Organisations should evaluate performance of boards

can only be, when the ailments are known or better still, when the patients themselves can describe the exact form of their illness.
Stakeholders and potential investors need assurance that an organisation is committed to the highest standards of governance and probity. A regular health check, through a performance appraisal shows this commitment. More and more businesses are now recognising that evaluating performances of their boards can be of real benefit in determining and improving boardroom practices and procedures.
The past decade has seen an explosion of corporate governance codes around the world. Regulators in countries are publishing their own “unique” approaches to this subject in which they seek to represent commonly held views on what good governance is all about within their jurisdictions. Many of these codes recommend that the performance of the boards should be evaluated.
The King Code, for instance, recommends that yearly evaluations should be performed by the chairman or an independent provider. The board should determine its own role, functions, duties and performance criteria as well as that for directors on the board and board committees to serve as a benchmark for the performance appraisal.
The results of performance evaluations should identify training needs for directors. King Code also says that the nomination for the re-appointment of a director should only occur after the evaluation of the performance and attendance of the director. An overview of the appraisal process, results and action plans should be disclosed in the integrated report.
The Brazilian Code also matches the King Code by saying that a formal evaluation of the Board and each of the board members should be made every year. The evaluation method should be adapted to the circumstances of each company. The Combined Code in the UK pioneered this recommendation when it said that the board should state in the annual report how performance evaluation of the board, its committees and its individual directors has been conducted. The non-executive directors, led by the senior independent director, should be responsible for performance evaluation of the chairman, taking into account the views of executive directors.
While it is accepted that corporate governance codes are necessary, it is also realised that codes alone are not sufficient if the ultimate goal is to achieve a board of directors which performs more than ordinary.
The Walker Review consultation report on corporate governance in UK banks and other financial industry entities, in 2009 revealed that not all boards had at that time, given the process of board evaluation the attention and seriousness that it deserves, despite the Combined Code having been for more than a decade. Therefore it is not about the letter of the law, but rather commitment to a practice and culture of good and value adding ongoing appraisals.
There are many boards which adopted the practice of carrying out health checks of their performances even as early as in 1994, as reported in a publication by the International Finance Corporation (IFC).
Matthew Barrett, a former Chief Executive Officer, of Barclays Bank, shared that from his experience of over 30 boards in four countries, a commitment to annual evaluations proved to be a powerful change agent.
In his role as chairman and CEO of Bank of Montreal he introduced board evaluations back in the early 1990s, when board evaluation was a very rare practice anywhere in the world. The practice of appraising performances of boards should not be seen as a legalistic, “tick a box” function, but more to address the fact that boards are complex social structures with hugely difficult jobs to perform, which are getting more and more complicated. No board can boast of having arrived. Learning is no longer just a curve, but a long process of discovering and re-discovering what it means to have good governance.
The swiftness of change in today’s world has made every business global in its own way and more vulnerable in every way. How else could a board get through this discovering process and act as value added contributor to the ongoing success of the organisation, if it does not evaluate itself?
It is the way people work together and not the rules and regulations which are important for the success of boards. In this way, boards and director appraisals tend to touch on two basic areas; people factors and process factors. People factors are likely to be more important of the two in achieving an effective board.
For example, how the directors work as a team, what are their interpersonal skills, is there a dominant or bullying chairman or CEO, is the chairman an effective leader, do all directors contribute, what is the level of commitment through preparedness, engagement or absenteeism, is the board objective in acting on behalf of the company, is it robust in taking and sticking to difficult decisions; are decisions reached by the whole board, do decisions take account of shareholders and stakeholder’s views and concerns, are there any “unmanaged” conflicts of interest, is the composition of the board being refreshed (succession planning)? Do directors have a clear understanding of their mandate?
On board specific issues, it could be asked if the board is setting itself clear performance objectives and how well has it performed against them?
What has been the whole board’s contribution to the testing and development of strategy? What has been the board’s contribution to ensuring robust and effective risk management, including the contemporary climate change issues? Is the composition of the board and its committees appropriate with the right mix of knowledge and skills sufficient to maximise performance in the light of future strategy? The IFC report also provides guidelines on evaluating board processes, by asking questions such as; is appropriate, timely and unbiased information, of the right length and quality, provided to the board and is management responsive to requests for clarification or amplification?
Does the board provide helpful feedback to management on its requirements?
Many companies struggle, or have struggled, with getting the right level of information to the board. The optimum amount will vary from board to board depending on the type of business and the level of trust that has built up.
Too much can be just as damaging as too little. Are sufficient board and committee meetings, of appropriate length, being held to enable proper consideration of issues? Is time used effectively? Getting the optimum number of board and committee meetings can be a problem e.g. balancing needs of the business with availability of directors, particularly when there are overseas directors.
On the role of the chairman, the evaluation seeks to test if the chairman is demonstrating effective leadership of the board? Are relationships and communications with shareholders well managed? Are relationships and communications within the board constructive? Are the processes for setting the agenda working? Do they enable board members to raise issues and concerns?
The methodologies in carrying out board evaluations vary from organisation to organisation. Should it be an in house procedure or outsourced? If it is carried out by an external reviewer, the general practice is to have a base questionnaire, which either is given to directors or covered by face-to-face interviews. The best methodology is one which the board is most comfortable with.