The Effective Board

 

Introduction

It is an established principle of Corporate Governance that Boards should evaluate their effectiveness periodically in order that they can set developmental goals and objectives and measure their progress.

The UK Corporate Governance Code recommends that boards should undertake a formal and rigorous annual evaluation of their own performance and that of their committees and individual board members.

FTSE 350 companies are expected to undertake annual internal reviews with an externally facilitated review every three years. The Spencer Stuart 2019 Board Index survey confirmed that this was the case for 148 of the 150 listed companies they surveyed. Notably, currently troubled Quilter and HSBC were the two companies that did not conduct an evaluation.

The great majority of reviews, internal and externally facilitated, involved a questionnaire designed to elicit board members’ assessment on a scale of 1-5, with some scope for comments on a number of aspects of the board’s operations. The norm is for the Chair, or often the Company Secretary, or any third party involved then to take the content of the questionnaire as the basis of a conversation or interview. A report is compiled for the Chair (or for the board if the Chair undertook the Review), combining the questionnaire and interview data.

The board Chair should act on the results of the performance evaluation by recognising the strengths and addressing the weaknesses of the board and, where appropriate, proposing new members be appointed to the board or seeking the resignation of current board members.

A well-conducted board evaluation helps the Chair to:

  • assess the balance of skills within the board;
  • identify attributes required for any new appointments;
  • review practices and procedures to improve efficiency and effectiveness;
  • consider the effectiveness of the board’s decision-making processes;
  • recognise the board’s outputs and achievements.

Individual evaluation should aim to show whether each director continues to contribute effectively and to demonstrate commitment to the role (including commitment of time for board and committee meetings and any other duties).

Following the board’s discussion of the findings, a set of actions should be agreed for the board’s development over the next period and reviewed periodically.
Whilst the practice of reviewing board effectiveness remains in its infancy, the trend is clear: an initial focus on process and governance has been expanded to include the group dynamics of the board, and now is shifting to encompass a focus on how the board is contributing to the underlying business.

Evaluating the Performance of the Board and Directors

As with all elements of a business, Boards need to continually monitor and improve their performance.

This can be achieved through annual evaluation, which provides a powerful and valuable feedback mechanism for improving effectiveness, maximising strengths and highlighting areas for further development.

The evaluation process should be objective and rigorous.

Like induction and board development, evaluation should be bespoke in its formulation and delivery. The Chair has overall responsibility for the process, and should select an effective approach, involving the Senior Independent Director (SID), where there is one, and Company Secretary as appropriate. The SID should lead the process that evaluates the performance of the Chair and, in certain circumstances, may lead the entire evaluation process.

The Chair should consider ways in which to obtain feedback from the workforce and other stakeholders – for example, the auditors – on the performance of the board and individual directors. Chairs of board committees should be responsible for the evaluation of their committees.

Board evaluations should inform and influence succession planning. They are an opportunity for boards to review skills, assess their composition and agree plans for filling skills gaps, and increase diversity. They can help companies identify when new board appointments may be needed and the types of skills that are required to maximise board effectiveness.

The outcomes from the board evaluation should be shared with and discussed by the board. They should be fed back into the board’s work on composition, the design of induction and development programmes, and other relevant areas. It may be useful for a company to review how effective the board evaluation process has been and how well the outcomes have been acted upon. The Chair is encouraged to give a summary of the outcomes and actions of the board evaluation process in their statement in the annual report.

The nature and extent of an external evaluator’s contact with the board and individual directors are defining factors in the overall quality of the board evaluation process.

Questionnaire-based external evaluations alone, are unlikely to get underneath the dynamics in the boardroom. In addition to one-to-one interviews with both the executive and non-executive directors, board observations and governance reviews, the external evaluator should also meet with the senior management team to gain their views of the board.

Whether facilitated externally or internally, evaluations should be rigorous. They should explore how effective the board is as a unit, as well as the quality of the contributions made by individual directors.

Some areas which may be considered, although they are neither prescriptive nor exhaustive, include:

  • 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;
  • clarity of the senior independent director’s role;
  • 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.

Externally Facilitated Board Evaluations

When selecting a board evaluator, the Chair needs to:

  • be clear what the board evaluation will offer – each provider will have a different method and experience with cost and approaches varying greatly across providers;
  • evaluate the skills, competencies and references of each individual involved in the evaluation against a specification agreed with the board;
  • be mindful of existing commercial relationships and other conflicts of interests, and select an evaluator who is able to exercise independent judgement; and
  • agree with the evaluator the objectives and scope of the evaluation, expected quality, value and longevity of service, and communicate this to the board.

To ensure a more valuable review, the Chair will need to ensure full cooperation between the company and the evaluator, including full access to board and committee papers and information, to observe meetings, and meet with directors individually.

The Chair is responsible for making sure the board gets the most from an externally facilitated board evaluation and should ensure it is not approached as a compliance exercise. The Chair is likely to find the board evaluation process more valuable if:

  • its recommendations are constructive, meaningful and forward-looking;
  • there is a clear set of recommendations and actions, and a time-period for review of progress against agreed outcomes by the evaluator with the board;
  • it includes views from beyond the boardroom, e.g. shareholders, senior executives who regularly interact with the board, auditors and other advisors, and the workforce;
  • it includes peer reviews of directors and the Chair plus feedback on each director;
  • good practice observed in other companies is shared;
  • the evaluator observes the interaction between directors and between the Chief Executive and Chair;
  • there is a robust analysis of the quality of information provided to the board;
  • feedback is provided to each individual board member; and the board is challenged on composition, diversity, skills gaps, refreshment and succession.

The UK Corporate Governance Code recommends that FTSE 350 companies have externally facilitated board evaluations at least every three years. Chairs of smaller companies are also encouraged to consider doing this periodically. External facilitation can add value by introducing a fresh perspective and new ways of thinking, and a critical eye to board composition, dynamics and effectiveness. It may also be useful in certain circumstances, such as when there is a new Chair, if there is a known problem requiring tactful handling or there is an external perception that the board is, or has been, ineffective.

The Excellencia Board evaluation including Director 360 Board effectiveness questionnaire is an on-line questionnaire completed by all board members individually which gives board members the opportunity to compare their own assessment of performance and contribution with that of their peers. The questionnaire covers the following:

  • Self-assessment of Board effectiveness
  • Self-assessment of individual contributions to the Board
  • Director 360 – 3600 Assessment of the contributions of fellow board members to the Board including the effectiveness of contributions across a full range of issues, willingness of individuals to take a lead on issues including those outside their direct area of responsibility, and the ability to keep up to date with new issues and bring them to the attention of the Board where appropriate.
  • Director 360 – 3600 assessment of Board behaviours including: listening, constructive challenge to others, conflict avoidance, openness to challenge and building a consensus