What makes a good board?

A robust communications interaction — where respectful discussion is allowed to flourish — can be the making of a successful board.

When it comes to the effective functioning of a board, experienced director Elizabeth Jameson AM FAICD says its internal dynamic is the “beginning, middle and end” of its performance.

The current chair of the Endeavour Foundation and the Queensland Theatre Company, and a director on dozens of boards over the past three decades, Jameson says a board’s interactions and how it makes decisions are crucial. “It makes all the difference in the world to have a strong and healthy dynamic,” she says. “A poor dynamic can destroy even a board made up of the best people in terms of skills and background. That is worthless if there is not a good dynamic.”

An effective board dynamic is defined as the interplay between directors and the habitual communication and decision-making processes built over time. It is not just worthwhile for individual directors seeking a harmonious workplace, it can have a material impact on a company.

Research published in the International Journal of Disclosure and Governance in 2014 found collective board behaviour contributed four per cent to company performance, compared to a 0.5 per cent contribution based on the individual skills of directors. Dysfunctional dynamics were found to detract up to four per cent in overall performance. So ensuring an effective process to evaluate and assess board dynamics can have a significant role in performance management and continuous improvement.

The 2018 AICD publication, Reviewing Your Board: A guide to board and director evaluations, notes that both collective board and individual director assessments should be standard. “There are few business units, work teams or employees in well-run businesses who are not subject to the regular discipline of performance evaluations,” the guide says. “These evaluations allow companies, groups and individuals to anticipate possible difficulties and encourage continuous improvement.”

Experienced director Jennifer Williams AM FAICD, chair of Yooralla and Northern Health, echoes the importance of continuous improvement. “The good thing about a board assessment is that it really makes you reflect on your behaviour,” she says. “Are you putting the right effort into all of the domains of responsibility that you have at the board? The discipline of these board assessments is very helpful in making sure that all aspects of your organisation are performing at the highest level they can. There are always improvements you can make.”

Red flags

After conducting more than 500 board evaluations over 30- plus years, Professor Geoffrey Kiel FAICD, chair of corporate governance and strategy consultancy Strategic Governance, has observed some red flags that can highlight when the group dynamics are veering off track. He says his part of the process involves asking directors how frequently their meetings feature certain behaviours.

These include one or more directors dominating the discussion, being overly emotional, directors being ignored or dismissed, or others who are unlikely to make decisions or change their mind, or who are slow to trust the information that is provided. There are also questions about professional courtesies, treating all directors with respect, arriving prepared and on time, or breaching confidentiality.

“What we know about board dynamics is that you can be too powerful, and come across as dominant, but you can also be too meek and mild,” says Kiel. “There are two ends and the ideal is to find the right balance. The most corrosive is with the CEO, and sometimes the chair, through their personality, or perhaps they own majority control.”

Kiel says that to “know thyself” as a director is the first step in creating an effective dynamic.

“The days of the very domineering CEO and chair are over. The new generation of directors are more in tune. They’ve learned about emotional intelligence.”

The individual vs the collective

Another key element in board evaluations is determining how the group comes together to assess competing priorities. Organisational psychologist and founder of Change Focus Group Rob Newman says the dynamics of decision-making have been the root cause of many high-profile governance failures. “The board dynamics part is where most boards fail at the corporate level,” he says. “The way we operate together changes how individuals will react. A board is a social environment.”

A healthy board dynamic fosters open and constructive discussions — facilitated by an effective chair — where dissenting opinions are welcomed. However, groupthink can set in if the group becomes overly comfortable or averse to challenge. A culture of not speaking up also risks poor and incomplete decision making.

Newman points to the banking and aged care royal commissions, where suboptimal outcomes emerged due to inadequate cultures and decision-making processes.

“Generally these were smart people and captains of industry with good intentions, still producing poor decisions,” he says. “We had the right input in terms of knowledge, people and intent. But for some reason, there was a black box between all these things. That black box is the way they interact with each other.”

