How to measure board effectiveness

While board effectiveness is crucial for desired organisational outcomes, measuring it is complex. As such, measuring board effectiveness must go beyond lagging indicators like shareholder returns or the absence of crises.

This article advocates for evaluating board effectiveness based on the quality of the board's decision-making processes, a universal requirement influenced and enabled by various measurable 'good governance practices'. These leading indicators include factors like trust amongst board members and with management, intellectual capital utilisation, strategic oversight, clear roles, diverse expertise, effective deliberations, and robust risk management. By focusing on these practices and seeking executive feedback, boards can gain a more accurate and proactive understanding of their effectiveness, fostering an environment conducive to high-quality decisions and, subsequently, desirable organisational performance.  

An effective board is something that all board members desire and governance practitioners (and regulators) recommend as an element and sign of good corporate governance.

But while measuring board effectiveness seems like a simple thing to do, when you begin to dig into it, it’s far more nuanced.  

It’s for this reason that the first place I like to start with such easy-looking-but-complex-when-you-dig-into-them questions is with a shared understanding of what we’re talking about. To that end, let’s break down this question: How do we measure board effectiveness?

Defining board effectiveness

The key words here are measure, board, and effectiveness.

From the Merriam-Webster dictionary, we can define measure in this context as "to estimate or appraise by a criterion".¹ And, in this context, board is defined as "a group of persons having managerial, supervisory, investigatory, or advisory powers".² For our purpose, this is the cohort of company directors who regularly come together to govern an organisation. For nonprofits, this group can also be referred to as the committee, management committee, or other similar terms. 

'Effectiveness', in our context of boards and governance, has a more complicated definition. 

The corporate governance codes in westernised economies (such as the ASX Corporate Governance Principles and Recommendations in Australia and the UK Corporate Governance Code) describe the need for boards to regularly assess their 'performance'. 'Performance', I believe, is intended to be synonymous with 'effectiveness' in our consideration of a board's impact, value, and contribution to an organisation's sustained operation.

Drawing from my Master's dissertation, if you will indulge me in a slight deep-dive, in Australia the ASX Corporate Governance Principles and Recommendations (Fourth Edition) are not explicit in what is meant by 'performance' of the board.³ The associated commentary advises boards to consider performance in light of "... the currency of a director's knowledge and skills, or if a director's performance has been impacted by other commitments".⁴ Without specific guidance, boards could use the ASX Principles and Recommendations themselves as an indication of what tasks are to be performed by the board, and that adherence to the eight Principles means the board is performing satisfactorily. Or boards may use a director's current knowledge and skills, and/or a director's ability to perform (meaning, they are not sitting on too many boards as to impact their ability to perform on one particular board) as signs of board or director 'performance' and/or 'effectiveness'.⁵ These are no doubt important attributes of board members, but I'm sure even with a cursory understanding of boards, they are not the be-all and end-all when we think about board effectiveness.

So, what criterion shall we use to estimate or appraise a board's effectiveness? 

Traditional board effectiveness measures

My Master’s research highlighted to me that board effectiveness was largely being measured by using two proxies: 

• shareholder return (or some other financial milestone like profitability or revenue, or, for non-profits, progress, impact, or achievement of mission) and/or 
• the absence of a problem/crisis. 

These are important outcomes that boards and organisations must pursue; however, the problem with correlating board effectiveness with shareholder returns and the absence of a significant problem is that these are usually outcomes of numerous inputs and are impacted and influenced by many other factors, such as the broader economic environment, rather than as a direct result of the effectiveness (or not) of the board. The board is only part of the overall governance framework of the organisation.

Whilst certain financial outcomes and the absence of crises are important organisational outcomes to measure and manage, they are not a comprehensive measure of board effectiveness. So, what could be?

High-quality decisions

What is universal across all boards is their necessity to make high-quality decisions. This is a characteristic that’s shared across all boards, in all industries, in for-profit and not-for-profit organisations and everything in between. 

They decide which strategic objective(s) to pursue, how resources will be allocated to achieve such end goals, and how to manage the risks inherent in the organisation’s operations, amongst the hundreds of other decisions that boards make each year.

In her book How to Decide, Annie Duke shows us that ‘decision quality’ is determined on the quality of the decision-making process—not the outcome experienced by the decision—which, in turn, is influenced by a degree of luck that is often underappreciated. 

Duke divides decisions into two categories: good-quality/good-outcome decisions, and bad-quality/bad-outcome decisions. She recommends learning from experience what contributes to the good-quality/good-outcome decisions, rather than purely relying on outcome(s) to determine the quality of a decision(s).

According to Duke, "being a better decision-maker means being a better predictor of the set of possible futures [that can come from the various decisions that can be made, including the decision to not do something]".⁶

Based on this perspective, we can begin to measure board effectiveness based on the quality of its decision-making processes and, to a degree, the outcomes of its decisions (it’s here that we would see financial outcomes or performance to mission, and the absence of problems/crises being measured).

