Evaluating the Board of Directors
In our previous article we touched on Good Governance and the Selection process that a shareholder goes through on identifying members whom will sit on the company’s Board. The next step in boardroom effectiveness is the evaluation of the Board of Directors.
In Zimbabwe, evaluation of the Board of Directors is not common practice, despite the potential benefits of increasing the board’s effectiveness and accountability, most appraisals are usually focused on the company’s CEO and executive management. However, evaluation of the board is central to corporate governance, and an effective board assessment process has the potential to be transformational. The challenge for boards today is to add value to the organisations they govern. Performance evaluation is a means by which boards can ensure they have the knowledge, skills and ability to meet this challenge.
A thorough board evaluation will determine board effectiveness and whether its members are acting in the best interests of the organisation and promoting the highest standards of corporate governance. In most companies globally, Board evaluation is a yearly exercise via choice or via regulatory recommendation. Regular board evaluation helps ensure that board standards are maintained and the corporation is capable of ensuring long-term viability and credibility. The evaluation process is usually tailored to the needs of the company, the specific situation it is in, the stage of the company’s lifecycle, the corporate structure, the Board culture and the embedded processes. However, there is no common format, which is universally acceptable and applicable to all companies. Members of a board of directors may also be assessed on the fulfillment of their responsibilities for the stewardship of the organisation.
Areas to Evaluate
The board evaluation committee needs to form some goals and objectives. Each organisation’s evaluation tools should be customized to the unique needs of their business. Here are some areas to consider including:
- Identify areas that require improvement
- Determine whether the board member’s contribution is in keeping with the needs of the board and organisation
- Identify issues or areas that need more attention in board meetings
- Evaluate the diversity and composition of the board
- Inquire whether nominations are merely a routine exercise
- Assess the strength of each individual board member and if they need further development
Factors to ensure board effectiveness
The Board performs three major roles in a company – it provides direction (i.e. sets the strategic direction of the company), it controls (i.e. monitors the management) and provides support and advice (advisory role). Board evaluation typically examines these roles of the Board and the entailing responsibilities, and assesses how effectively these are fulfilled by the Board. The effectiveness of the Board depends on a variety of factors, some of which are:
- Board Structure: Questions concerning board structure incorporate issues such as board and committee composition. This accounts for ethnic and gender diversity and size of the board. This section should assess whether meetings and other board processes are being held too frequently or too infrequently. Questions should review the effectiveness of board and committee charters and the competencies of the members serving on the board and committees.
- Dynamics and Functioning of the Board: This category may assess standard board functions like the board calendar and agenda. It should also examine relationships such as the interactions and strength of communication with the CEO and executive management. These questions should also explore how cohesive the board is, and whether all board members engage and participate at the level they should. The board chair has a huge impact on board dynamics and functioning. Some boards evaluate the board chair role separately from other board roles.
- Business Strategy Governance: Oversight is an umbrella term that encompasses the board’s role in strategic planning.
- Financial Reporting Process, Internal Audit and Risk Management: Strong internal controls are a vital necessity in today’s corporate market because of the complexity and pervasiveness of risks. This category includes challenging topics like abusive related party transactions, the strength of financial and other internal controls, whistleblower policies and risk management.
- Monitoring Role: The term oversight also includes the board’s competence in monitoring policies and systems and in implementing strategic plans.
- Supporting and Advisory Role: The board’s role in governance includes playing a supportive and advisory role to managers, and boards should assess their strengths and weaknesses in this area as well.
- The Chairperson’s Role.
The evaluation of the performance of the Boards is essentially an assessment of how the Board has performed on all these factors.
The assessment process
The assessment process for boards of directors varies widely as organisations should choose the methodology that best suits their operation. Discussions about evaluation of the Board and its Committees are initiated in the Board by the Chairperson and the consensus of the Board obtained about the need for the evaluation and whether the exercise should be conducted in house or with the help of an independent external expert.
