The concept of corporate governance is constantly changing. The conventional governance model, known as shareholder primacy, which gives preference to the interests of shareholders and commercial profit over everything else, has been challenged by the increasing prominence of stakeholder capitalism. This approach demands that boards and executive leaders also consider the needs of clients and employees,  as well as the impact of their decisions on other stakeholders, communities and the environment.

The Covid-19 pandemic accelerated several trends that had already been disrupting the business world. These include digitalisation, ESG issues, sustainability and resilience, as well as diversity, equity and inclusion. The pandemic also highlighted an increasingly volatile, uncertain, complex and ambiguous business environment. These factors add to the board’s challenges, intensifying the ‘issue load’ it must manage and increasing the complexity of its leadership and governance roles.

As trusted advisers to the board, the role of the governance professional is one of constant adaptation, evolving to a multifaceted and increasingly pivotal position that incorporates a much wider remit than purely administrative and technical governance solutions. Those working in governance roles must continually advance and expand their skills while developing the organisation’s governance model.

Effective sustainable governance

The board’s fundamental role is to provide insights, foresight and oversight to steer the company  in advancing its operations, financial performance, strategy and stakeholder engagement, while remaining true to its mission and purpose. A sound governance framework can assist the board in fulfilling its responsibilities and maintaining effectiveness during times of change and growth, without losing integrity and values or compromising quality and purpose. The following are the key pillars of board effectiveness.

Board mission and purpose

An effective board should clearly understand the mission and purpose of the organisation it serves and ensure that all decisions the board makes regarding its operations, policies and strategy are aligned with such mission and purpose.

Board structure and leadership 

Due to regulations and exchange requirements, boards usually establish audit, remuneration and nomination committees. Today, more boards are establishing other standing committees, like executive, ESG/sustainability, governance, risk and compliance committees, to absorb some of the work overload and to drive focus on strategic issues. Ad hoc committees may be helpful at times to handle shorter-term board matters.

Once the board and committee structure is established, it is important to have a well-defined authority and decision matrix. This matrix will specify who is responsible and accountable for making the relevant decisions, whether it is the entire board, a committee or a particular director. It will also define who must be consulted or informed before or after the decision is taken. The matrix should be updated regularly to reflect changes in the business environment and priorities. It should be detailed enough to guide the management on when they need to seek board approval and what process they should follow to communicate information on matters not requiring board decisions but still part of the governance process.

Board composition

Building a high-performing board is similar to managing an orchestra or a sports team. It requires careful planning and consideration of the skills, talents and competencies of each board member. Effective board members should possess core leadership skills and values that include ethics, integrity, communication (including active listening), inspiring and empowering others, and strategic and critical thinking.

It is essential for board directors to have a solid understanding of corporate governance principles, legal and regulatory requirements, and ethical standards. They should also demonstrate a commitment to progress, organisational values, ongoing professional development, and service and contribution.

In addition to these skills and qualities, behavioural attributes and competencies that enable directors to contribute to board effectiveness are also important. This includes engaging and collaborating with fellow board members, management and stakeholders. It also involves discretion and diplomacy.

Information infrastructure 

Timely access to reliable and high-quality information is the bedrock of the board’s rational and efficient decision-making process. An effective board information infrastructure delivers board meeting materials that are complete, accurate, clear and concise in a timely manner. The board should not be inundated with irrelevant details or information overload, nor should it be required to make decisions before all the information is provided and considered.

To make the most value out of it, the board information packs should be sent to the board of directors sufficiently in advance. This allows everyone to fully absorb, consider, prepare and actively contribute when the time comes. Information on complex issues and emerging trends should be presented in an easily understandable format, which may include visual presentations.

Also, it should not be a one-way download. All directors should understand that they must come prepared to engage, discuss issues and deliberate at meetings, not simply to review board materials and hear presentations. Boards should seek independent third-party reports and insights on stakeholder feedback, emerging trends, and economic challenges and opportunities.

Board culture

Culture has gained recognition as a crucial factor in good governance in recent years. Diversity is a major part of fostering a healthy culture, but this goes beyond gender and ethnicity – it encompasses multiple dimensions that are indispensable to board effectiveness. In my previous article in this journal, I discussed the promotion of diversity of thought as one value or mindset. Groups that have a greater diversity of thought have more significant cognitive potential to generate alternative solutions, to communicate unique insights between group members and to reduce the risk of unchallenged decision-making. All board members should be receptive to different viewpoints and should feel included, heard and respected.

Other crucial characteristics of a robust board culture include a healthy and respectful partnership between the board and the executive, trust and candour between board members, thoughtful and productive resolution of issues or disagreements and a willingness to address poor board behaviour that negatively impacts the board.

The role of governance professionals 

Corporate governance guidelines

As with any successful team, the board’s effectiveness is rooted in having a shared mission, purpose, engagement strategy and vision. Governance professionals can assist the board in creating guidelines for corporate governance that clearly define the board’s purpose, values, engagement practices and strategy.

Clarifying and communicating these standards offers a definite direction to the board members that helps them make informed decisions and advance the company’s purpose, strategy, performance and long-term value. These guidelines can also act as a helpful reminder to board members of the higher purpose of their work, including the mission, vision and values statement, the people they are working for and the people they represent. Clarity in these issues is particularly important in times of conflict.

Board and committee meetings 

Efficient and effective board meetings play an instrumental role in every organisation’s healthy and good corporate governance system.

One of the most common challenges to board effectiveness and performance is staying focused on strategic, performance and governance priorities, and a growing range of competing business-critical topics, without being distracted by unnecessary detail or time-consuming and energy-sapping administrative and procedural matters.