On its way to producing high-quality decisions, there are a number of measurable enabling activities and outcomes that also happen to be evident on the boards of high-performing organisations.

Board effectiveness prerequisites

These correlated practices and attributes contribute to the board’s decision-making process, which—when its outcomes are also measured—increase the likelihood of the organisation achieving the desired financial performance while avoiding crises. 

These practices and attributes are a blend of subjective and objective measures, and literature abounds on what board inputs, practices, and attributes correlate with traditional board effectiveness measures; usually referred to as ‘good governance practices.’ It’s worth noting here for a moment that good governance practices enhance the likelihood of positive organisational performance, not guarantee it. There are many internal and external factors that can contribute to poor organisational outcomes despite having an effective board. 

Here is a selection of these good governance practices selected from a variety of sources. These are practices that most boards can examine themselves against as they are universal in their application.

• The degree of perceived trust, confidence, and synergy of the board members and senior managers/executive.* Mowbray determined that all three are present in high-performing organisations.
  
  
• The level of intellectual capital present on the Board and its accessibility and use by the board and executive.* This includes access to a director’s tacit and explicit knowledge, and their social networks.
  
  
• Cohesion and planning ability as it relates to board and executive succession planning.* Particularly as it relates to aligning the board members’ skills with the organisation’s changing strategic circumstances.
  
  
• Shaping and monitoring long-term strategy.* 
  
  
• Clarity of understanding of the role of a board member and the board, whether it's documented, and how often this is reviewed.#
  
  
• Achievement of board diversity targets (as defined by the board and aligned with organisational goals).#
  
  
• Board member skills and expertise aligned to board and organisational needs.#
  
  
• Deliberation processes (based on impact of decision), including time spent in constructive debate, quality and quantity of information and analysis received, experts consulted, decision-making frameworks used, level of consensus, etc.).#
  
  
• Reviewing decision outcomes (including the deliberation process used)* Caution must be exercised here so that decision outcomes are not incorrectly conflated with the decision-making process.
  
  
• Accountability and transparency: Stakeholder feedback and satisfaction regarding transparency and accountability, and level of regular communications/disclosures made.#
  
  
• Risk management: risks identified with mitigation plans in place, regular review, and depth of understanding by board members of the organisation’s risk management processes. Aligned with the board’s risk appetite and tolerance level.#
  
  
• Board member participation in professional development programs.#

It’s important to note that each organisation may have additional requirements placed on its board members, such as fundraising contribution for a not-for-profit or shareholder relations for a listed company. These can be included and measured in line with the regular board effectiveness (or board performance) evaluation.

To further enhance the data sourced from a board performance review, Mowbray* recommends including the view of the executives on board performance, to avoid the risk of board members having an insular and distorted reflection of their own performance.

Identifying the governance practices that matter—those that are known to contribute to decision-making quality and effectiveness—is necessary to ensure the environment is conducive to every board’s requirement to produce high-quality decisions and improve the chances of desirable organisation performance. These lead indicators can help boards understand and better manage their effectiveness than the retrospective measures of shareholder value (or performance to mission) and the absence of problems/crises.

Three immediate actions to assess your board's effectiveness

1.Initiate a discussion on the definition of 'board effectiveness' within your specific context

Effectiveness isn't always clearly defined. Dedicating meeting time to establish a shared understanding of what it means for your board and organisation will lay the groundwork for more meaningful evaluations.

2. Reflect on and document your current decision-making process

This article emphasised the importance of boards making high-quality decisions. Your board can begin to examine how they currently make significant decisions, including the information considered, the level of debate, and any frameworks used. Documenting this process provides a baseline for future improvement.

3. Anonymously solicit feedback from the executive team on board effectiveness

Recognising the risk of insular self-assessments, boards can quickly implement a process for gathering anonymous input from the executive team regarding their perceptions of the board's performance and effectiveness. This offers a valuable external perspective. 

References

¹Merriam-Webster definition of 'measure' (verb) (5), accessed 1 April 2025, https://www.merriam-webster.com/dictionary/measure

²Merriam-Webster definition of 'board' (noun) (3(a)(1)), accessed 1 April 2025, https://www.merriam-webster.com/dictionary/board 

³ASX Fourth Edition (n 1), Recommendations 1.6 and 1.7, 11. 

⁴ASX Fourth Edition (n 1), Recommendations 1.6 and 1.7, 11. 

⁵Recommendation 1.6 guides boards to pay "particular attention ... to addressing issues that may emerge from [the] review, such as the currency of a director's knowledge and skills or if a director's performance has been impacted by other commitments."ASX Corporate Governance Principles and Recommendations Fourth Edition. 

* The Third Team: Linking Boards and Organisational Performance, by Dr Denis Mowbray for the Chartered Governance Institute, 2021.

# A set of KPIs for boards based on ISO3704, unpublished article by Steven Bowman FAICD 2025