Governance innovation needed for higher board performance

New thinking on past issues and future action should be top of directors’ minds.

When asked what impedes board performance, directors nominate usual suspects: an overemphasis on compliance rather than strategy; poorly structured and facilitated board meetings; and overly long, complicated board papers.

Few could argue these and other recurring governance obstacles have been resolved. As boards streamline their processes, extra regulation and rising governance expectations are adding to compliance, board meetings and board-pack length.

Company director and governance consultant Anne Skipper FAICD AM, says the core problem is lack of innovation in board processes. “If you look at the typical board meeting and board pack, it’s about directors analysing information from the past. That’s important, but so too is boards structuring time to think about what’s ahead.”

Dr Vince Murdoch, a governance consultant, says boards must be bolder with change if they want to lift performance. “Extra regulation and industry disruption are not going away. On the one hand, boards face greater compliance because of heightened community expectations and government regulation. On the other, they need more time to focus on strategy because of industry disruption. It’s a hard balance to achieve.”

Murdoch adds: “Finding ways to streamline board meetings or board packs is needed, but it is ‘low hanging fruit’. When one considers the many challenges facing boards, it’s obvious they need to be more innovative to maintain or enhance their performance.”

Here are eight ideas to drive governance innovation:

1. Different governance models

Murdoch believes boards could consider aspects of Netflix’s governance model, where directors attend senior management meetings throughout the year and board presentations are structured as online memos with links to supporting information.

Netflix’s goal is to increase transparency among the CEO, executive team and board – an approach that is working, judging by the US entertainment giant’s success this decade.

“I doubt that Australian boards are ready for the Netflix model, but it has merit,” says Murdoch. “It addresses one of the great problems affecting board performance: directors having far less information than managers and limited exposure to the firm’s day-to-day activities. Finding ways to engage directors more in the firm, without encroaching on management, has value for boards that want to lift performance.”

2. Board, management interaction

Murdoch has coached boards on how to ask questions of management. Separately, his firm has coached executives on providing information to boards and liaising with directors. “We assume directors know how to ask questions of management, and executives know how to get the best from the board. But problems in this relationship often detract from board performance.”

Executives can think they are being “interrogated” in board meetings and fear the governance process amid intense regulatory, investor, media and community scrutiny of organisations, says Murdoch. “Boards are under rising pressure to challenge management on issues and the risk is board meetings start to feel more combative than collaborative. And that executives become more defensive and less open with the board.”

Murdoch says improving board/management interaction is an under-recognised opportunity. “In one case, we coached management on how to prepare information for the board, present it and respond to director questions. Board productivity increased markedly. Management also felt better about the process because directors had been coached on how to ask questions and get more value from the information.”

He recommends executives move from a ‘presentation mindset’ to one of discussion facilitation in their board interactions. “We have always thought about executives presenting to boards whereas perhaps we should be considering executives as the stimulus for a discussion with the board. Directors complain when they’ve already read the paper and executives proceed to present what’s in the pack. If we allow ourselves to think about it as a discussion, executives and directors can more fruitfully debate the vital issues and the board can use the additional time to reflect and determine their view. It can be a lightbulb moment when executives view board-interaction differently.”

3. Board-meeting cycles

Murdoch says more boards should challenge traditional thinking about meeting cycles. Instead of having, say, 10 meetings a year, a listed-company board might move to a quarterly cycle with each meeting running two or three days. Key committee meetings, such as for audit, would stay monthly and the main board could have shorter meetings as needed.

“The current cycle of monthly meetings puts directors and managers on this never-ending cycle of board-pack preparation and meetings,” Murdoch says. “Consider a 1,000-page board pack for a bank board: directors probably expect the pack at least a week before the meeting; the CEO needs to see it a week before directors; managers need to write their part a week before the CEO gets it; and the company secretariat starts on it a week before that. It’s quite possible that next month’s board pack is being written before the current board meeting has occurred.”

