How To Measure Governance Effectiveness With KPIs That Matter

16 November, 2021
Blog | Corporate Governance
Article by: Monica Lagercrantz

Writing for Insead, Dr Yilmaz Argüden states that “the ability to gain the trust of global financial markets and of all the stakeholders in the value chain is becoming the key to success” for boards, and that the route to achieving this is good corporate governance.

To be able to quantify the success or otherwise of your efforts as a board, you must be able to track your progress, and knowing how to measure governance effectiveness will allow you to do this accurately.

One of the challenges is that this measurement usually happens only once a year. The process is still seen by many companies as a formality, rather than a valuable business exercise.

However, this is a “dangerous mindset” in the words of Hannah Gibson-Patel, senior HR consultant at RSM. She adds that, all too often, boards look inwardly only when something goes wrong, but in order to input a culture of continuous improvement, analysing and measuring effectiveness and performance over time should become a way of life.

What Should You Measure?

Of course, you need to work out what you should measure. Here are some common metrics that you should consider tracking to help your organisation move forward in an effective manner.

Achievement of strategic objectives

Each company has its own set of strategic objectives, those steps you need to take to help you achieve your ultimate business goals. Objectives are the markers of success, reassuring you that you are on track and correctly fitting all the puzzle pieces into place to create the full picture.

Your strategic objectives are the solid actions you will take to fulfil a goal that tends to be less clear and more aspirational, such as being the “go-to tool toy manufacturer in the country”. It is great to have that ambition, but it needs breaking down into bite-sized chunks that describe the journey to get there. Measuring the success of these chunks helps you work out how close you are to achieving your goal and whether you are still on track.

Operational and financial results

Operational performance and financial results are entwined. By monitoring and measuring the two, you gain a better understanding of how operations and other factors, such as delays in those operations, feed into your profit and loss as a business.

Being able to measure this relationship helps you understand where you stand as a business and what needs to change to cut out operational issues and improve financial performance.

This also helps you understand how effective the communication is between Finance and Operations. By working together closely, one can see the effect it has on the other and how to improve to achieve the best result for the business and its profitability.

Organisational risks

It is essential that you keep an oversight on the organisational risks that could affect your business so that you can take steps to prevent them. A lack of communication between departments is a common issue within companies but can be avoided by sharing information across teams, for example.

By assessing the board’s understanding of the risks facing the company, you can gain a better understanding of the areas on which you need to concentrate. You can also require committees to look into risks in each of their specific areas to keep track of where the risks are and how to mitigate them.

Continuous improvement

There are many types of continuous improvement programmes that boards of directors implement, such as the Plan-Do-Check-Act cycle. With this method, you plan the changes you want to make, you put them into action on a small scale, check that they are working and act to scale them up or change the processes to make them more effective.

The Check element of that cycle is where you measure the effectiveness of whatever change you have made. This is a key part of tracking your progress towards good corporate governance. Boards should always be planning ways to improve their processes and use resources optimally so that they can ensure they are always moving in the right direction.

Reporting systems performance

The role of the board in decision-making is crucial to the success of the business, and that process is informed by reporting. If the quality of your board reporting systems is not adequate, that has a knock-on effect for the organisation as a whole, not just on governance.

Taking time to assess what information is being reported and how clearly the reports are made is essential in fine-tuning your board reporting. Delivering the right insights to your directors enables them to implicitly understand the issues at hand and ensures they are in the best position possible to choose a course of action.

Corporate Governance KPIs

In order to create a shortlist of the most important metrics for good corporate governance, you need to set and assess your key performance indicators (KPIs). Here are the sorts of KPIs you should be looking at in order to measure your governance efforts.

