A company’s health and survival is largely dependent on those who are leading it, namely the board of directors. With their technical and practical expertise, business experience, leadership and direction, executive boards are expected to consistently drive company performance and create value for shareholders amidst regulatory uncertainty, global disruptions, and economic downturns. Simply put, there are goals and objectives that boards must meet.
Board performance can make or break a company; therefore, measures must be taken and policies set in place to ensure that board members, both as individuals and as a whole, are effective in the fulfillment of their responsibilities. Facing the reality that governance failures such as in are inescapable, stakeholders have become more critical of boards and are constantly calling for greater transparency and accountability.
This has resulted in greater awareness of the importance of board evaluations and any other exercises designed to measure and increase board effectiveness and performance. So much so that board evaluations have made their way into laws and regulatory requirements. An example of this is the NYSE Rule 303A.09, which requires all companies listed in the New York Stock Exchange to conduct board evaluations every year, while the UK Corporate Governance Code requires not just a formal annual evaluation, but also a third-party assessment every three years for FTSE 350 companies. Despite all this, many companies and organizations often regard these assessments as mere compliance, and not as value-adding exercises.
Working with constant change, it is imperative for boards to be adaptable and maintain the skills necessary to handle whatever new challenges come their way. A way of identifying strengths, weaknesses, and obstacles to effectiveness, a board evaluation is simply part of the continuous effort to improve governance at the highest level and, as a report from Simpson Thacher put it, “a necessary step to ensure that the board continues to function optimally in a changing business environment.”
To get started, the following areas should be considered when conducting a board evaluation:
When conducting a board evaluation, the first step in is knowing why it is needed in the first place. The board must clearly establish what is to be achieved in and by the evaluation, as this will guide all other aspects of the procedure such as the scope, the format, the assessor, etc. These goals will be specific to the needs and issues of the company in its current context, and will not always be the same every time. That being said, the reasons for conducting board evaluations generally fall under regulatory compliance or problem resolution.
Areas to Assess
In line with the main objective and depending on organizational context, the board will have to identify specific areas for assessment. However, there are a number of areas which generally contribute to overall board performance, such as:
- Board composition: Boards need to assess whether they have the necessary experience and expertise required to match the growing and changing needs of the organization. Diversity among board members should also be considered.
- Use of board time: Boards should evaluate whether they are spending enough time on the issues and matters most relevant to the business.
- Information flow: Essential to the board’s effectiveness is ensuring that they receive the right kind of information in the appropriate formats and quantities. At the same time, board members should be given enough time to adequately review the information.
- Board culture: Board culture plays a significant part in cultivating a healthy and productive environment for directors to interact and work with each other. Board members should be able to engage each other with respect even when holding opposing points of view.
- Board supervision: As the top governing body, the board should ensure that they are effective in their guidance and direction of the management.
- Committee performance: Committees, as well as their structure, should be reviewed for their effectiveness in addressing and resolving the board’s concerns and action items.
- Internal controls: The board should have in place adequate internal controls, policies, and other built-in mechanisms to control and mitigate risk.
For the success of the evaluation, it is crucial to have the support of all members of the board. It will be difficult to draw out insights or proper contributions from directors if they are uncooperative or unmotivated. It is then the responsibility of the board leadership to establish a culture where the benefits of such board assessments are communicated to and understood by all current and incoming members. A high level of participation in the evaluation process can only be achieved when directors are comfortable with both the free exchange of opinions and the idea of performance measurement.
Another aspect to take into account is who will be doing the board evaluation. While most companies conduct theirs internally, others opt to hire outside consultants for the sake of impartiality. Under the guarantee of confidentiality, directors may find themselves more comfortable sharing their honest opinions and thoughts with a third-party consultant rather than with an internal facilitator. Costs; however, may be a consideration as hiring a third-party consultant will be more expensive than having an insider conduct the evaluation. Ultimately, whoever facilitates the board evaluation should have the board’s confidence as the most qualified and experienced person for the job.
At the end of the day, the significance of such an evaluation is lost if there is no follow-through. Boards should set aside time to discuss and process the results of the evaluation. Board leadership should be ready to act on the findings and results of the evaluation by forming action plans and delegating the implementation of discussed recommendations to the appropriate parties.
Beyond mere compliance and box ticking, a board evaluation is a valuable tool that can help boards maximize strengths, build on weaknesses, and enhance overall performance. Companies who regularly and diligently conduct thorough board evaluations will find that the practice of proactive self-reflection communicates a true commitment to good governance and continuous improvement.