Methodology — WhatWhoHowDo™
The Board Benchmarking survey methodology is based on our unique WhatWhoHowDo Framework designed by a world leader in corporate governance and board effectiveness. The WhatWhoHowDo Framework was created after many years of interviewing hundreds of directors around the globe and internally observing dozens of boards in action.
The WhatWhoHowDo Framework can be shown diagrammatically as follows:
Each element of the WhatWhoHowDo Framework is set out below:
“What” — Board structure and role clarity
The “What” describes the scope of the board’s responsibilities.
Most importantly, the “What” sets out the “road-map” or “rule-book” for proper corporate governance. This component of the framework considers the extent of the documentation of roles and responsibilities of an organisation’s board of directors, committees of the board and individual directors. The appropriateness of the size and structure of the board and its committees, the clarity of performance expectations for individual directors and the extent to which the board is independent of management (including having independence of mind and judgment) are all dealt with under “What”.
“Who” — Board composition
The “Who” describes who is on the board.
This section focuses on the competencies and skills of existing (as well as prospective) directors, including their effectiveness. It also considers how new directors are recruited to the board, their induction, their opportunities for continuing education and development, important qualities that directors should possess, whether director performance is regularly assessed, how under-performance is dealt with and the adequacy of director remuneration. Best practice includes, for example, a “gap” analysis of competencies and skills that are required for a board given the organisation’s strategic needs, what the existing competencies and skills of current directors are, and how the recruitment of new directors takes this “gap” in competencies and skills into account.
“How” — Board process
The “How” describes how the board carries out its main tasks.
How a board comes together to make decisions is a critical determinant of the quality of its decision-making and ultimately its effectiveness. How boards act — or fail to act — is a complex interaction and the result of many factors including:
- the leadership skills of the chair of the board
- individual director behaviours and director dynamics
- the nature of the board’s relationship with management
- how board meetings are operated
- the appropriateness of information received and internal reporting
In short, these items are the “hard” and “soft” elements of “board process” or “How” the board makes decisions. Because so many of these factor manifest themselves “inside the boardroom,” or at least “behind closed doors,” little is known of the effectiveness of boards at these processes, nor is much of this information disclosed publicly. Nonetheless, research suggests board process lies at the heart of whether a board will be “effective” or not at carrying out its tasks. If the “How” is carried out well, this will increase the effectiveness of the board as it carries out its main tasks.
“HOW” — A) BOARD AND COMMITTEE LEADERSHIP
The leadership skills of the chair of the board are central to an effective board process. Effective boards are invariably led by a strong, diligent chair, a chair that builds healthy board dynamics and who is trusted by the other directors. This section also deals with questions such as the following: Does the chair conduct effective meetings? Is the effectiveness of the chair assessed regularly? What is the basis for selecting the chair of the board and chairs of committees? How does a board deal with ineffective leadership? The answers to such questions will determine the effectiveness of the board’s leadership.
“HOW” — B) BOARD BEHAVIOURS AND DYNAMICS
Directors may possess the appropriate business experience and competencies but if they do not “behave” in an appropriate manner around the board table, they will fail to contribute effectively to a healthy board dynamic. Collectively, a Board should have a balance of behavioural styles or its dynamic (and ultimately its decision-making) will be deficient. Identifying, assessing and modifying individual director behaviours are very difficult tasks for most boards to achieve. This component of the framework accordingly considers the extent to which the board works constructively as a team, creates organisational value through high quality decision-making and whether irectors listen to and respect one another. It also addresses how undesirable director behaviours are dealt with and whether any organisational topics are off limits.
“HOW” — C) BOARD AND MANAGEMENT RELATIONSHIPS
Effective decision-making also results from the quality and nature of the relationship between the board (including board committees) and management. The CEO typically has the power to influence this relationship, including the power to determine how information is filtered, the exposure of direct reports to the board, and, most importantly, how open management is with the board. Trust and constructive dialogue between management and the board and the committees of the board will impact on the success of the board and management relationships. This section also addresses whether bad news is promptly communicated to the board and the appropriateness of the procedures for contact between directors and management between board meetings.
“HOW” — D) AGENDAS, MEETINGS AND MINUTES
The appropriateness of the board’s agendas, meetings and minutes are also key indicators of performance. How well a board plans its annual agenda of meeting topics, including how it allocates its time among strategic, performance, risk and compliance matters is essential for a proper functioning board. This section also considers whether management inappropriately influences agendas or meetings and how well significant issues are followed up by the board. Whether management’s involvement in board meetings contributes to the board’s productivity is also addressed in this section.
“HOW” — E) INFORMATION AND INTERNAL REPORTING
Information is the “life-blood” of an effective board. This section considers whether a board receives information in the quality, quantity and format that it deems appropriate. In order to understand the key drivers of the organisation, the board must ask effective questions of management to fulfill its oversight and strategic roles and make the necessary decisions. How boards receive information and internal reports from committees of the board and management will impact a board’s ability to apply the skills, knowledge and experience of directors to oversee management and the organisation. The board needs to be well informed on material matters and given the appropriate information to function effectively.
“Do” — Board tasks
The “Do” describes what the board does in terms of their main tasks. The board’s most important tasks include the following:
- playing a significant role in direction, strategy and planning;
- oversight of organisational performance and the selection, assessment, remuneration and succession planning of the CEO and management team; and
- oversight of risk management, organisational assurance and external reporting (including the integrity and quality of financial reporting and internal controls).
If a board carries out its most important tasks well, it can significantly enhance the organisation’s overall performance. If it is unable to meet these fundamental responsibilities, the organisation is likely to suffer as a result.
“DO” — A) DIRECTION, STRATEGY AND PLANNING
The board can make a measurable impact on the long term performance of an organisation by making significant contributions to the organisation’s direction, strategy and planning. This section deals with the extent to which the board and management take time to develop a shared commitment to the organisation’s direction and strategy, including whether the board has a shared understanding of what actions are required to execute the organisation’s strategic plan. Once business plans and annual budgets are aligned to strategic intent, executive remuneration should be tied to the achievement of both medium and long term goals. This section also addresses the extent to which the CEO welcomes constructive input into the organisation’s strategy, whether the board fosters a culture of innovation across the organisation and whether the organisation is sufficiently prepared for a crisis.
“DO” — B) CEO, ORGANISATIONAL PERFORMANCE AND COMPENSATION
This section covers one of the most important jobs of the board: hiring, compensating, reviewing and replacing the CEO. It addresses the extent to which the board plays an active role in overseeing the growth of the organisation’s leadership talent pool and whether the board has ensured that there is an appropriate succession plan in place for the CEO and other senior management. In addition, whether the organisation’s incentive program motivates the desired organisational behaviours is a further factor assessed in this section.
“DO” — C) RISK, ASSURANCE AND EXTERNAL COMMUNICATION
An organisation’s ability to adopt a culture consistent with its agreed risk appetite is a foundation stone in the sustainability of high performance. This section also considers whether the board exercises appropriate oversight to ensure the organisation has an effective internal control system in place, an effective compliance framework and indeed whether the board helps establish the right “tone at the top”. The extent to which the board ensures that all stakeholder contacts are handled well and its use of the organisation’s annual general meeting as a centre piece for communications with the shareholders are also addressed.