Formal board evaluation processes have grown significantly in recent years in both the proportion of boards seeking assistance and the level of sophistication expected.

This article considers board evaluation trends and issues.

Strategy first

Board evaluations are most effective when an organisation has a defined strategy. It may seem surprising but it is still not uncommon to find that this basic step has not been taken within some boards. This could be an outcome of an ineffective board, and as such board renewal is essential. If this is the case it is a bit of a chicken and egg problem. If not, the process is made much easier if there is a broad strategic direction established.

Typically, we find a board evaluation conducted after, or even during, a board strategy review is most effective. It is at the time of this review process that the most value added outcomes of a board are expected, demonstrated and can be evaluated. Sober reflections on what has been achieved, as a board, and its future path, are critical antecedents for a valid board and individual director assessment.

Regulation and guidelines

ASX Corporate Governance Council Principles Recommendation 1.6 requires listed entities to disclose its process for board evaluations, and whether the process has been applied. While this has now been in place since 2007, each year sees a raising of the bar as companies improve their disclosure and processes, and investors raise their expectations.

The November 2012 APRA regulatory requirements (SPS 510) for superannuation fund boards to conduct board evaluations is starting to take hold as the large funds seek external assistance at least every 3 years.

Other, earlier APRA requirements applying to regulated deposit taking, general insurance and life insurance industries (now rolled up into CPS 510) have also contributed. As the financial services sector of the economy is relatively large, these board directors have taken their experiences with them to their other boards that are outside the financial services sector.

Diversity

It is understandable that some boards may not want to invite outsiders to assist it assess how well it is doing, given the confidential nature of board deliberations. This is changing.

The correlation of greater board diversity with those seeking external assistance is no coincidence. One outcome of diversity appears to be more openness to others’ opinions, including a more mature reception of opinions emanating from a confidential board evaluation process. This observation is verified to an extent with the observation that the listed company boards that do not seek independent assistance in the process are those that also lack diversity.

Non-directors have a valid perspective

A very useful input into the evaluation process are observations by people who are not board members, but who have had frequent interaction with the board and its various committees. Usually, these outsiders are management, but can also include external board advisers, regulators and others. Non-board members need to be sufficient in number to protect the confidentiality of their individual input. We often find there is a distinct difference in perspective from a board’s self assessment and the assessment of others in a position to have observed the board function. The theme of diversity works well here too. In this case, it is a board seeking input from diverse sources.

Do not assume that there is nothing new to learn about your board’s effectiveness. Adding in a new perspective, such as the perspective from management, can enhance the evaluation process.

Board renewal

The need to address board renewal often means encouraging directors to move on from the board. This is often a difficult process to conduct internally, and better addressed with neutral, independent assistance using processes that protect the individual confidentiality of board member assessments of their peers.

Increasingly, not-for-profit and especially superannuation boards need an independent process to tackle these issues as their director re-appointment process may otherwise not result in appropriate and needed renewal without a confidential director performance assessment.

Disclosure of board skills matrices

The focus on board renewal and director assessment has also been brought into the spotlight in relation to listed companies with the requirement to publish skills matrices under ASX Corporate Governance Council Principles Recommendation 2.2. While these matrices have so far been fairly generic, the attention of proxy advisers and large investors will be brought home to some listed company chairman as they go into their 2015 engagement sessions. In coming years we expect more proxy adviser and investor probing of chairmen on the validity of their company’s published skills matrices. Investors will insist that these be made more useful for their deliberations on director election resolutions. This may contribute to greater reliance on external assistance in constructing the matrices, and objective and confidential assessment of the extent to which individual directors fill gaps in the matrix.

Provide an avenue for confidential input

Many boards consider that there is a high degree of openness among their directors. But this needs to be tested every now and then with a more confidential process that permits anonymous director and other stakeholder input.

Follow up

Follow up is often missing. For example, some issues are considered too sensitive or confidential to ask the company secretary to assist. Various external providers can offer a follow up service. In addition, modern technology can play a role in providing a cost effective feedback and follow up mechanism that takes about 5 minutes after every meeting to asses progress on key issues identified in the evaluation process.

External providers

There is a huge range of external services now available to boards. In particular, good quality services are available for reasonable cost to not-for-profits, small private companies and superannuation funds.

As boards for larger organisations have more financial resources, the range of sophisticated external services has also expanded. Most large organisations get most value from customised evaluations. Customised evaluation can assess the effectiveness of the board in regard to an organisation’s unique strategy, as well as specific issues associated with its competitors, industry, regulatory environment and past performance.

 

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