The Australian Prudential Regulation Authority (APRA) has proposed updates to corporate governance rules for financial institutions. Responses vary, as some note stricter compliance requirements. The reforms aim to promote sound governance principles. Amid these changes, it's relevant to also consider what makes boards effective, in both their structure and operation.

Composition of the board

Business theory suggests that diversity can enhance workplace performance, an idea which is often applied to Boards. Board diversity can be considered in several dimensions:

• Experience – Directors bring various levels of experience to the Board. The presence of management or commercial experience among directors is viewed as valuable in overseeing and guiding organisations effectively and ethically, while safeguarding stakeholder interests. Prior CEO experience among board members can influence both the board and CEO’s functioning.
• Skill set – Each board member contributes a distinct set of skills. Skills matrices are commonly used to assess whether the board collectively possesses the necessary capabilities. It is important that such assessments go beyond compliance, recognising that different organisations may require varied skills over time. A broad set of competencies enables the board to respond to diverse challenges effectively.
• Working relationship – The board operates as a team, albeit one that generally spends less time together than other organisational teams. Effective boards adjust responsibilities according to situational needs, maintaining appropriate consultation levels. While consensus may sometimes be required, identifying when it is necessary helps boards operate efficiently. The chairperson plays a key role in fostering these working relationships.

Role of the chair

The chair of a board has a significant influence on the performance of the board. It is arguably the difference between good and great boards. While the actual chairing of meetings is important to ensure all content is covered within allocated timeframes, the chair can ensure that they bring out the best of the diverse group of individuals who form the board. Effective chairs don't expect all members to have a view on every topic and/or issues – they will seek the input of the right members at the right time – provide opportunities to all, while balancing the loudest voice with those who speak less but when needed.

The chair has responsibilities which extend outside of the boardroom – providing board members with feedback, ensuring they feel like they are making an appropriate contribution, getting other members up to speed on emerging issues and seeking their input on important topics in between scheduled meetings. Like other members of high performing teams, giving and receiving feedback so that one can continue to grow and develop in their role is important.

The chair is also responsible for providing feedback to the CEO. While most CEOs have a balanced scorecard which they are measured against, an effective chair will provide insights to the CEO not just relating to their performance against this scorecard but just as importantly, on their behaviours as a CEO. These, less tangible measures are fundamentally important to the culture within an organisation and while harder to measure, can be the difference between good and great.

Balancing the various board responsibilities

Boards have a wide range of responsibilities, including strategic planning, risk management, compliance oversight, and performance monitoring. Highly effective boards balance these duties, managing risk appropriately according to the organisation’s strategy. Since the Royal Commission into Financial Services, there has been greater attention on risk minimisation. While strict compliance remains essential, boards may also need to accept risk in pursuit of organisational objectives. Navigating this risk spectrum is a distinguishing factor for boards.

Debate can arise regarding the boundaries between board and management roles, especially if there is perceived overlap between oversight and operational decision-making. Such situations may present ambiguities. boards and management teams that engage in open and transparent dialogue tend to address these issues more effectively. Collaboration and communication between the board and management remain important.

Infrastructure to support the board

For a board to function optimally, it must be supported by appropriate infrastructure. This includes ensuring that board papers are of high quality—sufficiently detailed to highlight key points without overwhelming the reader, yet concise enough to avoid omitting critical information. Papers should be structured and written clearly so that main themes and issues can be readily identified and understood.

Many boards establish subcommittees to oversee significant aspects of the organisation. These committees play a crucial role, particularly regarding how delegated decisions are communicated back to the board, enabling members to collectively fulfil their responsibilities successfully. Effective communication between committee chairs, the board chair, and all board members is essential. While formal updates from committees are important, informal communications outside formal meetings also contribute significantly to board effectiveness.

Furthermore, the board’s papers should be supplemented by access to appropriate levels of management. CEOs who facilitate direct engagement between the board and their leadership team—and empower these leaders to collaborate with and respond to feedback from the board—enable the board to perform at its highest level. Conversely, attempts to "manage" the board or a lack of transparency can undermine board effectiveness. The board’s approach to addressing issues and the culture fostered in the boardroom have a direct impact on the nature of management's engagement with the board.

Ongoing board development

Board members in general are very focused on ensuring they continue to develop and have access to the latest themes, trends and other changes in the corporate environment relevant to their roles. This is an important aspect of their role, as noted above, their roles and responsibilities are broad in nature. Some of the most advanced boards of some of the largest companies will also provide their board members with ongoing access to innovation globally. This can include visiting organisations from other industries in different parts of the world to explore and understand new technologies and how they are being used as well as varied and different ways of approaching innovation. These types of development opportunities are very effective and assist with the development and oversight of strategy, which is such an important aspect of the role of the board.

Therefore, while we contemplate the proposed changes by APRA and reflect on the role of the board, the effectiveness of a board rests not only on its ability to balance diverse responsibilities but also on its commitment to fostering growth, open communication, and continual learning. By investing in the development of its members, maintaining a robust infrastructure, and nurturing a culture of transparency and collaboration, boards can elevate their impact and help drive organisational success.