What's the Return on Investment of Your Board?
Companies invest significant time and effort to support the work of the board. There are costs related to board meeting preparation and execution, director compensation, time spent in meetings, and time spent preparing meeting minutes and agendas. Directors too must invest considerable time learning, sharing their expertise, and engaging in the work of governance to provide effective oversight and better position companies for long-term success.
In the past two years, a new era of virtual interaction and market volatility has led to increased board engagement, including boards providing perspectives on thorny issues more frequently. Moving forward, this heightened investment of time and resources in the board’s work is likely to grow in response to regulatory changes and stakeholder expectations around fast-evolving topics such as cybersecurity, climate change, geopolitics, and human capital.
This level of board engagement is expensive. So, what is the return on investment (ROI) to companies and their stakeholders and how can it be measured?
What Is the Return?
In a recent survey we conducted, directors told us their biggest value contributions to their organizations are around capital allocation, succession planning, and enterprise risk management—notably more traditional, process-driven areas. After multiple years of relentless disruption and crises, directors ranked disruption, cybersecurity, and crisis prevention and preparedness as the areas where they’re delivering the least amount of value.
This suggests an opportunity for boards and management teams to up their game and embrace and optimize the strategic value of the board. A high-value board plays a crucial role in securing the company’s future in an age of disruption. Such a board can use its rich diversity of perspectives and experiences to help management see around corners and redefine risk as opportunities for innovation and expansion. It can provide an incentive and hold management accountable for keeping a long-term focus and creating durable stakeholder value. It can provide an effective challenge that cuts through internal bias and increases the rigor of debate for optimal decision-making.
How Do You Measure It?
In our recent director survey, around half of the directors who participated said that company performance toward achieving goals (e.g., revenue growth, share price) is among the best ways to assess board effectiveness. This key finding is a way to approach the ROI of the board equation. The ultimate outcome of a high-value board is reflected in the success and prosperity of the business itself. A board should see the evidence of its efforts manifest in the company’s financial performance, including in growth through the innovation it fosters and in cost reduction from the risks it helps the company avoid.
Of course, such an assessment of board performance through the lens of corporate performance must track long-term trends (not short-term movements) and be highly nuanced and rooted in the context of the company’s specific challenges and business environment. For example, a board should consider whether a company is in a high-debt industry or a growth cycle, the economic conditions and volatility it is facing, and the shorter-term impacts of long-term investments in innovation and transformation. Such an assessment must also consider stakeholder impacts because long-term financial value and sustainability depend on the creation of value for the broader group of stakeholders on which the business depends. Importantly, as scandals have shown and continue to remind us, the risk of corporate malfeasance must also stay front of mind for the board.
Traditional board evaluations, particularly those facilitated by an independent third party, also play a crucial role in measuring and driving the ROI of the board. Even high-performing boards can benefit from an external perspective and the consideration of new insights and practices.
Keeping the ROI of the board question front and center can help boards and management maximize their board investment. Ultimately, building and leveraging a high-performing board and being deliberate as to which activities and which board members directly drive value are part of a novel but important perspective.
Editor’s Note: The views reflected in this article are the views of the author and do not necessarily reflect the views of Ernst & Young or other members of the global EY organization.
Kris Pederson, NACD.DC, is the Americas leader of the EY Center for Board Matters.