supplemented by corporate governance codes and guidelines. The codes and guidelines vary by country and sector.

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

The board’s supervisory role focuses on monitoring the delivery of short-term performance. Directors seek assurance and manage risk when performing this role. They are concerned with: 

• The organization’s near-term outlook. 
• Whether the business will deliver its operational and financial goals.

The board’s steering role focuses on enabling sustainable, long-term value creation. This means considering strategy and making significant investment decisions. When performing this role, directors must be strategic and forward-looking, shaping management's thinking and making high-quality decisions that align with the organization’s purpose and values.

The most effective boards excel in both supervisory and steering roles, delivering both short-term goals and long-term vision.

Why does board effectiveness matter?

Boards affect the key drivers of organizational performance, such as: 

• CEO succession planning.
• Financial strategy.
• Sustainability
• Company culture. 

By setting the organization’s strategy and goals, the board defines the parameters within which decisions are made throughout the organization. This impacts how resources are allocated and outcomes are achieved, extending far beyond the boardroom. The board also ensures that the organization keeps its license to operate by proactively managing risks and complying with relevant regulations.

Multiple academic studies have explored the connection between effective boards and successful organizations. And we can more clearly see the value of board effectiveness in the government-led inquiries and lawsuits that follow corporate scandals. With boards having been implicated in high-profile collapses from Enron and Blockbuster, these inquiries highlight the importance of an engaged and effective board in preventing corporate failure.

As the Institute of Directors found in their analysis of the UK Post Office scandal, “the root causes were failures in human decision-making, organizational 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?

To ensure safe and responsible operation, boards need strong foundations in individuals, infrastructure, and information.

Individuals

Boards with diverse skills, relevant experience, and a culture of collaboration are better equipped to navigate complexity, think creatively, and make high-quality decisions. It is essential to have the right people around the table and ensure that those people behave in the right way, both as individuals and as a group. 

Infrastructure

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

Information

Directors need information that covers the relevant topics in appropriate detail to enhance their knowledge and enable productive discussions. Accurate, timely, and well-presented data helps them understand the drivers of performance and enables them to think creatively, supporting high-quality decisions.

What do top-quartile boards do differently?

Done well, these three pillars (individuals, infrastructure, and information) provide a strong framework for the board. But the most successful boards don't stop there. They contribute meaningfully to value creation in the organization by strengthening two additional pillars: impact and innovation.

We call these five pillars the “5 I's of board effectiveness.” Our board reviewers use them to guide their approach to board assessments.

What are the key factors affecting board effectiveness?

Boards are not homogeneous. The average public company board has between 9 and 11 directors, each with a different set of skills, experiences, and personality traits. Because of this, a wide range of factors can impact board effectiveness. 

• Composition: The board’s performance is strongly influenced by the number of members, the balance of executive and non-executive members, and the knowledge and backgrounds of individual members. A more diverse board analyzes situations from a wider range of angles, ultimately driving better outcomes.
• Culture: A culture of collaboration that encourages challenge and debate helps the organization tap into its members’ expertise. It also supports the board in understanding performance and shaping strong decisions. Research shows that simply giving people “permission to debate” improves outcomes.
• Mandate: The board must be clear on its roles and responsibilities, and the wider organization must understand its role too. This focus and alignment ensure that directors can engage with issues in the right way, and that the board’s performance can be more easily assessed.
• Strategy: The organization’s strategy determines what is required of the board. For example, if a business is pursuing an M&A strategy, the board will need a different set of skills and experiences to shape and execute this strategy, compared with a turnaround or restructuring situation.

What are the common challenges affecting board effectiveness?

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

Common challenges include: 

• Lack of diversity.
• Inadequate training.
• Crowded meeting agendas.
• Limited access to timely information. 

These issues can hinder the board’s ability to address complex issues and make well-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.

Boards can overcome these obstacles and improve their performance by: 

• Offering targeted education and professional development opportunities.
• Taking a strategic approach to agenda planning.
• Providing best practice report-writing guidance to management.

How do you measure board effectiveness?

Measuring board effectiveness provides valuable insights that can help improve the board’s overall performance and boost its contribution to organizational success.

Regular board evaluations, including self-assessments or facilitated external board performance reviews, can help boards identify their strengths and weaknesses and benchmark their performance against best practice standards. This helps the Chair and company secretary identify gaps and take proactive steps to improve the board’s effectiveness. Online tools can also gather and analyze data on board processes, activity, and impact, to support the board in developing a continuous improvement mindset.

According to research conducted by Board Intelligence in December 2024, only 17% of executives believe that their boards are set up to harness the opportunities presented by AI. Boards should regularly reflect on their performance in order to navigate new challenges and risks and harness emerging opportunities. By identifying gaps, boards can proactively stay ahead of industry demands and deliver guidance that helps their organizations thrive.