Governance professionals support the Chair and the board by being valued advisers promoting and sustaining the robustness and efficacy of corporate governance arrangements and practices, and by ensuring alignment of the board’s oversight focus with the company’s strategic priorities and governance considerations through proactive management of board and committee work programmes and agendas.

Board and committee meeting schedules and core agendas should be formalised for the upcoming year or two, reducing scheduling conflicts and director absences. The development of an indicative annual work programme for the board (and committees) will allow governance professionals to engage objectively with the Chair and CEO on the shape and proposed content of board and committee meetings a few months out. There must also be sufficient inbuilt flexibility to facilitate the addition of the inevitable last-minute imperatives.

The work programme for each meeting will typically need to cover the following topics:

• management update
• updates on strategic priorities and projects
• business and operational deep dives (these updates should also include market and competitor analysis, where relevant, to provide the board with a comprehensive understanding of the particular business and sector operating environments)
• material governance and regulatory considerations, and
• administrative imperatives such as minutes and progress on addressing matters arising from previous board meetings, and approval of amendments to key governance documentation.

When creating a meeting agenda from the work programme, it is important to allocate a significant portion of the agenda to discuss strategy, business and performance-related goals. While it is crucial to address governance, regulatory and administrative matters, the board’s focus should be on priorities that have the potential to create real value for shareholders and stakeholders. Unanimous written consent for board or committee action on routine, non-controversial matters could be an effective way to save time.

Information and communication conduit

Poor communication may block the board’s decision-making and collaboration. Ensuring best-in-class board information management, processes and dynamics is at the  heart of the governance professionals’ role. Governance professionals hold a unique position encompassing strategic and operational activities, and acting as a bridge for information, communication, advice and arbitration between the board and management, as well as between the organisation, its shareholders and its stakeholders. Due to the nature of their role, governance professionals are ideally placed to align the interests of different parties around a boardroom table, facilitate dialogue, gather and assimilate relevant information and enable effective decision-making.

Governance professionals should ensure board papers are written in a style which is clear, concise, complete and in understandable language, answer all the questions that directors are likely to ask and adequately reflect the substantive matters for consideration, as well as the decisions or actions required, and that they are distributed well in advance of board and committee meetings. This should enable directors to contribute fully to board and committee discussions and debates, and enhance the board’s capability for sound decision-making.

Sufficient time should be allocated to facilitate constructive dialogue and discussion. Board members should be encouraged to actively engage, ask questions and speak up. The directors’ contributions will provide different perspectives, facilitating consideration of the problems from different angles before the board arrives at the solutions, thus avoiding the danger of groupthink.

After the board meeting, it is necessary for the governance professional to promptly deliver high-quality, concise, complete and coherent minutes for approval by the directors. This ensures that the directors’ memories of the meeting are still fresh and allows all present directors to review the minutes before they are finalised. Governance professionals should also have a process for promptly communicating board decisions, such as complying with any regulatory filings resulting from the meeting’s decisions and notifying the management team of any decisions that affect them or require their action.

Promoting board culture

The modern governance professional serves as a vital link between the board, the shareholders and the various business units. He or she  acts as a facilitator, helping to convey important information between these parties. By attending board meetings, governance professionals gain a deep understanding of the board’s goals and desired culture. Additionally, through their daily interactions with the business and the shareholders, they gain first-hand knowledge of the actual culture on the ground and any external perceptions. This places governance professionals in an ideal position to identify and escalate pertinent information and practical insights, help advance the cultural framework agenda and coordinate teams on behalf of the board.

Perhaps even more fundamental is the governance professional’s ability to influence culture at the board level. By accentuating the positives, minimising the negatives and utilising tools like board training and development,  and board effectiveness reviews, the governance professional can create  a shift in mindset that will result in different role-modeling behaviours. As an expert in governance, the governance professional will be the key adviser to implement new corporate governance measures.

Governance professionals can help arrange for the board to engage in informal ways between meetings to foster trust and build relationships.

Induction, training and succession 

Board evaluation is increasingly acknowledged as an integral part of the process for improving board performance and dynamics, regardless of size, status or type of organisation, but not when considered only once a year. Sustainability is central as boards must strive to achieve continuing effectiveness and high performance throughout recurring annual cycles, not just around annual review time to ‘tick the box’.

Where possible, the board should develop and maintain, in collaboration with senior management, a competency map (or board skills matrix) that identifies and scopes the skills and type of experience needed on the board now and into the future based on an understanding of the company’s strategies, key stakeholder demands and increasing regulatory scrutiny of board effectiveness. A board should also ensure that directors are evaluated based on their behavioural competencies. These qualities impact their relationships with others on the board and their decision-making contributions.

Governance professionals support the Chair and the board in determining skills requirements and membership appropriate to the organisation’s purpose and strategy, and in achieving the proper mix of diversity and experience on the board and committees, consequently facilitating related succession planning requirements, as well as board evaluation and directors’ induction, development and training requirements.

Governance professionals also have a crucial role as ‘talent managers’ for the board, ensuring that the talent within the boardroom is effectively nurtured and that new directors are valuable additions to the board. This includes promoting an effective induction and transition process, and providing customized continuous learning and development opportunities for board members.

Conclusion

In today’s corporate world, there is a growing emphasis on the effectiveness of the board and its ability to continuously improve as a high-performance team. A highly effective board of directors can contribute significantly to the success of an organisation beyond its statutory requirements. It is a powerful source of added value to the company, as well as its customers, shareholders, directors, executives, employees and many other stakeholders. An equally effective governance professional plays a decisive and influential role in ensuring the board achieves sustainable effectiveness.

Patricia Hui FCG HKFCG(PE)

Lawyer and governance professional

Ms Hui’s previous CGj article was published in the November 2023 edition of this journal.