The Importance of Effective Board Evaluation

The Importance of Effective Board Evaluation

Board effectiveness goes to the heart of success. Without a high functioning board, a company will never truly be able to reach its potential. But without evaluating your board’s behaviour and processes regularly how will you know how effective it is or where improvements are needed? We take a look at the importance of board evaluation, the guidance available and highlight some questions all boards should consider.

Why Board evaluation matters

• It allows Boards to look inwardly and identify areas for improvement
• Provides assurance to stakeholders and shareholders that the Board is effective
• Helps to ensure that discussions and decision-making are effective
• Helps the Board stay on track to achieve the company’s strategic objectives
• Allows Boards to review and improve their diversity and skill base
• Helps inform succession planning

What should an evaluation do?

Effective evaluation can help Boards review and improve its:

• Skills and experience
• Processes (including decision making)
• Composition
• Activities
• Behaviours

Are evaluations carried out regularly as recommended? Is the appointment of evaluators transparent?

Minerva Analytics in their recent Regulatory Briefing, [1]found that “despite the 2005 European Union recommendation that boards should conduct an annual evaluation, many European companies have not followed through” with an even lower number of companies conducting external evaluations. They also found a problem with the quality of disclosure, with most only stating that an evaluation had been conducted, but no details on the outcomes and any actions taken to improve effectiveness. There was also a “lack of disclosure provided on evaluation when compared to the information provided on other board advisors” (such as external auditors, recruitment firms or remuneration advisors). “This means stakeholders do not have the information on hand to assess the quality and effectiveness of evaluators”.

There is a general concern that the lack of guidance on board evaluation means that good governance is not always achieved in this area. Board evaluation can become another box-ticking exercise rather than leading to genuine progress and improvements. To that end, last summer shortly after the publication of the new UK Governance Code, the Government asked ICSA: The Governance Institute to convene a group to review the quality and effectiveness of board evaluations.[2]The end objective of this is to establish a code of practice for external board evaluations. Such a code will no doubt lead to vast improvements in this area.

As the Minerva report succinctly puts it “for evaluation to be effective it should produce an outcome with follow-up actions that willincrease board effectiveness.” Whilst we await the establishment of a Code of Practice in this area, we take a look at how the FRC Guidance on Board Effectiveness[3]might be used by Boards to internally evaluate their effectiveness.

Board Effectiveness

The Guidance was published alongside the new UK Corporate Governance code last summer and although it is not mandatory, it contains suggestions of good practice. Although the Code (and therefore the guidance) is applicable to all companies with a premium listing in the UK, its contents can be adapted by all companies regardless of type and size who are seeking to achieve high levels of governance and effectiveness.

Boards that want to maximise success should “focus on continually improving their effectiveness” and give considerable attention to the behaviours that they display, individually and as a group, remembering that they are setting “the tone from the top”.

The Guidance contains useful introspective questions for Boards – smaller company boards, those not ‘covered’ by the UK Governance Code and perhaps not in a position to appoint external facilitators would benefit from considering some of the questions included within the Guidance. Questions such as:

• What proportion of board time is spent on financial performance management versus other areas of strategic importance?
• Is the balance between the focus on immediate issues and long-term success appropriate?
• Is sufficient board time allocated to idea generation, opportunity identification and innovation?
• How will we assess and measure the impact of our decisions on financial performance, the value for shareholders and the impact on key stakeholders?
• How do we articulate and communicate what we consider to be acceptable business practices?

Culture

The last few years has seen increased focus on the importance of culture and values as key pillars of good governance and fundamental to maximising success. Therefore, there is lots of focus within the Guidance on values and culture, and how Boards can be effective at monitoring this. Any evaluation should look at how well the Board lives the ‘values’ and monitors culture throughout the organisation.

The Guidance states that focus on culture needs to be continuous. Some questions to consider:

• How do we demonstrate ethical leadership and display the behaviours we expect from others?
• To what extent is our own way of operating a reflection of the values we are promoting? Can we give good and bad examples?
• Is the board clear on what sort of culture is needed to underpin the company’s purpose and its long-term success?

You may want to consider asking others (such as staff) their thoughts during an internal evaluation:

• What does the workforce say about ‘the tone from the top’ and the ‘tone from the middle’?

Decision Making

Any valuable evaluation should look at the decision-making processes of the Board. How a Board receives information, discusses and ultimately makes a decision is crucial to its effectiveness.

