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September 2012

Judgments, decisions and board effectiveness

 

By Lewis Maleh, CEO Bentley Lewis.

 

We all make decisions and judgements based on personal bias. However, in order to ensure your company is run effectively by the best possible board, it’s important to take a more considered and structured approach to executive recruitment. It’s also worth taking a look at what the UK Corporate Governance Code expects of mutual insurers.

Daniel Kahneham,winner of the 2002 Noble MemorialPrize in Economic Sciences, has written a thought provoking book called “Thinking, Fast and Slow”, which was recommended to me by a FSA Supervisor.Kahneham is considered the father of behavioural economics and he summarises much of his research in his book.Kahneham eloquently addresses the way in which we make choices and judgements based upon our experiences and map of the world.

Kahneham comments that “questioning what we believe and want is difficult at the best of times” and this is equally true when evaluating board effectiveness and deciding who to invite on to the board. A well informed independent opinion can be a great help when making a judgement on how well the board is performing or who to appoint.We all have a tendency to make judgements about people based on cognitive bias rather than hard evidence.Forming an opinion on the correct mix of skills on a board and its effectiveness is vital to any company and should be approached in a slow and methodical way to ensure the best possible outcome.

As stated in The UK Corporate Governance Code “the board should have the appropriate balance of skills, experience, independence and knowledge of the company to enable them to discharge their respective duties effectively.” In addition “as part of their role as members of a unitary board, Non-Executive Directors should constructively challenge and help develop proposals on strategy”. Baroness Hogg commented in the Financial Reporting Council’s, Guidanceon Board Effectiveness (March 2011) that “boards need to think deeply about the way in which they carry out their role and the behaviours that they display, not just about the structures and processes that they put in place.”You can read her full preface and more details on the change in emphasis in the most recent edition of The UK Corporate Governance Code. The change in focus towards thinking about the way in which boards make judgements and decisionsemphasises the importance of using a structured approach to board evaluation and recruitment.

During a recent conversation with my FSA contact, he commented that a well thought out matrix of skills versus board member (see fig 1) using the traffic light grading system,is a useful tool to assess the combined skills of a board. Each member might have all or a number of the skills and when combined should make a balanced board. During my discussions with CEO’s in the Insurance sector, the general opinion is that it is wise to avoid individual board members taking ownership of particular issues. Decisions and reviews should be made collectivelyto ensure everyoneis engaged in all the issues and part of the decision making process. I suggest that members demonstrate a broad range of skills to avoid this scenario.

 

 

Role

Chair

CEO

Executive Directors

Non-Executive Directors

Skills

 

 

 

 

 

Leadership

 

 

 

 

 

Strategic thinking

 

 

 

 

 

Communication

 

 

 

 

 

Inter-personal

 

 

 

 

 

Analytical & Critical Thinking

 

 

 

 

 

Understanding of Economic Issues

 

 

 

 

 

Educational Experience

 

 

 

 

 

Financial Experience

 

 

 

 

 

Legal Experience

 

 

 

 

 

Ability to function well in meetings

 

 

 

 

 

Creativity/Lateral Thinking

 

 

 

 

 

 

Fig1. Combined skills matrix

The key skills you include in your matrix can then be used in succession planning and to design a thorough and robust selection process for new board members.  On appointment of new Executive or Non-Executive Directorsthe FSA like to see evidence of this and it is generally accepted as best practice. There is a great deal of discussion at the moment about diversity on boards which is best dealt with separately. I think it is important to mention that as long as collectively they have the correct mix of skills and experience, I believe diversity in gender, background, industry experience and so forth makes for a much more effective board.

By using the skills matrix it can be decided which skills are essential and interview questions can then be designed to identify these core skills. It is important to have a diverse interview panel to minimise bias and to ensure the best possible decision is made.

Selecting people to be part of a board is not an exact science.There are many factors which can impact an individual’s contribution and their ultimate success or failure. However, I believe that planning a thorough interview process will increase your chances of making a successfulExecutive or Non-Executive Director appointment. Don’t make judgements based only on your intuition, however good it might be. Take the time to think about what your company really needs and make sure your decision making process is as robust as it can be. After all, a company is only as good as its people.

 

For more, contact: lmaleh@bentleylewis.com, 0207 580 4110


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