Area
KPIs
Nominating Committee
  • Board diversity – in terms of skills, experience, background, age, gender ethnicity and other factors
  • Skills and expertise – which of the most relevant skillsets for tackling industry trends and risks are evident on or missing from your board?
  • Succession planning – is there a succession plan for replacing the CEO and other senior figures?
Compensation Committee
  • Executive compensation – what is the link between executive pay and performance (both financial and non-financial)?
  • Turnover rate – look at all turnover, but focus on turnover of high-performing employees
  • Equality in compensation – between genders, ethnicities etc.
  • Employee engagement
Audit Committee
  • Expertise – what percentage of members have a background in finance or accounting?
  • Reporting – is the committee balancing financial and non-financial metrics?
  • Audit strategy – is there an annual audit strategy review and to what degree were the findings implemented?
  • Internal and external audits – what is the ratio of discrepancies between internal and external audits?
Compliance Committee
  • Mitigation – what is the percentage of identified risks that have mitigation plans put in place?
  • Training – percentage of directors who attended training on risk and compliance topics
  • Risk analysis – do you hold regular reviews of risks for the business and current and future compliance issues?
  • Sanctions – how many sanctions for non-compliance were issued against the organisation?
  • Non-compliance – how many non-compliance events were identified?
IT Governance Committee
  • Training – percentage of committee members who have attended IT training
  • IT infrastructure – based on regular inspection and review, how up-to-date is the company’s IT infrastructure?
  • Cybersecurity – how many of the current and future cybersecurity threats do you have mitigation plans in place for?
KPIs for Overseeing Senior Management
  • Functions – have you defined the relationship between the committees?
  • Roles – are management roles clearly defined?
  • Accountability – have you assigned roles and responsibilities?
  • Mission – are the core values defined?
  • Principles – do you have robust ethical conduct principles?
  • Sustainability – have you defined corporate social responsibility (CSR) principles?
  • Processes – have you defined your processes and standards?
  • Strategic decision-making – to what extent does the board understand the strategy?
  • Execution – has there been a review of the execution of the strategy?
  • Financial reporting – has there been a review of the financial reporting?
  • Non-financial reporting – has there been a review of the non-financial reporting?

How To Measure Governance Effectiveness

1. Focus on strategic measures

Using strategic performance measurements means that you distil your top-level objectives into day-to-day goals and create a balanced scorecard for reporting on the various KPIs with consistency. This allows you to focus on those measurements that are of most value to your business and to test and hone the choices you make in terms of strategic guidance and execution.

2. Develop performance measurement skills

Before you can assess whether your strategy is a success, you need to understand what success looks like. Board members need to develop their performance measurement skills to understand what is a meaningful measurement and what the results mean in terms of progress.

3. Get board and CEO buy-in

Without the buy-in and consensus of executives, it is very difficult to assess the effectiveness of your corporate governance. Many of the KPIs rely on honest and frank reporting from directors on various aspects of executive life. So, relaying the benefits of an engaged and effective board in terms of how it helps to meet objectives is key to strong governance and accurate performance measurement.

4. Track progress over time

Only by reviewing progress over time can you understand whether your decisions are making the impact that they should for the business.

One example is the annual board evaluation. It is certainly important to make sure you evaluate your board every year so that you can check that you are hitting all the right targets on the route to meeting your goals. But how do you know if you’ve made progress? You need historical data that you can collect with a digital board evaluation tool like BoardClic. Once you have that data, you can compare this year’s results with last year’s or even do a multi-year board assessment. All of this enables you to understand if board performance has improved or declined compared to what it was before. Boardclic also provides industry benchmarks to help you establish a baseline.

5. Measure often

Increasing the frequency with which you evaluate your own performance can only improve your governance quality.

Besides running an annual evaluation, gaining real-time feedback after each board and committee meeting keeps you accountable and prevents you from veering off course. BoardClic Meeting Express identifies the areas of strength as well as those areas in which you need to improve with clarity. This helps you achieve continuous improvement and, in turn, create good corporate governance.

FAQ

What is good corporate governance?

Good corporate governance means that your mechanisms, processes and procedures are effective and roles within the organisation are clearly defined. The board takes collective responsibility for the company’s long-term success and it goes about its business with the characteristics of good governance – accountability, transparency, fairness and responsibility.

Who is responsible for measuring governance effectiveness?

The board should take responsibility for measuring governance effectiveness, leading by example in the business by its participation in the process. The shareholders will hold them to account in meeting the strategic vision with their action plan.

Conclusion

Understanding that you should measure governance effectiveness is important, but knowing how to measure governance effectiveness is essential. Each organisation is a different case, so it is up to individual entities to drill down into the KPIs that matter to them and their mission. Once you have decided what to focus on, the best way to ensure you remain on the correct path is to start recording your KPIs and track them over time.

References and further reading