The Guidance advises that Boards can minimise the risk of poor decisions by investing time in the design of their decision-making policies and processes, including the contribution of committees and obtaining input from key stakeholders and expert opinions when necessary.

Questions Board’s should ask themselves about decision-making include:

• Does the board have a clear idea of the success criteria related to a particular decision?
• What are we doing to test key decisions for alignment with values? Can we give examples and explain how this was considered?
• What are the risks that the decision could encourage undesirable behaviours or send the wrong message?

• Can we explain how the impact on key stakeholders has been taken into account?

Effective stakeholder engagement

The Guidance further covers how the Board can effectively engage with shareholders of all sizes and other key stakeholders. An evaluation should look at how well the Board engages with other interested groups.

Questions for Boards around stakeholder engagement include:

• Can we describe how stakeholders are prioritised and why?
• What are the key concerns of our workforce, our suppliers and our customers, and how are we addressing them?
• Does the workforce consider that customers and suppliers are treated fairly and that the company cares about its impact on the environment and community?

The Board may also wish to refer to The Stakeholder Voice in Board Decision Making, issued jointly by ICSA: The Governance Institute and The Investment Association, for detailed guidance on how to build stakeholder considerations into board discussions.[4]

Division of responsibilities

An evaluation of the Board’s effectiveness should look at the different roles of Role of Chair; Committees; Senior independent director (if you have one); executive directors; and non-executives and whether they are contributing effectively to the Boards output.

According to the Guidance, the chair is pivotal in creating the conditions for overall board and individual director effectiveness, setting clear expectations concerning the style and tone of board discussions, ensuring the board has effective decision-making processes and applies sufficient challenge to major proposals.

The chief executive’s relationship with the chair is also a key influence on board effectiveness and should be looked at during evaluation.

Effective information

Key to the effectiveness of the Board and its ability to make decisions is receiving appropriate information.

Board papers and supporting information should:

• be accurate, clear, comprehensive and up-to-date;
  • contain a summary of the contents of any paper; and
  • inform the director what is expected of them on that issue

Composition and succession planning

The Board should regularly review the skills required, identify the gaps, develop transparent appointment criteria and inform succession planning.

Evaluating performance

Looking at the evaluation itself, the Guidance states that the chair has overall responsibility for the process, and should select an effective approach, involving the senior independent director (if there is one) as appropriate.

Whether facilitated externally or internally, evaluations should be rigorous and should result in clear actions for improvement.

The Guidance includes a substantial (though not exhaustive) list of areas that could be included in an evaluation:

• the mix of skills, experience and knowledge on the board, in the context of developing and delivering the strategy, the challenges and opportunities, and the principal risks facing the company;
• clarity of, and leadership given to, the purpose, direction and values of the company;
• succession and development plans;
• how the board works together as a unit, and the tone set by the chair and the chief executive;
• key board relationships, particularly chair/chief executive, chair/ senior independent director, chair/company secretary and executive/non-executive directors;
• effectiveness of individual directors;
• effectiveness of board committees, and how they are connected with the main board;
• quality of the general information provided on the company and its performance;
• quality and timing of papers and presentations to the board;
• quality of discussions around individual proposals and time allowed;
• process the chair uses to ensure sufficient debate for major decisions or contentious issues;
• effectiveness of the company secretary/secretariat;
• clarity of the decision-making processes and authorities, possibly drawing on key decisions made over the year;
• processes for identifying and reviewing risks; and
• how the board communicates with, and listens and responds to, shareholders and other key stakeholders.

The frequency and thoroughness of your Board evaluation will depend on the size and type of your company, but all boards should take time to review their effectiveness and processes to ensure maximum benefit to the company’s success.

Help where you need it

Bridgehouse Company Secretaries are brilliantly placed to help with all your governance needs. For advice on your internal or external board evaluation and to get in touch click here

[1]Minerva Analytics, Regulatory Briefing, Board Evaluation in Europe, February 2019 (https://www.manifest.co.uk/downloads/minerva-briefing-board-evaluation-in-europe-2019/)

[2]https://www.icsa.org.uk/about-us/press-office/news-releases/icsa-to-review-the-quality-and-effectiveness-of-board-evaluations

[3]https://www.frc.org.uk/getattachment/61232f60-a338-471b-ba5a-bfed25219147/2018-Guidance-on-Board-Effectiveness-FINAL.PDF

[4]https://www.icsa.org.uk/assets/files/free-guidance-notes/the-stakeholder-voice-in-Board-Decision-Making-09-2017.pdf