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01/12/2014
The ASX Corporate Governance Council (CGC) has raised the bar in relation to disclosures relating to Board Performance Reviews.
In the Council’s 2010 Corporate Governance Principles and Recommendations, there was a requirement under Recommendation 2.5 to “…disclose the process for evaluating the performance of the board, its committees and individual directors.” In addition, the commentary under this recommendation called for regular board performance reviews against appropriate measures.
According to research undertaken by the Governance Institute and Boardroom Partners on the disclosure practices of ASX 200 companies in 2012, almost half (45%) of the companies surveyed did not specifically address all requirements of disclosure. More specifically, their disclosures were seen to be:
- Lacking in detail
- Missing some important aspects
- Generic
- Not tied to any particular actions.
The disclosure requirements have now been made even more stringent and explicit under the 2014 CGC Corporate Governance Principles and Recommendations. Specifically, under Recommendation 1.6 it is suggested that a listed entity “…should, where appropriate, also disclose any insights it has gained from the evaluation and any governance changes it has made as a result.”
In our experience, the best board chairs not only welcome the opportunity to make such disclosures but also seek out opportunities to fully explain the details of their governance improvements with investors and proxy advisors, where appropriate to do so. Here are some best practice guidelines for disclosing insights gained from a board review, and the governance changes made as a result.
What to disclose?
The purpose of disclosing information about the board review findings and actions taken as a result is to build investor confidence in the company and its governance practices. Accordingly, disclosures should aim to focus on:
1. Issues raised previously by investors
Whilst it is stating the obvious, the number one priority should be to clearly demonstrate that the board has addressed any areas of concern to investors or proxy advisors. For example, if they have raised concerns about the number of independent directors on the board, then it will be useful to disclose information about the board renewal process, and the estimated timing associated with recruiting new independent directors.
2. Priority issues for investors
The principal topics included in a board review generally include:
- Board structure and composition
- Strategy and risk
- Board processes
- Review and decision-making
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People
Of these topic areas, investors are generally most interested in the first area – board structure and composition. More specifically, they are particularly focused on the following questions;
- Does the board have the depth and breadth of skills and experience to provide effective oversight and add value to management – both now and for the future? Are there any obvious gaps?
- What is the board’s plan to address these gaps?
- Do directors bring sufficient diversity of thought?
- Does the board have sufficient independence from management?
Useful and effective disclosure could address these questions, without disclosing any sensitive or commercial-in-confidence information.
3. ‘Big picture’ issues
The board reviews we undertake for our clients rely on the 80-20 rule – that is, focus on the 20% of things that will make 80% of the difference. Disclosing information about micro, process-related matters will convey the message that the board do not take governance seriously and will not give investors confidence that the board is genuinely committed to delivering real change that will benefit shareholders. Investors are keen to see evidence of material change and improvement – not tinkering around the edges.
What not to disclose?
There may also be a number of themes or issues identified in the board review that would not be suitable for public disclosure, including:
1. Highly sensitive issues
If a board review is to be effective and result in real change, it will often unearth the ‘elephant in the room’. This is usually something highly sensitive and difficult for the board to address (if it was an easy fix, it would have been dealt with already!). The board should not feel under obligation to publicly ‘share its dirty laundry’, and Recommendation 1.6 takes this into account by including the words, “where appropriate”. Such issues could include matters such as board/management relationships and communication or individual director development needs. However, there are examples of Chairmen who have been prepared to share their own learnings that emerged as a result of a board review, and ways that they have changed or improved their leadership styles as a result. This, then, is an area where careful judgement is required.
Directors are also naturally wary about disclosing issues that demonstrate poor governance practice, but there are times when it may make sense to ‘own up to’ poor practices that have now been significantly improved.
2. Commercial-in-confidence issues
The outcome of a board review can also include commercially sensitive information, which the board would not want released to the market. For example, an analysis of skill sets needed for the board in the future could signal the company’s plans for growth, acquisition, divestment, merger etc. that it may not be appropriate to disclose ahead of time.
Conclusion
As indicated by the 2012 research, most companies (93%) disclose the process they adopt in relation to the conduct of board reviews, and there is a trend toward boards becoming more accountable for disclosing improvements to their governance practices. There is, however, a way to go in relation to the sharing of information about the outcomes of such reviews. It is our experience that many of the findings of board reviews that we undertake are not overly sensitive, and could be shared with the external market. Examples include restructuring board committees, reshaping the format of board agendas, improving the metrics provided in board papers to improve the board’s capacity to monitor and oversee operations, projects etc. and improvements to board succession planning processes.
© Guerdon Associates 2024
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