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Overburdened directors, slow response to risks, and gaps in digital transformation are hindering board performance. Please consider these fixes.
Higher expectations for the performance of corporate board members may require a major shift from the way boards have been run in the past. “Board bandwidth and the pace of change are testing board effectiveness,” according to a new study from PwC's Governance Insights Center and The Conference Board. While 41% of executives surveyed rated their companies' boards as excellent or good, the study also found that there are three main reasons executives feel their companies' boards are less effective. Of the more than 500 executives surveyed:
- 47% say too many directors serve on other boards
- 35% say boards are slow to respond to new risks and opportunities
- 34% say their board of directors has not kept up with digital transformation
In today's business environment, which includes capital market volatility, increased geopolitical risk, domestic political conflict, and increased regulation, many boards may want to consider addressing three issues that research suggests are reducing board effectiveness.
The study states that to improve board effectiveness, companies “may need to consider adjusting their oversight practices.” This means ensuring more time for forward-looking discussions, engaging early when issues emerge, improving the quality and timing of information, and ensuring that board composition and external commitments support the level of engagement the company currently needs. It may also require boards to dynamically re-prioritize as conditions change, practicing agility that management believes is essential to board effectiveness.
However, if a company's board and management team does not actively move to improve its effectiveness, it is natural to expect an increase in the number of shareholder proposals asking the board to address new risks, pursue new opportunities, or change business operations or board composition.
Additionally, to directly address the three main reasons why boards are ineffective, corporate board members might consider:
Regarding the excessive number of officers on the board of directors. Good governance best practices may dictate limiting the number of boards a company can serve on. Today, the typical non-executive director of an S&P 500 company serves on two or three boards at a time. This is probably an appropriate limit for boards to adopt, given the new responsibilities boards have taken on in recent years and the increased speed with which decisions need to be made to ensure positive outcomes.
Regarding the board's slow response to new risks and opportunities. New technology allows directors to make decisions faster. Important information can be sent to directors through the board portal or other software. Directors can meet virtually and, in some cases, with little notice if necessary. Artificial intelligence can be used to analyze large amounts of data and provide insights that improve the speed of board decision-making.
About boards not keeping up with digital transformation. Boards and management teams must commit to ensuring they have the resources to conduct a full-scale assessment of company operations and determine how technology upgrades will impact overall company performance. Delaying this process will only reduce company productivity and expose board members to the risk of being removed by shareholders for acting too slowly.
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