How do you identify if your board is as good as it could be? After all you are a group of talented individuals sharing collective responsibility for stewardship and shareholder return. If you are governance compliant and delivering a dividend then what more could you be doing? There are three key attributes that distinguish a good board from a great one:
- Ability to understand risk – This is more than operational, we mean strategic – political and reputational. This is about decision risk and appreciation of risk as opportunity for reward not simply threat for control. Ten years ago banks and building societies on both sides of the Atlantic thought they understood the risk in sub-prime lending: high returns were attractive, loans were secured by property, the loan book was a corporate asset not a liability. History show that incorrect perception of risk can be fatal, especially in a sales driven culture where risk is viewed as a growth inhibitor.
- Ability to distinguish between risk & uncertainty – Most risk registers contain a mixture of calculable risks and incalculable uncertainties, consequently this fails to convince investors that the board knows the difference. Risk is a future phenomenon, an estimate of a probable outcome and its probable impact, nothing is certain about the future. Uncertainty is implicit in any future forecast whether strategy or risk statement. Better boards are candid about the uncertainties they face. Investors are looking for competence and resilience in a board, they know certainty is an illusion.
- Ability to articulate alternative futures – Predicting the future is an uncomfortable role for the board as there are only two types of forecast: lucky and wrong. Presenting a range of alternative future outcomes is not only honest but welcome. While prediction itself carries inherent error, failure to offer a vision of various scenarios acknowledging uncertainty is unhelpful. Financial regulators prefer corporate reports to deliver certainty, yet investors more interested in the future always want more vision from a board because, unlike regulators, they will have ‘skin in the game’.
There are of course many other reasons some boards are better than others, it might be calibre of leadership or nature of the competition, it may be simply that investors are confident in a specific team with a proven performance record. Nevertheless when you look at the corporate failures and over the past twenty years, it becomes clear that better boards are more resilient and equipped to manage the unexpected being both more alert and responsive.