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“Most governance problems can be solved through a combination of transparency, alignment, and technology.” Richard Daly, Bridging Board Gaps Study Group
The standard board evaluation approach is relatively simple. A checklist of questions is administered through a combination of questionnaires or interviews, the results tabulated, and the answers, patterns and recommendations for improvements are fed back to the board, typically through the Chair or the Governance Committee. Typical self-evaluation surveys focus on compliance with basic board processes, such as director attendance and participation, while more sophisticated approaches for evaluating boards feature professional evaluators for skill-matching, behavioral characteristics, and team dynamics.
However, we think that the standard approach is not sufficient for developing high performance boards that add significant value to the business – especially in response to a major corporate event, such as an IPO, restructuring, spin-off, bankruptcy, or alarm bell. These events represent opportunities for a board to redesign the board on a blank piece of paper. This is when we can take a fresh, big-picture approach to evaluate the board’s performance by assessing the following criteria known to contribute to superior firm performance:
• The sophistication of the business based on a maturity model
• The relative cognitive capacity of the board and management to deal with complexity and ambiguity
• The resources used by the board to inform their decision-making
• The adaptive capacity of the governance structure and board members
• The alignment of the board with the strategic priorities for the business
Each of the evaluation criteria is assessed along maturity model continua of business complexity and corporate lifecycle. The Aspirational Corporate Governance Framework defines three performance parameters we measure to determine the board’s ability to consider numerous factors in decision-making, and is set against a business complexity continuum.
We evaluate business maturity of a business according to the complexity of its business activities and stakeholder interdependencies. The fundamental distinction is between value extractors at the bottom and value creators at the top of the maturity hierarchy. Low maturity businesses extract value through internal efficiency improvements. High maturity businesses create value by transforming how value is created for society.
We evaluate board’s cognitive capacity according the to the duration of the longest task of directors and executives. Longer time horizons are an indicator of the complexity of factors being considered and the ambiguity inherent in the decision-making. At the low end, directors are consumed by compliance and quarterly performance considerations. At the high end they are engaged in reshaping their business ecosystems over the next 20 years.
We use questionnaires, interviews and board meeting observations to determine the individual and collective cognitive capacities of board members and executive management.
We evaluate diversity of information resources being used for decision-making to determine level of certainty boards have in the information upon which they base their decisions. At the low end of the information diversity continuum boards members are homogeneous and rely almost exclusively on information provided by management. At the high end, board members have highly diverse perspectives on issues and rely on a governance structure that provides direct input from a broad constituency of stakeholders.
We use questionnaires to determine the extent to which individual directors and the board collectively use a variety of information sources to inform their decision-making.
We evaluate a board’s adaptive capacity to determine the firm’s sustainability. Boards and corporate governance practices must adapt to external influences in order to survive longer. Board attitudes and corporate governance structures can either inhibit or enable change. At the low end of the adaptive capacity continuum we find entrenched directors and weak stakeholder rights. At the high end, directors are motivate primarily by a desire to serve the needs of the company, and the governance system is designed to empower stakeholders to collaboratively affect corporate actions.
We use questionnaires and interviews to determine the board’s adaptive capacity.
We evaluate how well a board is aligned with the strategic priorities of the business to determine the extent to which governance practices are supporting or undermining management’s ability to deliver results.
A firm’s strategic priorities differ as it evolves from early to late stages of its corporate lifecycle. Their corporate governance practices tend to adapt accordingly. Research has found that a Management Controlled Board style is associated with higher revenue growth, which is typical for early stage companies, while a Sovereign Board Style is associated with higher profitability, which is typical for established companies. We evaluate the governance practices of the board to determine its “style” and relate that style to its strategic priorities as an indicator of strategic alignment. We also identify the firm’s strategic stakeholders from stated strategic priorities and evaluate the board’s focus these stakeholders.
We use questionnaires and interviews to determine the board’s strategic alignment.