Murdoch says fewer, longer board meetings would help directors conduct “deep dives” on issues and have extra time to meet stakeholders in the field. Quarterly board meetings could be held at different company locations and would take pressure off management to prepare board packs. They would also give directors extra time to digest information.

“Quarterly meetings would not suit all boards and I’m not suggesting boards would not meet monthly in other formats” he says. “Or that quarterly meetings would reduce director workloads, although one could expect a rise in board productivity. But too many boards and executive teams are on a ‘hamster wheel’ of monthly board meetings and packs because that is how it is always done. Something needs to change.”

4. Board packs

Murdoch says board packs remain one of the biggest frustrations for directors and a key factor inhibiting performance. Directors complain that packs are long, too poorly structured, information dense and do not adequately facilitate discussion and decision making.

“The typical board pack is written by several authors, such as division heads, and often lacks a coherent narrative and flow. This is a big problem because the board pack is still the main information source for directors. If the pack is too long, incorrectly structured or has the wrong information, directors have a distorted lens and their decision making and performance suffers.”

Murdoch says boards should rethink how they receive information. “Board packs are generally already too long and getting longer. It’s not enough to keep pruning the pack because more information is being added as new regulations emerge. One wonders how directors can read, let alone contemplate, board packs that are hundreds of pages long each month.”

5. Forward-looking focus

Anne Skipper says boards must find more time to focus on emerging issues and trends. “Industry is changing so quickly. It’s critical that board processes enable directors to think how about their organisation and industry could be disrupted or enabled by technology.”

Skipper chairs Silver Chain Group, a not-for-profit in the healthcare and aged-care sector that is known for innovation. She is also a director of People’s Choice Credit Union, Chair-elect of the Future Ageing Co-Operative CRC and Chair of Principal Australia Institute.

“I structure up to an hour-and-a-half at the start of Silver Chain meetings for directors to discuss disrupters to the organisation and what the future could look like,” says Skipper. “Compliance is critical, but I want the board to be forward looking and strategy focussed. You cannot drive board performance if the focus is mostly on compliance and the past.”

6. Information flows

Skipper says the traditional approach of directors getting a board pack each month that collates information, which might be several weeks old, is too slow. “Boards must find ways to ensure they have access to real-time information that is constantly updated. They should be able to contribute to the information, not just rely on what management provides them.”

She favours the ideas of interactive board information. “Rather than board packs being sent to directors when they are done, there could be a central repository for this information and sections of the board pack made available when they are completed. In this way, the board pack becomes a living, breathing document that management and directors can add to, rather than this voluminous pack that directors have to grind through. And directors can read this information throughout the month, rather than only in the days before the meeting.”

7. Decision-making frameworks

Clearer guides to enable decision making could enhance board performance, say Skipper. “You don’t want to be too rigid or have a one-size-fits-all criteria, but I do believe a well-considered framework can improve board decision-making and performance.”

She adds: “A good framework can help directors test if a management recommendation will make the organisation more efficient or profitable. And whether that decision aligns with organisation culture and values and stakeholder expectations. There’s been too many instances of boards approving management recommendations to grow revenue, without testing whether it was the right kind of revenue growth and if that growth was sustainable.”

8. Governance ‘pop-ups’

Skipper says the main board and its committees risk being too structured as markets are disrupted. “We need to find ways for directors and management to work together to explore emerging issues and trends, without adding yet another permanent committee or board task.”

Skipper likens this process to a ‘pop-up’ store that opens for a short time and achieves fast outcomes – an idea she gleaned from a fellow board director and governance consultant who uses this technique with startups and new business ventures. “A board might form an innovation taskforce to investigate an emerging threat or opportunity for the organisation and work with management. The taskforce reports back to the main board on the project and is disbanded upon completion.”

Working groups on boards are not new and many boards are reluctant to add another permanent committee to address emerging issues. Nevertheless, Skipper believes boards are missing an opportunity around working groups as a structure to examine emerging issues.