Selecting Board of Directors: What best practices organizations should adopt when selecting and assessing board of directors!

Selecting Board of Directors: What best practices organizations should adopt when selecting and assessing board of directors!

The Board of Directors are vital for any organization’s good governance. Governance determines how an organization is centered and where it stands. “The Boards of Directors are a group of individuals within an organization that are either elected or appointed as representatives of Shareholders or Owners to establish Corporate Governance and enterprise risk management policies”. (Source: ERMGovernance.com) It is given that for an organization to be successful, it should have a Board of Directors (BOD) with a broad mix of skills to oversee the wide range of issues that may arise. The BOD are collectively or in rare cases even individually accountable for your company’s performance, compliance and risk mitigation strategies. Depending on the size of the company and needs, the Board could be limited to just advisory role or fully mandated having the ultimate power as well as fiduciary / legal responsibilities. Since a BOD plays a crucial role in company’s strategy and risk management, it is essential that there is an effective process in place to secure the right mix of people in these roles.  In order to achieve this, most organization takes advantage of the Nominating and Corporate Governance Committee (NCG Committee). The NCG committee is in a unique position among all other board committees and can use a tool such as skills matrix to assist with reviewing the skill set of current Directors as well as identifying director candidates who best meet the need of the organization. (Source: ERMGovernance.com)

Often businesses may not have all the skills & expertise needed internally within its executive team. A good Enterprise Risk Management (ERM) requires the governance body to operate effectively in an ever-changing environment.  This is where a group of external and independent BOD can assist the leadership team focus strategically. The skills matrix is a very effective tool that outlines the desired complement of skills and areas of expertise that are considered important and being sought for the success of the organization. It could vary from organization to organization, but often share some core elements. Among many others these may include, industry/sector experience, financial literacy, CEO/senior executive experience, experience in areas of compensation/HR, operational experience, familiarity with the regions in which the organization operates and knowledge of corporate governance.

Safety & Risk Management, Governance and Strategy Development are among top three vital skills and experience that every board should possess. Although all other skills highlighted are equally important, a good balance and redundancy is often required. When selecting candidates for BOD, it is necessary to focus on the Board’s role in effective risk management.  Depending on geographical location, local and international laws demand risk management expertise at the Board level. For example, the Dodd-Frank Act mandates bank holding companies with total assets of $10 billion or more, and certain other non-bank financial companies to have a separate Board level risk committee including at least one Board of Directors with risk management expertise with experience in managing risk of large companies. In its report dated June 2015, The Conference Board Governance Center published “The Next Frontier for Boards: Oversight of Risk Culture” where it highlights some key challenges for Board oversight. The very first challenge highlighted in this report relates to the fact that many board members do not have real-world experience involving concepts of risk appetite, risk tolerance and appropriateness of risk culture.

A visual below is a good example of typical skills and experience that should be represented at the board level.

The NCG committee can benefit by making its BOD skill assessment and evaluation process transparent. One way to achieve that is to have some objectivity and rating criteria associated for its assessment. The below table outlines an example with rating criteria that one could use.

The skill assessment ranking is a tool that can also be used for developing education programs focused around the needs and interests of the BOD. It allows the NCG committee to adopt the Plan, Do, Study, Act (PDSA) cycle and continuously improve its skillsets. 

The Board shall review and, if determined appropriate, adopt a process recommended by the NCG committee for assessing the performance and effectiveness of the Board as a whole. Each year, the Board shall assess its performance and effectiveness in accordance with the process established by the NCG committee. Risk Mapping is a tool that can be customized to meet various risk assessment goals including BOD assessment. Typical risk map has severity and likelihood measures on XY grid. These severity and likelihood rankings can be customized to fit organization’s maturity and risk tolerance level. For the simplicity and demonstration of this concept, I have replaced the severity likelihood concept with percentage of director and ranking assessment. Where, percentage of director serves as a proxy of likelihood (e.g. higher the percentage of director correlating with expertise lesser the risk to the BODs capability for managing risks). The following risk map illustrates how to visualize the skills-gap based on the NCG committee’s assessment.

In the above example, position (A) describes a situation where 95% of the Board of Directors are self-assessed as beginners. Based on the assumed risk tolerance, this would fall under a critical risk situation. In a different scenario, position (B) describes a situation where 95% of the Board of Directors are self-assessed as Expert, putting organization in the best possible position from governance risk perspective.  This example is just a high-level illustration of governance structure assessment. There are many other aspects of governance structure including roles, responsibilities and policies that needs to be considered when measuring the effectiveness and resiliency of organizational governance.

What is your story?

I am very keen and interested in hearing your feedback and experiences in forming and managing a Board of Directors for your company. Please share your learning, challenges and insights.