The Relevance of Board Assessments

by Sam Tamayo on September 20, 2018 and last updated on September 20, 2018

The Relevance of Board Assessments

A board of directors’ main purpose is to ensure the organization’s success by jointly directing the company’s activities; this is achieved by making key decisions that would impact the organization’s bottom line. Appointed to act on behalf of the shareholders, they are entrusted to deal with issues pertaining to corporate governance, corporate social responsibility, and corporate ethics among others.

Considering the weight of their responsibilities on a company’s performance, it is quite surprising that very few organisations conduct regular assessments and derive meaningful results. In India, board assessments were a non-mandatory requirement under Clause 49 of the Listing Agreement. This is prior to Securities and Exchange Board of India’s (SEBI) Guidance Note which detailed guidelines on how board evaluations should be conducted.

Furthermore, on a study conducted by the Rock Center for Corporate Governance together with The Miles Group, it found that most board evaluations fail to recognize and correct poor performance among individual directors. In this nationwide survey of 187 boards, the results suggest that directors do not give each other honest feedback and boardroom dynamics are often sub-optimal.

Accelerate Performance

While many would argue that assessments should be done on an “as needed” basis, boards need to be wary of the strategic implications of this course of action. Since the board assessment is premised on triggers that will prompt a review (e.g. the organization’s decision to change its strategic direction), it shows that the company is acting reactively instead of proactively. This approach does not promote a culture of continuous improvement and demonstrates the board’s lack of commitment in improving its performance.

In the context of increased public and investors’ scrutiny, board assessments provide companies with a strategic opportunity to understand how a board is fulfilling its responsibilities vis-à-vis corporate policies. Assessments go beyond confirming that the board has the right competencies and experiences. Rather, they also help identify if the board is working as a collective unit by assessing how it performs on areas such as risk management, resource allocation, and succession planning among others.

Strategic benefits of a robust board assessment process include the following:
• Revitalizing the roles and responsibilities of directors and the board as a whole with the objective of accelerating decision-making and avoiding unnecessary delays and conflicts
• Identifying areas of board operation that needs attention so as to cope with the evolving needs of the company
• Recognizing process improvements to enhance board participation, objectivity, and integrity in executing decisions
• Developing a better understanding of the company’s progress with respect to its plans and goals as well as its current standing in the industry
• Fostering an environment of trust, respect, open communication, and collaboration among board members, the executive management, and the entire organization

Pre-assessment Checklist

In order to harness its full potential, the board assessment process and questions must be customised to reflect organization-specific structure, needs, procedures, and conditions.It must be able to quantitatively and qualitatively measure key areas and its outcome must result in an actionable plan. The outputs of a board assessment could range from minor amendments related to board processes to major changes that can address issues that contribute to dilemmas in the board. The list below outlines areas that may be included in a company’s board assessment checklist:

1. Mission and Strategy

Board members should be able to evaluate their performance with regard to how well they execute their mission and how their actions relate to their overall strategy. Through this, a company would be able to get an insight on whether the organization is on track to achieving its purpose.

2. Board Structure and Processes

Board members should evaluate the effectiveness of its corporate governance structures by having a closer look on its process related to frequency of meetings, board meeting participation, and reporting lines. By doing so, they can spot inefficiencies and enhance transparency and accountability which would lead to improved performance.

3. Roles and Responsibilities

Board members’ oversight, management, and engagement on pertinent matters should be measured by asking key questions amongst themselves such as:
• Do our directors demonstrate a good understanding of our strategy?
• Are we staying focused on our core competencies?
• Are our decisions able to maintain a sense of impartiality, independence, and fairness?

4. Behavior and Culture

Board members should be able to determine if they can effectively set the “tone from the top” without suppressing the staff from being heard. This includes having a deep dive on the board’s functions and how this translates to their dynamics.

5. Training and Development

Board members should be able to engage in technical training programs geared towards improving their ability to serve. After which, the board can be tasked to come up with executive development plans using the lessons they have learned in the training sessions.

Conclusion

Board assessments allow members to take a step back from habitual governance matters and honestly evaluate among themselves how well they are meeting their duties. While it may make some directors self-conscious about their actions, it is not meant to the pin the blame, humiliate, or degrade particular members of the board. Rather, it opens up opportunities for a board to clearly assess its effectiveness and to identify areas for improvement on how it can strengthen the way it operates and governs.

These assessments can contribute significantly to performance improvement at varying levels – from the board as a collective unit to the individual director level. Boards that commit to regular evaluations reap benefits such as improved leadership, enhanced teamwork, increased accountability, better communication, and more efficient board operations. When properly executed, board assessments offer actionable insights and provides value to not only the board and the organization as a whole, but also the people that they serve.

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