10 Questions Funders Are Asking Boards to Judge Effectiveness
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When it comes to evaluating the board effectiveness and an organisation’s governance practices, funders and investors - including venture capital, private equity, philanthropic foundations and even government - are increasingly turning their attention to the boardroom.
The board plays a critical role in success by overseeing strategic decisions, mitigating risks, and ensuring ethical conduct. To assess the strength of a company's governance structure, funders will often ask a series of important questions.
In this article, we will explore 10 key questions that funders commonly pose to boards when evaluating their effectiveness. By delving into these inquiries, funders gain insights into the composition, decision-making processes, risk management practices, and overall governance culture of the company.
Let's explore these questions and understand why they matter in the eyes of funders.
1 - What is the composition and diversity of your board?
Funders want to understand the makeup of the board to assess if it includes individuals with relevant expertise and diverse backgrounds. This helps ensure effective decision-making and reduces the risk of groupthink.
2 - How do you ensure board independence?
Funders inquire about the measures in place to maintain independence on the board, such as avoiding conflicts of interest and ensuring directors can make unbiased decisions in the company's best interest.
3 - What is your board's role in strategic planning?
Funders want to know how actively involved the board is in the company's strategic planning process. They seek assurance that the board contributes valuable insights, challenges management, and guides long-term direction.
4 - How do you assess and manage board performance?
Funders ask about the board's evaluation process to determine if there are mechanisms in place to assess individual director performance, overall board effectiveness, and identify areas for improvement.
5 - How do you handle succession planning?
Funders are interested in understanding the board's approach to succession planning for key leadership positions. They want to ensure that the company has a plan in place to ensure continuity and maintain strong governance in the future.
6 - What mechanisms do you have for managing risk?
Funders inquire about the board's involvement in overseeing risk management. They want to know if the board actively identifies and monitors risks, and if there are established protocols to address and mitigate potential threats to the company's success.
7 - How do you promote ethical conduct and compliance?
Funders want to assess the board's commitment to ethical conduct and compliance with laws and regulations. They inquire about the company's code of conduct, compliance programs, and the board's oversight role in promoting an ethical culture.
8 - How do you handle board conflicts and dissenting opinions?
Funders are interested in understanding how the board manages conflicts and encourages constructive discussions. They seek assurance that dissenting opinions are welcomed and considered, leading to robust decision-making processes.
9 - How do you engage with stakeholders?
Funders ask about the board's engagement with various stakeholders, including employees, customers, and shareholders. They want to see evidence of effective communication channels and a board that considers diverse perspectives.
10 - How do you ensure board accountability and transparency?
Funders inquire about the mechanisms in place to ensure board accountability and transparency. They want to understand how the board communicates with shareholders, discloses relevant information, and maintains a high level of transparency in decision-making processes.
Here’s a bonus question that might not get asked, but it’s fundamental to the performance of the board.
How aligned are the board behind the purpose (and mission) of the organisation?
Companies without a stated purpose are starting to struggle in the modern age. It’s impacting customer loyalty and attracting or retaining talented people. It’s also, important for funders, and if the board is not wholly aligned or, in my experience, not even aware of the company’s purpose, then this is a huge red flag to potential funders.
By asking these questions, funders can assess the effectiveness of a company's board and its governance practices, which influences their investment decisions and confidence in the company's long-term prospects.
So, our question to you is this? How prepared are you to answer these questions effectively and convincingly? Many boards, especially smaller charitable organisations, do not yet evaluate the performance of their board or don’t have solid enough governance structures, including decision-making processes, risk management procedures, and key documentation to pass muster. You’ll be very lucky to pass muster without this unless the funder is willing to support you as part of the funding arrangement.*
*Several of our board consulting clients have worked with us to support them in this process and have been funded to actually engage our services. So, often the work can come after the funding.