What makes an effective board?

How do boards maximise their effectiveness and what should they really focus on? And how can directors maximise their positive impact in an increasingly complex world? We asked Ryan McCarthy of the Board Leadership Centre for his insights.

With business becoming more demanding, the role and composition of boards has never been more relevant. According to McCarthy, this is especially the case for a wide range of stakeholders including current and aspiring board members. It also has implications for the evolving requirements for successful board members. “Companies have become more sophisticated in how they think about boards, how they think about the balance of skills and critically - how they think about diversity and especially diversity of thought.”

Experience no guarantee

Reflecting on the long term implications of the global financial crisis, McCarthy believes that one of the things that we've learned, particularly in Ireland, is that you need deep skills at board level to cope with issues that can confront every business.

“Just because someone has had a successful career in a previous life doesn't necessarily mean they’re best qualified to deal with a crisis that might hit the company they serve on the board of.”

According to McCarthy, given that the range of risk issues has grown exponentially, boards need to concentrate on certain issues when it comes to managing risk. “Boards spend a lot of time thinking about the risk management and from a corporate governance point of view, every company worth its salt will have risk registers and will have a processes in terms of evaluating and mitigating risk.”

Just because someone has had a successful career in a previous life doesn't necessarily mean they're best qualified to deal with a crisis.

Ryan McCarthy

Board Leadership Centre

Breaking risk into categories

However, McCarthy says the key to good risk management actually is more straightforward. “It's about taking the time to identify the very small number of risks that could have a real impact on a company. However, you also have to work out, do you have the skills and resources to cope with risk.

He believes it can be useful, for example, to categorise risk into various areas to help boards focus on the implications and mitigating actions. These could cover environmental, financial, geopolitical, behavioural/reputational and technological analysis as a starting point for any assessment and can be useful in understanding potential sources of risk and how it varies.

"The reality", says McCarthy and as seen over the last three or four years, is that we've been hit with risks, that in many cases came from left field.” He cites the growing impact of geopolitics from what had been a relatively benign base and notes how it is challenging boards to reassess their knowledge and sources of insight about how the world works and how it is changing.

McCarthy references the implications of the Russian invasion of Ukraine, the impact of which caught many organisations off guard and quite unprepared. “Companies who were nimble in terms of assessing impacts from these types of risks in terms of issues such as supply chain, fuel costs and so forth were able to manage that risk on a live basis much better than those who turned out to be unwittingly complacent.”

The balancing act

McCarthy also recognises that boards are often challenged in deciding where to focus. He acknowledges that businesses obviously need to get the basics right, serving customer needs, investing appropriately, and ultimately staying profitable.

However, he says that it is worthwhile taking some time to consider how to get the balance right between near-term and longer term risks. “I think it's a real challenge for boards to switch gear from thinking about current risk or near-term issues and the known knowns, vis-à-vis the unexpected that are more often are in the medium to long term.

Ultimately, he believes that boards and companies need to build deeper capability to deal with crises. “Getting the basics right around finance, governance and good information; good data, good reporting and increasingly good advice goes a long way. And I think if you build up the skills and the resources in those areas, you’ll be in reasonably good shape to cope with much of the unexpected.”

However, he believes boards need to consider if they need deeper support, and cautions that seeing risk as a desktop exercise of managing a list of issues is ultimately what causes trouble when crises emerge.

Really effective board members take the time to be self-aware about where they can best make a difference.

Ryan McCarthy

Board Leadership Centre

The value of self-awareness

And with so much information available to board members, what should current, or aspiring board members consider in terms of their effectiveness? McCarthy believes that really effective board members take the time to be self-aware about where they can best make a difference.

“The reality is, boards have no shortage of material to cover as provided by management. However, the best directors are very good at making sure that they're impacting companies and boards at a strategic level. They don’t get stuck in detail, and they stay alert to the sometimes initially faint signals of risk or organisational or market problems."

Reflecting on nearly two decades of advising business leaders and boards, McCarthy says that the volume of material that board members get asked to go through is vast and is increasing all the time.

“Good board members focus on things that are of real strategic value to companies and focus in on those things in particular and in the right manner. Critically, they know how and when to leave executives to manage the business and focus on the things that are actually impactful in terms of future direction.”

The benefits of the Board Leadership Centre

Finally, reflecting the changing nature of boards, those with board responsibilities have a new Irish based resource to support them.

Commenting on the recent highly successful Irish launch of the Board Leadership Centre, McCarthy says, “We’re acutely aware of the volume of information and noise that boards are confronted with. Our ambition is help boards and board members and chairs distil that information. We focus on the things that help them make really good decisions. Importantly, we also want to help them understand the implications of new, emerging issues before they become problematic, and we help boards gain insight into the strategic opportunity inherent in change.”

McCarthy concludes, “We’ve created a forum where on a peer to peer basis, board members and chairs can get together and share their own thoughts and insights around leadership and governance. And the added value is that we can bring the best of KPMG globally to this group and also bring the best external contributors to help inform better decisions.”