Conducting an Effective Board Review
When was your company’s last Board review? Within the last year? Within the last 5 years? Many boards neglect this area of good governance and do not look at their strengths and weaknesses often, or in enough detail.
The Combined Code, applies to UK listed companies on a voluntary (comply or explain) basis, and states that the Board should undertake a ‘formal and rigorous’ annual evaluation of its own performance and that of its Committee and individual directors. Although the Combined Code is aimed at UK Listed companies, many of its recommendations are just as beneficial for non-listed public and private companies alike, including not for profits and charities.
What should a board review cover?
Ideally, a review should cover three areas: the Board as a whole; the Chairman; and individual Board members.
This should look at how the Board operates as a unit and could incorporate the following (non-exhaustive) areas: whether it has achieved its performance objectives; the relationship between the Board and stakeholders; whether the information received by the Board is appropriate, timely and sufficient in quality; whether there is the right mix of skills and experience; whether the committees are well-balanced and effective; the Board’s contribution to ensuring robust and effective risk management.
Should look at: whether he/she demonstrates effective leadership of the Board; whether the process for setting the agenda is working; whether the Chair enables members to raise concerns and issues; whether relationships with stakeholders are well managed; whether the Company Secretary is being used effectively to maximize value.
Individual Board Members
Evaluations should look at whether each director:
- Continues to contribute effectively; and
- Continues to demonstrate commitment to the role.
This evaluation is particularly important for non-executive directors (NEDs) as executive directors should be fully committed time-wise to the company and be very familiar with the company’s operations (they will also usually be subject to some sort of staff-appraisal system). As part of the individual review, attendance sheets should be kept of all Board and Committee meetings to contribute towards the assessment of the individual director’s commitment. The individual review may also include the following (non-exhaustive) areas: How well the director is prepared for meetings; his/her willingness to devote time and effort to understand the company; his/her participate outside of the board room; the
quality and value of contributions at meetings; contribution to risk management and strategy setting; does he/she successfully refresh his knowledge and skills.
Who should conduct the review?
There are arguments for and against the use of external consultants/firms to conduct Board performance reviews. Using an external evaluation will bring objectivity to the process and help ensure that the process is rigorous and productive. However, there is obviously an added financial cost to this approach, which would be prohibitive for many companies.
We would suggest therefore that an external firm is brought in initially to conduct a performance review, followed by two years using an internal process based on the initial external findings/approach. In the third year (or fourth year at a push), an external evaluation should be used to keep the process objective and check the quality of the internal process.
Whether an external or internal approach is used, the Chairman should very much be leading the process, with assistance from the Company Secretary (if the company has one).
When an internal approach is used, the Chairman would lead on the performance reviews for individual directors, often conducting the face-to-face interviews himself. When it comes to the review of his own performance, this should be conducted by the non-executive directors who should also take into account the views of the executive directors.
What should the review achieve?
A list of appropriate and effective questions tailored to the individual organization should be used, the answers to which enable an assessment of performance to be made.
The board review should lead to identification of strengths and weaknesses which enables the Board to set smart objectives for improvement that can be monitored. The review may lead the Chairman to reconsider the balance of skills and experience on the Board and consider either immediate changes to the composition or factors that should feed into succession planning.
On an individual director basis, the review may lead to the additional training or professional development requirements to improve skills and knowledge.
The results of the Board review should be shared with the whole Board, whereas individual director’s appraisals should be kept confidential between the Chair and the individual.
Is your Board performing effectively? Is it aware of its current balance of skills and experience? Is it actively reviewing itself?
If your company has not checked its strength and weaknesses for sometime, we strongly recommend that you add a performance review to your current year’s plan for the Board.
If you would like any further information on conducting an effective Board review or would like external assistance in providing a tailor-made review, please contact us here to discuss your needs.
Sources: Corporate Governance 5th edition, Brian Coyle