Board evaluation systematically done, as part of a continuous improvement process, with full inclusion of the Board is good for business. Here Gerrit Aronson outlines the importance of a rigorous and meaningful evaluation of the Board’s performance, followed by a checklist of ER Consultants’ general approach in this area.

Of course Board evaluation is not new. For years Chairmen and Chairwomen, and Chief Executives have done it – often informally, usually privately, rarely systematically. Few did it well. Now the stakes have changed. The high profile big corporate failures have caused investors to ask ‘where was the Board when all this was going on?’ And in turn they have questioned companies not (yet) in trouble about how effectively their Boards are operating. The general focus on corporate governance, with its concern on independence and challenge from non executive directors, the loss of trust in the structure and operation of Boards, and the often misguided assumption of cronyism and ‘clubby’ environments, have all contributed to pressure for Chairmen and Chief Executives to be, and be seen to be, actively evaluating the operation and effectiveness of Boards. Furthermore, they need to be seen to be acting on the evaluations.

The Combined Code on Corporate Governance issued in July 2003 by the Financial Services Authority that applied from 1 November 2003 reflects the changing environment. One of its ‘Main Principles’ is stated as:

‘The Board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors.’ (FSA, July 2003)

The supporting principle and code provision spell out more specific expectations for the evaluation, and require that the Board state in its annual report how the evaluation has been conducted.

How best then to comply?

As with many issues of corporate governance that have been on the receiving end of legislative help, there is danger that simplistic rules bring about equally simplistic responses – the ‘tick-in-the-box’ approach. Reduced to an exercise in appearing to comply, the temptation can be to treat all Boards the same, directors as one mould, their duties and contributions identical; and to outsource the evaluation to a growing cadre of ‘experts’.

But Boards are as different as the businesses and shareholders they represent. The industry, the size of the business, the stage of the business, its geographic spread, its ownership structure, all affect what is required of the Board and its individual directors. A single model approach ignores the importance of diversity of skills and experience, as well as the behaviors and dynamics most appropriate to the specific needs of a given business during a specific time.

Furthermore, Boards fulfill a different role than management – a different job, not
just a higher order of management. Thus the basis of evaluation is different than what is normally thought of inside an organisation.

The Board is the highest authority – there is no boss to do the evaluation. Boards must do their own evaluation but do so in a way that is credible to shareholders and engaging to members. It must be rigorous and acted upon. It is best done by themselves but with facilitation that provides expertise, challenge and objectivity.

Boards with a clear corporate governance credo have an advantage. Clarity on what the Board uniquely does, what it delegates to the CEO, what goals and limitations it puts upon the CEO, what monitoring of process and results it sets out – all provide the reference to measure against in terms of the most fundamental evaluation of the Board’s collective responsibility for governance. This also provides the context within which the Board can more easily identify the skills and experience, especially the mix and diversity of skills and experience that it most needs. And it can more easily discuss and focus the most productive style of working as a Board – ranging from hard issues like frequency and order of meetings, to balance of presentation vs. pre-read, to softer issues of discussion process and behaviour norms.

When the foundations described above are in place, evaluation can become a far easier, less threatening, and more productive effort. Rather than a once-a-year event, it becomes part of a continuous improvement process.

Evaluation should start with assessing how well the total Board is fulfilling its collective responsibility and role. The process of doing so should be inclusive of Board members and participative. Most often it is helpful to have an objective outsider to provide facilitation and focus.

Individual evaluation done well can be engaging and empowering, done poorly, it is threatening and resented. The difference lies in the openness of the process, a shared understanding of the open versus private part of the evaluation, and agreement on what use will be made of the results. It is heavily dependent on the skill of the person(s) carrying out the process.

Finally, critically, is the issue of follow-up. Sadly, many Boards will do a once-a-year box ticking which will produce an acceptable result that can be satisfactorily communicated externally. Job done, all’s OK, tick in the box. Leading Boards will treat evaluation as a continuous improvement process. Some elements may occur more frequently than once a year, some less. The focus may change depending on the issues. Actions will be agreed ranging from mechanical items like timing of meetings or format of material to changes in behavior in meetings. Open discussion as a Board, private individual discussions, focused action, follow-up.

Board evaluation as a key element of effective corporate governance is worth
investment. Done poorly it is at best a waste of time and frustrating; done well it can positively impact on the long-term health of a company. Shareholders will increasingly expect the latter.

For further information, please contact Gerrit Aronson:
T 44(0) 1223 31594
E gerrit.aronsen@erconsultants.co.uk