Why Board Effectiveness Matters to Regulators

Regulators rely on boards to oversee the firms they supervise. Under the Senior Managers and Certification Regime, several board roles carry Senior Manager Functions, including the Chair and, at larger firms, the chairs of the risk, audit, remuneration and nomination committees and the Senior Independent Director. For dual-regulated firms, the Prudential Regulation Authority also assesses whether the board as a whole has the knowledge, skills and experience to oversee the firm.

When things go wrong, supervisors ask what the board knew, whether it challenged management and whether it had the right mix of expertise. A board that has honestly reviewed its own effectiveness, and acted on what it found, is in a much stronger position to answer those questions.

The UK Corporate Governance Code asks boards to undertake an annual evaluation, with an externally facilitated review at least every three years for FTSE 350 companies. Many regulated firms outside the Code’s formal scope follow a similar approach as good practice.

What a Good Review Covers

Composition and Skills

Does the board have the expertise it needs for the firm’s business and risks? A current skills matrix, compared against the firm’s strategy and risk profile, often reveals gaps in areas such as technology, risk, conduct or the firm’s specific markets.

Information

Does the board receive the right information, in the right form, at the right time? Papers that are too long, too late or too focused on activity rather than outcomes undermine even a well-composed board.

Challenge and Debate

Does the board genuinely challenge management? Are dissenting views heard and recorded? Do non-executives feel able to disagree with the chair and the chief executive?

Committee Effectiveness

Are the risk, audit, remuneration and nomination committees doing their jobs, and do they report clearly to the board? Committee chairs who hold Senior Manager Functions should be able to show how their committee adds value.

Relationship With the Executive

Is the relationship between the board and the executive open and constructive, without becoming too close? Does the executive bring bad news to the board early?

Culture and Conduct Oversight

How does the board understand and oversee the firm’s culture? Does it see the signals that matter, such as whistleblowing, complaints, conduct breaches and the standing of the control functions?

Individual Contribution

How is each director contributing, including the chair? Individual feedback is often the most sensitive part of a review and the most valuable.

Internal or External?

Internal reviews, often led by the chair or company secretary, are cheaper and can be well targeted. External reviews bring independence and a view of how other boards operate, and they make it easier to raise uncomfortable issues. Many firms alternate, with an external review every few years and internal reviews in between. For a board under supervisory pressure, or one that has recently had significant changes, an external review can be especially valuable.

Methods That Work

• Interviews rather than questionnaires alone. One-to-one conversations with each director and key executives reveal far more than tick-box surveys.
• Observation. Watching board and committee meetings shows how the board actually operates, not how members describe it.
• Review of papers and minutes. These show what information the board receives and how discussions are recorded.
• Input from the control functions. Heads of compliance, risk and internal audit often have a sharp view of how the board engages with them.
• Benchmarking. Comparing practices with peers helps boards see what good looks like.

Turning Findings Into Action

The most common failing is not the review itself but what happens afterwards. Findings should lead to a short, specific action plan, with owners and deadlines, reviewed by the board during the year. Typical actions include:

• recruiting a non-executive with missing expertise
• redesigning board papers and management information
• changing committee remits or membership
• introducing site visits or deep dives into specific areas
• training for directors on specific topics
• succession planning for the chair and committee chairs.

Boards should record the review, the findings and the actions in a way that can be shared with supervisors if asked. Showing that the board identified its own weaknesses and fixed them is a strong signal of good governance.

Smaller Firms

Smaller regulated firms often have compact boards, sometimes made up mainly of founders and executives, and may assume effectiveness reviews are for larger firms. In practice, the principles scale down well. A short annual discussion, led by the chair or an independent non-executive, covering whether the board has the skills it needs, whether it gets the right information and whether it challenges the executive, can be highly valuable. Where the board has no independent members at all, that absence is often the most important finding.

After Significant Change

A review is particularly valuable after a significant change: a new chair or chief executive, an acquisition, a move from Core to Enhanced status, a regulatory intervention or a period of rapid growth. At these points, the board’s composition and ways of working may no longer fit the firm, and an early, honest review can prevent problems from developing. Some boards commission a focused review at these moments, in addition to their regular cycle.

Filling Skills Gaps

Reviews frequently show that the board lacks expertise in a specific area. Common gaps in regulated firms include technology and cyber risk, operational resilience, conduct and consumer outcomes, and prudential risk. Filling them usually means recruiting a new independent non-executive, and at larger firms that appointment may carry a Senior Manager Function requiring approval. NED Capital, a sister practice of SMF Capital, specialises in non-executive and board appointments, and SMF Capital recruits where board roles such as the Chair or a committee chair need regulatory approval.

Common Mistakes

• Questionnaire-only reviews that produce average scores and little insight.
• Avoiding the chair. Reviews that don’t assess the chair’s own effectiveness.
• No follow-through. Actions agreed and then forgotten.
• Ignoring committees. Focusing only on the main board.
• Same reviewer every time. Internal reviews that never bring in an outside perspective.

A Review Checklist

• Is the review based on interviews and observation, not just a questionnaire?
• Does it cover composition, information, challenge, committees, culture and individual contribution?
• Does it include the chair’s own effectiveness?
• Is there an external review at least every few years?
• Are findings turned into specific actions with owners and deadlines?
• Does the board track progress during the year?

The Bottom Line

A board effectiveness review is one of the few times a board looks honestly at itself. In regulated firms, where supervisors rely on the board and several board roles carry personal accountability, doing it well matters more than ever. Boards that use interviews and observation, look at their committees and their chair, and turn findings into action, are better governed and better placed with their regulators. For more on the board-level Senior Manager Functions, see SMF Capital’s designations guide.