CORPORATES’ ATTITUDES to board reviews have changed; it used to be a case of “what’s the least we can get away with?”, but increasingly robust governance regulations have placed boards under greater scrutiny.
The boards of all FTSE 350 companies are now expected to conduct annual evaluation of their ‘fitness’ and most businesses are now undertaking some form of board evaluation procedure.
After a slow start, an increasing number are also opting to have their performance reviewed by independent external evaluators at least every three years (as recommended in the UK Corporate Governance Code 2010).
However, the relative youth of evaluation exercises, particularly external evaluation, means there’s still a shortage of ‘best practice’ information. In order to prevent ‘garbage in, garbage out’ results, boards should, we believe, consider the following issues:
How to approach a review
• Leadership and buy-in: the evaluation, including scope and process, should be led by the chairman and supported and understood by the whole board from the outset.
• Purpose and focus: it should be seen as a means of making real improvements in board effectiveness, not just as part of compliance or an opportunity to benchmark.
• Bespoke: an evaluation should be designed to fit the company’s particular identity and look at both current performance and future needs.
• Individual and collective effectiveness: it should cover both types of effectiveness and address behavioural issues as well as process and procedure.
• One-to-one interviews: these are the most effective way to extract quality information and should be kept anonymous to encourage board members to talk freely.
• Board feedback: crucially, the process should include feedback and debate by the whole board and lead to an action plan with periodic follow-up. Without this, change will not happen.
In addition to the process guide, our report includes a number of interesting findings:
• Effectiveness can be improved even in well-performing boards.
• Reviews often reveal different perspectives on situations.
• Evaluating board dynamics and behaviour is the hardest part of an effectiveness review, but offers the greatest potential for improvement.
• External reviews are particularly useful where a board is not functioning well, especially where behaviour is the root of the problem.
• The quality of the reviewer, whether internal or external, is critical.
What should be evaluated?
In the early days, board review tended to concentrate on processes, procedures and structures. But other, less tangible aspects of the board’s operation have a greater impact on its performance. These include how well the board provides leadership, offers challenge and makes decisions; whether its composition provides the most effective mix of capabilities and experience and, crucially, whether board dynamics and behaviour are working to best effect. It is here that the independence and objectivity of an external consultant is most useful, as board members are more likely to speak frankly to an experienced outsider.
Timing and scheduling: Schedule the evaluation carefully, with due reference to the publication date of the annual report (where details of the evaluation will be disclosed), and NEDs’ diaries. Time must be allowed for observation at board and sub-committee meetings and for individual director interviews and feedback.
Board context: the reviewing team will want to look into past evaluations and their findings and give consideration to future needs in terms of skills and capabilities. An interview with the company secretary is also an important element, allowing the evaluator to access board papers and the corporate governance model.
Observation at board and committee meetings: This will provide valuable understanding of how the board makes decisions and challenges management, and how members interact and communicate amongst themselves and with other stakeholders.
A ‘gold standard’?
Clearly the independence and integrity of the evaluator is critical in ensuring a productive outcome. We’re working with Sir David Walker to devise a Code of Conduct for providers of board reviews which articulates precisely what should be expected from an evaluation and the participating parties’ responsibilities.
Companies need to have confidence that the reviewer will treat all findings as confidential and that the chairman will be able to define and shape the process to the needs of the company.
In addition, the FRC has stressed the need to avoid conflicts of interest in appointing external consultants. The use of a disinterested external evaluator should also offer reassurance to shareholders that the review has been carried out objectively.
Thus, an external review has the potential to facilitate the drive to optimum performance of the board and NEDs. Feedback from one IDDAS review led to an increased collective desire to develop the connection between NEDs, especially as new NEDs join. It also gave an insight into the behavioural profile of the board, allowing the CEO to better shape and tailor strategic discussions. These are real benefits which will affect not just the board but also the executive team, shareholders and other stakeholders.
Helen Pitcher is chairman of board effectiveness consultancy IDDAS