The board, its composition and evaluation of performance is central to corporate governance. Increased scrutiny has recently focussed on the activities of the board and its committees particularly post the banking crisis and experience shows that a successful board is not guaranteed by just bringing together successful people.
All boards, and their committees, can benefit from evaluations: in particular subsidiary boards are often training grounds for listed company boards and getting into good governance practices at subsidiary level can pay dividends later on.
Board evaluations can bring tremendous benefits and a properly conducted evaluation can contribute significantly to performance improvements on three levels: organisational; board and individual member level.
One of the main goals of board evaluation is to enable boards to purposefully identify and surmount the barriers that impede their effectiveness. Establishing an effective process for board evaluation can send a positive signal to the organisation that board members are committed to doing their best.
The Financial Reporting Council (FRC) announced the new UK Corporate Governance Code (Code) back in June 2010. The Code applies to accounting periods beginning on or after 29 June 2010 and applies to all companies with a Premium Listing of equity shares regardless of whether they are incorporated in the UK or elsewhere.
The principles in the Code, on a ‘comply or explain’ basis, are that:
Performance evaluations have been in the Code for some time but the three yearly external facilitation element is a new provision and one listed companies will have to take into account.
External facilitation once every three years has a role as it helps to gain a view on how a board is doing compared to other comparator boards. A good external facilitator can add much external perspective which a board would otherwise not be able to access. An external view can be both challenging as well as reassuring: both aspects are important to boards and directors in equal measure so external facilitation has a valid place.
Board evaluations, when completed properly, can identify areas of strengths and weakness, leading organisations to make changes that positively impact performance and shareholder value. Done well they can provide independent and impartial advice, objectivity and rigour especially if facilitated externally.
However, research has shown that the majority of companies are not submitting themselves to independent board performance evaluations. Indeed the changes in the new Code are not mandating externally facilitated board evaluations: a company merely has to explain why it is not appropriate to undertake one. Why is it that boards have been reluctant to have external facilitation? Costs may be a factor but also lack of available information and guidance on best practice may contribute to a reticence by boards.
One size does not fit all and getting the scope of evaluation right is critical. There are four main reasons for undertaking board evaluations:
The chairman sets the tone from the top and plays a pivotal role in the evaluation.
Determining the scope of the evaluation undertaken and whether it extends to board committees and individual directors is key as these are increasingly important to overall governance within a company.
The options chosen will depend on the cycle that the company is in and what the company is seeking to achieve from the evaluation. Options range from:
It is important to employ the right follow-through to implement the changes highlighted as necessary or desirable. Results can be used to initiate group discussion as well as to implement process changes if identified. The role of the chairman is key to introduce follow-up items on subsequent agendas so that they are acknowledge and completed.
Basic management principles can be initiated to create action plans with specific time lines for implementing the evaluation recommendations and for monitoring the recommendations. The outcomes from an evaluation and actions resulting from the evaluation should form a continuous process of improvement. Board development plans can be a successful outcome of any evaluation.
Investors need to know if a board is an effective board and good corporate communication can do much to convey the board’s message to investors and other stakeholders on what outcomes arise from evaluation. Investor relations teams can be useful in this regard. At a minimum the board should provide the following details:
About the author: Vanessa Jones was the Head of Corporate Governance at ICAEW. She is a Barrister and Chartered Secretary and has worked within the listed and non-listed corporate sector in both in-house legal and company secretarial roles.