Board effectiveness through the C-suite lens

In Asia, where hierarchy and structure are prevalent, rating one's superiors can be frowned upon as unacceptable. Perhaps, even tantamount to disrespect.

Consequently, the assessment of a board's effectiveness by management is an exercise not for the faint hearted. Some boards have sought to approach this delicate area by using independent third parties such as consultants and academics.

However, reaching out to management for its view of the board is not a common practice here. As such, it could be instructive to learn from the insights of a survey conducted by PwC and The Conference Board in November 2021 on Board Effectiveness: A survey of the C-suite. The survey reached out to 556 C-suite executives at public companies across the US, representing over a dozen industries, the majority of whom lead companies with revenues in excess of US$1 billion (S$1.36 billion).

The survey yielded interesting findings that can be applied to boards in Singapore.

Board-management dynamics

In general, C-suite executives recognised their boards' understanding and firm grasp of the company's strategy (84 per cent), key business risks and opportunities (79 per cent), competitive landscape (73 per cent), shareholder base (76 per cent) and executive compensation plans and incentives (72 per cent).

However, when assessing their directors' overall performance, the majority of executives (55 per cent) rated their boards as "fair", with only 19 per cent indicating a "good" performance and 10 per cent "excellent". Less than a quarter (23 per cent) of the executives surveyed said their boards were fully prepared for meetings and only 27 per cent said directors spent enough time on their duties.

The discrepancy between the 2 sets of findings could point to a lack of in-depth communication between the C-suite and their respective boards concerning expectation setting, and the need for more attention to board-management dynamics. Directors also need to be up-to-date on emerging trends and regulatory changes.

Refreshing boards

Another area highlighted by the survey relates to the topic of board refreshment. An overwhelming 90 per cent of the C-suites think that at least one or more directors on their board should be replaced. By contrast, 53 per cent of the directors who were asked the same board refreshment question did not think a change was required.

Part of the motivation driving the desire for board refreshment may stem from the presence of long-tenured directors. While experience can be an asset to boards, the presence of long-serving directors is viewed by the senior executives as possibly hampering board effectiveness: 60 per cent say this impedes board diversity efforts, and more than half (53 per cent) believe long tenure leads to diminishing director performance.

Interestingly, 42 per cent of the C-suites observed an excessive deference to veteran long-tenured directors on their boards. This is even more pertinent in the Asian context where there is an inherent deference to seniority and experience.

In Singapore, the nine-year rule was implemented at the start of 2022, where independent directors appointed to the board for more than 9 years have to be put to a two-tier shareholder vote. However, some companies have simply redesignated their directors as non-independent non-executive directors to keep them on the board.

Rules notwithstanding, boards and C-suites play an important role in ensuring a healthy pipeline of qualified, diverse board candidates that can be tapped on to supplement the range and depth of board competencies. It is prudent to prepare for board refreshments as part of an overall exercise to continually strengthen and renew the board with skills and backgrounds to enhance its capabilities.

Broad challenges

The pandemic-related challenges of the past 2 years are only some of the rapidly evolving challenges that companies face. Others include climate change, net zero targets, digital transformation and rising expectations of stakeholders. All these contribute to the uncertain business landscape that companies need to successfully navigate.

A significant proportion of the C-suite executives surveyed in the US expressed reservations on their boards' skillsets, expertise and knowledge to fully engage them in key areas. In matters like technology, crisis management, cyber security and ESG (environmental, social and governance) matters, only about one-third of senior executives rate their boards as being good or excellent in these areas. Put another way, two-thirds of US C-suites are looking for their boards to develop and grow expertise in these areas to have a better grasp of these critical issues.

Of particular interest is the area of ESG. Eighty per cent of directors surveyed indicate they understand the topic well or somewhat well, compared to just 47 per cent of C-suites when asked the same question of their boards.

While the results of this US survey need to be seen in that territorial context, the responses nevertheless throw up some interesting questions and issues that Singapore boards may wish to reflect on, as they work to continually upgrade and improve the standard of board performance.

The writer is a member of the Advocacy and Research Committee of the Singapore Institute of Directors.