The evaluation process involves identification of areas for evaluation; formulating a questionnaire on the areas for evaluation; obtaining responses of individual directors to the questionnaire on a rating scale; conducting interviews with individual directors and analysing the responses to the questionnaire and interviews; and reporting the findings resulting from the analysis to the full Board. The Board deliberates on the report, develops an action plan and periodically reviews the progress of implementation as well.
- Board self-assessments
Self-evaluations are typically coordinated either by the board chair, the governance committee chair, or the board secretary/ corporate governance officer. A board’s performance is generally evaluated by a standard questionnaire and/or through one-on-one interviews.
Board self-assessments are important because they strengthen how corporations operate, which has a strong relationship to how they govern. Every stakeholder has something to gain from boards that perform well and that practice good governance. Board self-assessments bring value to board directors, shareholders, managers, the organization and, ultimately, clients and customers.
Boards should come away from the board assessment process with results that are meaningful and actionable. However, Board assessments are not an appropriate arena in which to demean or embarrass board directors. The Board evaluations will lose their effectiveness when board directors use them as an opportunity to place blame on other directors.
- External evaluations
External evaluations are carried out by an external third party, retained by and reporting to the board. External evaluations of board directors are also made by using a questionnaire and/or one-on-one interviews. But such external evaluators may bring their own judgment on the quality of the board’s performance during the evaluation, and may decide to also request inputs from other stakeholders.
Internal evaluations have many benefits, but in certain circumstances, engaging an external independent expert or consultant or advisor to facilitate the Board evaluation process may work better. One view that supports independent external evaluations is that the evaluation process becomes more independent and transparent. Internal evaluation tends to become mechanical, while an external evaluator could bring in fresh perspectives and approaches.
NB: It is of great importance that trust is established in the credibility and confidentiality of the process of board evaluations, regardless of whether it is managed by the board itself or by a third party. Trust is the best incentive to encourage candid input and feedback from board members and other stakeholders, and makes it more likely that the evaluation results will be taken seriously by the board.
Additional ways to make a good process better
An important component of board evaluations is full candor during the self-assessment process. While there are different ways for this to be achieved, three approaches are emerging as leading practice:
- individual and peer evaluations, and
- 360° feedback.
Individual and peer evaluations: Whether through questionnaires or interviews individual and peer evaluations can improve an evaluation process, especially one that is already generally successful as applied to the board as a whole and its committees. Listing and other regulatory requirements have made it a requisite for board assessments to be conducted for almost all public companies and some organisations are also taking the initiative to evaluate committees and individual directors. This form of evaluation can be a valuable way to enhance overall board performance, foster a sense of individual accountability and allow any gaps in knowledge, skills and behavioral attributes to be better addressed. Peer assessments provide a mechanism for directors to enhance their own performance and address and remember any peer performance issues.
360° feedback: Feedback from others outside of the boardroom can provide invaluable perspectives into the board’s performance. Potential participants in a 360° session may include shareholders on how they view the directors and board (especially where directors meet with shareholders/investors), and employees and others who have significant interaction with the board and its committees — such as the corporate secretary, chief financial officer and other senior management. In particular, one of the most challenging aspects of a board’s role is to both oversee and challenge, while also cohesively working with, coaching and building strong rapport with senior management (especially the CEO). Great boards set and evaluate management’s performance, while supporting and motivating them. Boards should evaluate how well they are performing this role by incorporating management feedback as part of the evaluation process.
Performance evaluation is a key means by which boards can recognize and correct corporate governance problems, capitalize on the board as a strategic asset and add real value to their organizations. Board assessments can contribute significantly to performance improvement at four levels: the board as a collective team; board/committee leadership; committees; and the individual director level. Boards that commit to a regular evaluation process find benefits across these levels in terms of improved leadership; increased clarity of roles and responsibilities; improved teamwork; increased accountability; better decision-making; enhanced communication; and more efficient board operations.