Governance: Board of Directors Effectiveness

On February 26, 2021, The Board of Governors of the Federal Reserve System issued guidance on the “Supervisory Guidance on Board of Directors’ Effectiveness.”

This guidance focuses on a board’s performance of its core responsibilities in describing five key attributes of an effective board. Although the guidance is directed to all domestic bank holding companies and savings and loan holding companies with total consolidated assets of $100 billion or more, in my view, it’s good guidance in general.

Board Effectiveness

  • Oversees the development of, reviews, approves, and periodically monitors the firm’s strategy and risk appetite.
  • Directs senior management to provide directors with sufficient information in scope, detail, and analysis to enable the board to make sound, well-informed decisions and consider potential risks.
  • Oversees and holds senior management accountable for effectively implementing the firm’s strategy, consistent with its risk appetite, while maintaining an effective risk management framework and system of internal controls.
  • It assesses and supports the stature and independence of the firm’s independent risk management and internal audit functions through its risk and audit committees.
  • Considers whether the board’s composition, governance structure, and practices support the firm’s safety and soundness and promotes compliance with laws and regulations, based on factors such as the firm’s asset size, complexity, scope of operations, risk profile, and other changes that occur over time.

Survey

This is sound but not new guidance. However, it did remind me of a recent survey that looked into top-performing boards.  Below are some excerpts from the survey.

  • The average Director spent 200 hours a year on board activities (excluding travel) per company, but not all Directors spend those hours the same way.
  • Directors spend more time on forward-looking, value-creating activities
  • Directors were less likely to spend time on lengthy financial statement reviews, audit-related activities, and compliance-related activities—although all those activities get done too.
  • Focus areas were strategic planning, oversight of M&A transactions, and CEO succession planning.
  • Directors also were more likely to report engaging in enterprise risk review, board refreshment activities, and crisis management scenario planning.
  • Directors report significantly higher satisfaction levels with their board culture. Ninety-eight percent of these directors rated their boards as a 9 or 10 on board culture on a 1–10 scale, over twice the frequency at which the global peer set rated their board culture.
  • Directors are open-minded but focused: They want to hear many viewpoints and conflicting opinions, but they engage with those voices in a productive manner focused on finding common ground and working toward an actionable conclusion.
  • Directors are mindful of the importance of building strong relationships inside and outside the boardroom.
  • Boards with the self-identified strongest cultures behave differently from those with weaker cultures due to director behaviors, board chair leadership, and purposeful decisions about how the board spends its time and energy.
  • On Boards with strong cultures, Directors are deliberate and thoughtful. They are more likely to challenge executives when appropriate constructively but are careful to avoid crossing the line from oversight into operations and management.

“Many times, it seems boards spend too much time on operational performance versus strategic issues,” one director wrote in the survey this year. “We eat what we are fed.”

Closing 

As the organization’s ultimate decision-making body, fundamentally, the Board of Directors plays two critical roles: overseeing management on behalf of shareholders and other constituencies; and advising management, albeit with limited involvement in everyday company operations. Today there is a lot of pressure on Boards to improve their performance and oversight, which means there needs to proper composition to help drive board engagement.

I welcome your thoughts and comments.

Best,

Jonathan T. Marks, CPA, CFF. CFE

 

Attribution

Russel Reynolds 2019 Survey or Study – Global Board Culture and Director Behaviors Survey

SR 21-3 / CA 21-1:  Supervisory Guidance on Board of Directors’ Effectiveness

 

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