Boards of US public companies should theoretically be more effective today than ever before. In the S&P 500, boards have reached record levels of independence and diversity. They have added directors with new competencies and expanded their roles in addressing social and environmental issues. Mindful of their increasing workload, they are also limiting the number of other boards on which their directors can serve.
Yet only 29 percent of US C-suite executives rate their boards’ effectiveness as good or excellent, according to a new survey conducted by PwC and The Conference Board of more than 600 executives at public companies. Many in management are dissatisfied. Their concerns include who is on the board, what knowledge they bring to discussions, and how they engage in the boardroom.
It is time for this to change. The issues management has raised anonymously in the survey should spark candid discussions not just in the boardroom among directors, but between the board and management.
As for who is on the board, 75 percent of C-suite executives want to replace either two or more of their directors. By contrast, a separate PwC survey shows that a majority of directors are satisfied with board composition. And when directors think one of their colleagues should be asked to step down, it can be because the director is either too deferential to management or oversteps the role of a board member. Executives are concerned about director behavior, too, but they also see turnover as necessary to increase the level of diversity and breadth of skills on the board.
Boards, not management, are in the driver’s seat when it comes to determining board composition. Boards can, however, solicit input from senior management when conducting annual evaluations of board performance or when recruiting new directors. A company’s chief financial, legal, technology, and human resources officers, among others, may have valuable perspectives on how to strengthen board composition. In addition, boards can conduct periodic assessments of the performance of individual directors, as is becoming a more common practice in the S&P 500.
When it comes to what knowledge directors bring to discussions, the good news is the C-suite survey showed the majority of executives believe their boards have a firm grasp of corporate strategy, business risks and opportunities, and the competitive landscape. But half of executives say their boards understand neither the impact of digital technologies nor the company’s climate strategy. These are critical gaps as we enter a new era of AI-driven digital innovation and a sustainability transformation. Just as concerning as subject matter gaps, 48 percent of executives say their boards do not understand shareholder priorities, and 57 percent do not understand the concerns of other key stakeholders.
In addressing this knowledge deficit, our view is that boards should be cautious adding “niche” directors who may be relied on (perhaps too heavily) for narrow expertise but add relatively little to most board discussions. Boards can, however, benefit from recruiting directors with experience in areas such as human capital and risk management, both of which have general applicability.
Finally, in regard to how the board conducts itself, only 33 percent of executives say their boards ask probing questions. From management’s perspective, the issue isn’t that directors show up unprepared, but that they are devoting insufficient time to their roles.
Board education can help close this gap. Well-informed directors are more likely to ask the right questions. Management should devote more resources to board education inside and outside the boardroom, so all directors are fluent in key areas and those in board leadership roles can serve as full strategic thought partners for management. The C-suite should provide regular, data-based reports on the state of the company’s relationship with, and expectations of, investors and other key stakeholders. And like a majority of the S&P 500, more boards should follow suit by engaging in direct discussions with investors.
It is also critical for both the board and management to embrace a culture that encourages candid, constructive discussion. But much of the burden falls on management: It needs to do a better job of providing premeeting materials that highlight key topics for discussion, and not overpack agendas with presentations that offer little chance for substantive dialogue.
These survey findings are a call to action. Without diminishing the board’s authority over management, boards should enlist senior management’s advice on board composition, its support for more in-depth director education, and its commitment to providing not only clear briefing materials that support debate and discussion, but also comprehensive information on the company’s relationships with shareholders and other stakeholders. Above all, directors should view management as a key partner in fostering greater board effectiveness.
This article was first published on the Barron's website.
