09 Oct 2018
Board assessment, corporate governance and improving performance - Part 2
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In this second and final extract from our white paper, ‘Board Assessment, Corporate Governance and Improving Performance’, we argue that regular independent board assessments can improve a company’s performance and suggest how best to go about such an important process.
As companies confront fluctuating economic conditions, digital disruption, globalisation and increased regulatory pressure, the role of the board and its performance have come under greater scrutiny. Companies simply cannot afford to have boards that aren’t performing up to their full potential.
It is also accepted that boards and individual board members perform better when they receive regular feedback and are held accountable. Board members should be periodically assessed to ensure they are performing well in their roles and are meeting best-in-class benchmarks.
As this consensus has emerged, board assessments have become more widely utilised internationally, in both common law and civil law jurisdictions. Regular assessments are now recognised as a critical structural tool for assessing the effectiveness and efficiency of boards.
Asking the right questions
Board assessments undertaken by an external party can provide a detailed, objective and impartial evaluation of how a board is functioning and enable transparent, fresh thinking.
To keep the board running at its peak performance, questions need to be asked.
- Is there a common understanding of the board’s objectives?
- Are all members of the board aligned as to what they and the organisation are trying to achieve?
- Are all board members clear about how to fulfil their role?
Based on a common understanding of the board’s goals and objectives, board members may then be asked whether they have the adequate information, resources and capacity to tackle the challenges presented by the business and to optimise the effectiveness of their decision-making.
Furthermore, board assessments ensure proper alignment between the organisation’s goals and what the board is spending its time on to ensure that appropriate governance and oversight are being provided. If the objective of the company is to expand into new markets overseas, but 80% of the board’s time is spent talking about the company’s domestic environment, this is a problem.
When you consider how important a board of directors is to the functioning of a company, it is surprising how little most companies spend in terms of time and resources to make sure their supervisory body is functioning properly. Companies tend to spend significantly more on graduate recruitment and management development programmes. Creating a feedback and assessment loop at the board level is just as important as it is at any other level of an organisation.
How should board assessments be implemented?
Board assessments can vary significantly in terms of their rigour. Assessments range from an informal board survey to a more formal ‘audit’ that may include one-on-one meetings with directors, observation of board meetings, and a review of operational procedures.
Good board assessments contain quantitative and qualitative findings. The latter infuse the process with rich insights that enhance the usefulness of the quantitative data.
Assessments generally commence with the chair agreeing to the scope of the evaluation. The exercise may be conducted in-house or by an external expert. Either way, the right evaluator will be able to absorb relevant sector-specific information, explore sensitive issues and ask the right questions.
An initial assessment can be conducted through an online survey.
Typical questions for board members might include:
- Is the board spending the right amount of time on important topics?
- Is the balance between determining strategy and overseeing compliance sufficient?
- Does the board have the right mix of skills and competencies?
- How effective is the chair?
- Is the relationship between the chair and company executives productive and collaborative?
The external facilitator can then conduct one-on-one interviews with each board member to explore their survey responses in more detail. The findings from these interviews can then be presented back to the chair or to the entire board, as appropriate.
Some evaluators also sit in on a board meeting to observe the meeting dynamics and the contributions of individual board members as well as the overall quality of the debate and the board’s decision-making processes. Observing the board in action can add valuable insight to a board assessment and triangulates with other data gathered through the survey and interviews.
In terms of evaluating the skills and qualities of individual board directors, many different parameters can be considered. These include their contribution to leadership, financial analysis skills, personal commitment and availability, the value they have added on specific topics, and their interpersonal skills. A director’s performance depends on their behaviour as well as their skills and experience.
How often should a board assessment be carried out?
For many companies, board assessments are becoming either an annual or biannual exercise. Some companies do this as a matter of practice, whilst others include board assessments as a requirement in their charter.
They should be undertaken regularly with an independent review every two or three years, or when there have been substantial changes in the composition of the board, or a radical re-shaping of the business.
At the very least, an annual pulse-taking exercise is advisable.
In the UK, FTSE 350 companies must conduct an externally-facilitated, detailed board assessment at least every three years, and more often if there has been a change in the chair or CEO or a substantial change in the business mix. This requirement, imposed by the UK Financial Reporting Council, underlines how valuable such assessments can be to shareholders.
In the eyes of regulators and shareholders, the role of the board in safeguarding and increasing corporate value is taking on ever-greater importance. There is a growing need to continually assess how effectively board members are performing in their roles and how the board as a whole is helping the company to achieve its objectives.
Board members perform better when they are held accountable by their peers and external parties and when they receive regular feedback. Regular board assessments ensure proper alignment between the organisation’s goals and how the board is spending its time.
Setting time aside to consider how the board is performing in its supervisory role and to ensure that it is taking into account the interests of all stakeholders is no longer just a good idea, it’s essential to good governance.
You can read the first extract from the white paper, which discusses the nuts and bolts of corporate boards including their structure, responsibilities and competence.
To read the full report, download it now: