Governance in focus: A strong chairman can deal with difficult issues

Board members across the Gulf are becoming aware of the need to enhance knowledge, skills and capabilities, for better corporate governance as a board’s effectiveness can at times unfold under the scrutiny. But what makes an effective board?

Alvaro Sanmarti / The National

Company board performance is under the spotlight more than ever before. Media coverage of recent governance failures, including Volkswagen, Fifa and Toshiba, highlight that the effectiveness of boards can at times be strongly tested, and this test may unfold under the scrutiny of shareholders, customers, media and the public.

While no company wants to ever face such highly disruptive events, sometimes even the smallest organisation will need to tackle emerging issues that require strong leadership from the chairman and his board.

Board members in the Gulf are becoming more aware of the necessity to enhance their knowledge, skills and capabilities, to build better boards. This is evidenced in a study last year by the GCC Board Directors Institute (BDI), where fewer than one third of the board members surveyed believe boards in the Gulf are effective.

But what makes an effective board? The Institute has conducted extensive research into the facets of board performance, and has found that four specific key areas are conducive to highly effective boards.

First, the role of the chairman is crucial in driving board performance. Broadly speaking, the chairman ensures that the board performs effectively and supports the business and strategy of the company. A good chairman works well with people, gains consensus, and is “brave” enough to do what is right for the organisation. That chairman has the responsibility to challenge and support management, frame the discussions in a manner that enables the board to address key issues and formulate proper resolutions. In times of crisis, a strong chairman does not lose sight of the company’s purpose and continues to lead the board effectively, deals with disruptive, unforeseen events and protects the organisation’s long-term interest, above all else.

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Governance in focus

■ Management: Know your requirements before you set up a board

■ Teamwork: The board is a team, and that's how it must work

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■ Awareness: UAE companies increasingly aware of gains to be had

■ AGMs: When annual meetings become forums for confrontation

■ Virtual AGMs: When the AGM is everything but personal

■ Editor's letter: An issue important to our well-being

■ History: Be good, because investors are watching more closely

■ Poll: Corporate governance in the UAE – have your say

■ Analysis: A good board brings right mix of knowledge and culture

■ Gender equality: 30% Club GCC chapter to boost women numbers on company boards

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Second, succession planning for senior management roles is pivotal for the long-term success of all companies – whether they are publicly listed, state-owned, family owned or privately held. More than 40 per cent of BDI’s survey respondents said that their organisations did not have a succession plan in place. Highly effective boards develop and continuously revise the plan. To ensure a successful transition, implementation of the succession plan can begin as early as three years before the transition. In the most effective chief executive replacement plans, the chief executive also plays a key role in selecting, grooming and onboarding their successor. Continuous succession planning helps the board to remain aligned on the development of the senior management team and the specific needs of the organisation. A solid plan leads to a smooth transition, which contributes to sound governance, mitigates risk and fosters the trust of shareholders and stakeholders.

The third pillar for high-performing boards is risk management. According to the institute’s survey of GCC board members, 44 per cent of respondents identified audit and risk management as being areas where they would like more expertise. In addition, more than a third of respondents disagreed when asked if all their colleagues had a clear understanding of the top five risks facing their company. A paper by PwC summarises the responsibilities of a board in relation to risk well, stating that the board is responsible for understanding company management’s approach to risk appetite – and also for having substantive discussions about it as part of strategy and risk oversight. According to PwC, it is this active involvement of the board in risk discussions that is pivotal to a company’s adequate approach to risk taking and management and which will ensure a company’s success in the long-run.

Strategy is the fourth driver of high-performing boards. Many organisations spend time reflecting on past performance, when looking forward is essential in driving future growth. More than half of respondents in the BDI survey agreed that all members of the board made a significant contribution to strategy development and strategy-related discussions. These same discussions ensure that the board is fully engaged with the strategy of the company, and allow boards to play a role in understanding and shaping company direction in partnership with management. Boards then must hold management to account in delivering on that strategy.

The board performance recipe counts several essential ingredients but four are indispensable: role of the chairman, succession planning, risk management and strategy.

Ultimately they will enable the company to successfully navigate emerging issues, sustain organisational performance and longevity and overcome intense difficulties, in or out of the public spotlight.

Jane Valls is executive director of the GCC Board Directors Institute, a not-for-profit organisation