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The New Science of Board Audit

By Michaël Berglund - IIC Partners, Stockholm

STOCKHOLM - At its best, the business of assembling a board of directors has been a fine art. At worst, it has all too frequently been a cynical exercise in patronage and empire building. Now, as a matter of necessity, board making is becoming a somewhat more exact science.

 

In Sweden, board audits are required by law, while in most other jurisdictions they’re increasingly used to ensure — and to provide proof — that boards have been chosen to give companies and their investors the benefit of the best available oversight.

“Board audits are really a matter of basic due diligence,” says

 

Michaël Berglund, board audit practitioner and founder of Michael Berglund Executive Search in Stockholm. “Audits ensure that the people who direct and review your business and your executive team have the necessary skills, motivation and, yes, the personal integrity to fulfill their roles.

 

“It’s not enough that all the individuals are skilled and respected,” Berglund says. “As a group, they must possess the full range of skills relevant to leading the business. They must have the time and the inclination to take on these considerable responsibilities and they must be prepared to ask difficult questions in a constructive fashion.

 

“Board members need to do more than vote. They need to be prepared to shape the agenda and the business,” he says.

A board audit enables the Board Chair and the owners to assess these issues and reshape the board according to their findings.

 

Sometimes, Berglund says, ‘audits’ are conducted by the Board Chair, but these are really just subjective evaluations that lack independent, third-party perspective, especially when it comes to the crucial function of assessing the performance of the Chair.

 

The Berglund team developed their audit process after interviewing more than 30 of Sweden’s top corporate directors at length on all aspects of board functions, directorship and best practices. The resulting framework document could be described as a very detailed questionnaire, but Berglund is emphatic that a real board audit cannot be performed as a written survey. Every member of a board must be professionally interviewed so that the spontaneous dynamic of conversation can be allowed to surface detail and nuance and so that unexpected responses can be probed.

 

The Berglund method involves compiling an audit of the board as a whole, but explicitly avoids detailed evaluations of individual board members.

 

“We prepare a written report of our findings and present it to the chair and to the nominating committee,” Berglund says. “Then we assist as required but in the end its up to the client to decide how to proceed. We find this works much better than focusing inquiries on individuals because people are less defensive. They provide more complete and honest answers if they are not intimidated by the prospect of personal evaluation.

“In the end, the result is the same,” he says. “The report identifies strengths and weaknesses of the group and the process enables all members of the team to see where the problems lie and what gaps need to be filled.”

 

In Sweden, he says, a few general themes have surfaced. With some exceptions, he says, Swedish boards of directors could focus more attention on risk analysis, CEO evaluations and human resources strategies.

 

“In other countries, the issues may be different or similar, but I would suspect there might be some similarities,” Berglund says. “We’ve all heard it said that board members are chosen for their abilities to analyze numbers but they’re less comfortable in areas that call for intuition.