Board evaluation & effectiveness
The crises the corporate world has witnessed in the past decade or so has illustrated the potentially risky consequences of allowing ‘group-think’ in the boardroom. Further the fact that directors control major resources, both financial and human, and have responsibility for highly complex organisations, Board Evaluation has been found to be an effective way to keep behaviours in check both for the collective board and individual members. The ability of a business to deliver its strategic objectives and generate the expected returns is, to a great extent, driven by the Board and it is crucial that advisers, business partners, lenders and investors are satisfied that the Board is well-structured and has the ability to operate in a way that merits the required investment
Board Evaluation provides the board with an opportunity to review the skills, experience and diversity both of gender and perspective. Additionally, from a succession planning perspective, it provides the board with an opportunity to openly discuss whether the plans in place are adequate for the long term success of the company. On top of these issues it also allows the board to evaluate the processes of board support and decision making.
A full board evaluation may also include a review of governance documents, committee charters, board meeting minutes, board meeting agendas and observation of a board meeting. Observing the board dynamics and exchanges between directors during live meetings can be a very useful input when providing advice and recommendations for improvement, particularly related to the quality of board discussions.
Board Evaluation gives the board an opportunity to identify and remove obstacles to better performance and to highlight best practices. Board Evaluation leads to Board Effectiveness through - The right structures, The right people, The right issues , The right process , The right culture , The right information, The right remuneration, and The right follow through.
As per McKinsey research paper, Best practice isn’t good enough, even if your board is stacked with highly qualified members. Without the right human dynamics there will be little constructive challenge between independent directors and management, no matter how good a board’s processes are. As a result, the board’s contribution to the company’s fortunes is likely to fall short of what it could and should be.
Some of the key Types of Evaluation are:
- Least concern to directors who are nervous
- Particularly important that the chairman is fully committed to the process; otherwise the results may be unfairly ‘influenced
- the process seems usually to involve questionnaires devised either in house or acquired from an outside source
- Usually involves the chairman having either a structured or unstructured interview with each director.
- The natural reluctance of directors to be completely open on sensitive issues with someone within the company.
- There is no easy opportunity to get behind the initial answers for additional information.
- The coverage may not be comprehensive; the answer to one question may prompt others not on the questionnaire.
- The board does not benefit from any comparison, even at a high level, with that of another company.
- The approach may not be entirely acceptable to investors, since they are unlikely to be able to ascertain the rigour of the process used.
In-house facilitated by external facilitator
- Usually on questions either compiled by personnel within the company or provided from an external source, but the written responses are returned to and, analysed by, a third party
- Introduces a degree of independence in the analysis, and may reveal the outline of more sensitive issues, it can still suffer from the other restrictions applicable to the “in house” route.
- As a safeguard against inertia or complacency, in order to accelerate, and render more objective, their own assessments of the board’s capabilities and to plan future changes of the membership where this is envisaged.
- Some proxy firms/activists routinely criticise or challenge the tenure of certain directors on the basis of judgments which may be regarded as mechanistic (“box tickers”). Periodic third-party evaluation can provide clear legitimisation of the decision.
- External involvement every two or three years will enhance the value of the regular, in house annual process.
- Periodic external facilitation may make it easier to solicit the views of other senior executives immediately below board level whose inputs would be compromised should they be involved in conducting the process.
- Senior executives may be understandably reluctant directly to criticise directors who are their employers and may be more likely to be candid in speaking with an external facilitator.
- When you know you have a problem: A situation which will require tactful, impartial handling, and make the process smoother and potentially less explosive.
In our Evaluation practice at Hunt Partners we have often observed that many Directors are concerned that the exercise may reveal confidential information when reporting the evaluation outcomes. Well designed and professionally executed evaluations very easily address this concern and provide the confidentiality to the entire process and also have the potential to achieve various benefits, listed as under:
- Composition of the Board: The Board has a suitable mixture of skills and other attributes among the Directors and highlight any inadequacies or areas that may be required while inviting new directors to the Board
- Improved decision-making: Evaluation process leads the Board to reconsider Board practices, including priorities on the agenda and the efficiency of its communication systems and information architecture.
- Early Warning systems: The process of raising directors’ concerns acts as an early warning system to the Board, which will allow changes to be implemented before more deep-rooted problems set in.
- Improved performance: Board and individual effectiveness improves as a result of developmental assessment. Improvements in Board practices and structures help to improve trust, respect and business confidence.
- Improved accountability: Improvement in accountability, transparency and disclosure. Positive results of ‘Board Evaluation’’ can be included in Annual Report, which allow the Board to frame and provide evidence of the value it creates for the company and beyond.
The Board Evaluation process followed by Hunt Partners has been designed in consultation with Board Evaluations Ltd, UK, one of the foremost advisory firms in Europe and adheres to the following principals:
Definition of the Evaluation objectives
It is important to define the key objectives of the evaluation, what directors collectively want to accomplish
Assigning Responsibility to drive the Evaluation process
Identification of the ‘Champion’ to drive the process is most important as it involves driving the process internally, getting the Directors to take out the time as well as to ensure that the board follows up on the issues that emerge.
Going beyond the Board room, by including senior management in the organization and best practices from other Boardrooms.
Including the few key senior management team members who interface with the board to seek their inputs. The Board should also benchmark itself against other high-performing boards.
Directors are interviewed individually on a confidential basis and asked for both their qualitative and quantitative assessment of the key areas that determine the effectiveness of the board. The interviews are conducted by seasoned/trained boardroom consultants from Hunt Partners who understands boardroom issues and CEO/board relations.
Follow through with a commitment for addressing issues that emerge
Boards need to commit the time to review the results and address the issues that are raised through the evaluation process by creating the structure to implement the steps to improve effectiveness in the future.