The 2022 PwC Annual Corporate Directors Survey found that nearly half (48 per cent) of global directors surveyed would replace at least one or more of their peers. Almost one in five (19 per cent) would replace at least two. They cited a reluctance to challenge management or a tendency to overstep the boundaries of their respective roles in the colleagues they deemed to be underperforming. However, just 37 per cent of the respondents had implemented individual performance assessments, with another 35 per cent willing to adopt it.

Effective evaluation processes can assist to shine a light on any challenges in the board dynamic.

How and when to evaluate the board

From full external evaluations with surveys, interviews and observations, to peer reviews and team profiling, there are ways to evaluate the team interactions of the board. The group dynamics might be observed to provide insights into how and why the group makes decisions and takes action. Importantly, the structured reviews also provide directors with an avenue to optimise performance or raise concerns about the team’s effectiveness.

Jameson says her ideal process is for boards to rotate annually through a full external assessment, a “light-touch” review of the roadmap from that evaluation, and a team profiling exercise each year. She notes that these can provide insights into how and why individuals respond within the group.

“Boards aren’t doing [team profiling] enough,” she says. “In a lot of boardrooms, you’ve got really high-performing individuals who have had successful careers. They are experts in their own technical areas, but often they are not experts in psychology.”

Jameson adds that normalising the process can reduce tension among directors.

Newman thinks boards should have informal evaluations at the end of each meeting — noting what was done well, what could be improved, and what changes should be made. He says external reviews can assist to see what the board can’t see of itself.

“Insiders are often blind to the social milieu they live within,” he says. “Often, insiders have accommodated things they perhaps shouldn’t have, and may have some concerns — but an outside eye would see pretty clearly. The job as an external [evaluator] is to provide information and evidence to the board to then, as a decision-making body, use that information to reflect on itself.”

Booster shot

For two organisations, assessing the functioning of the board and its members proved a stimulus to performance.

Yooralla

For disability services provider Yooralla, assessing the board processes with an external review was just good governance. The chair of the Victorian-based for-purpose organisation, Jennifer Williams AM FAICD, says the AICD Board Advance program proved extremely useful, with insights into the organisation’s continuous improvement, succession planning and governance of strategic priorities.

“Even when you think you are a high-performing board and don’t have many issues, you may find some when you go through what is a reasonably comprehensive process,” says Williams. “There were useful elements that have now become a work plan for the board to implement.”

Williams, who is also chair of Northern Health, deputy chair of the Independent Hospital Pricing Authority and a board member of Barwon Health, says the evaluation resulted in an improved framework for short, sharp self-evaluations each meeting, a plan for board renewal to include more directors with lived experience, and a recommitment to a process for stakeholder engagement.

“If we had not had the evaluation, we probably would not have taken the time to identify those issues and make sure we followed up on them,” she says. “I wasn’t expecting any, but was pleased there were no surprises. Everybody felt we worked well together as a team and had respectful relationships.”

“A lot of the time, from a board perspective, it is go, go, go,” says fellow director Felix Walsh AAICD. “Sometimes, board evaluation doesn’t get the space it deserves. This actually carved out that space.”

ARC Disability Services

Liz Brown GAICD, chair of Cairns-based ARC Disability Services, also undertook the evaluation process last year as the organisation developed a new strategic plan. She says the disability services provider undertook the review to ensure it had adequate systems to enable growth and change.

“Part of that was looking at what foundational pieces we needed for the organisation and ensuring we had a really robust platform to be able to move forward,” she says. “We started with the board and our governance, and [questioned] if we have the appropriate structures, systems and processes that would be fit for purpose for the future.”

Brown says the process included the online questionnaire with all seven directors and five members of the management team, and a facilitated discussion post-evaluation. “The questions were quite robust,” she says. “The way they were asked really did make each respondent reflect on them. The outcomes and recommendations were not surprising, and really good. They gave us a really clear direction.”

ARC now has a roadmap for improvement, while confirming some existing processes.

“For us, it provided the validation of the key issues, and that was a really useful process,” says Brown.

This article first appeared under the headline 'The Dynamics of Decision' in the July 2023 issue of Company Director magazine.