Why board evaluations are important

Board evaluations are one the most significant developments in corporate governance in the last 30 years. Originating in the UK as a response to corporate scandals and failures, today they feature in the regulation of listed companies all around the world, providing a mechanism for measuring and improving board effectiveness through regular appraisals.

However, they are not restricted to large, listed companies. Any organisation regardless of size or sector can benefit from a tailored, periodic board review that promotes commitment to healthy board dynamics and continuous improvement.

What are the benefits?

The evaluation process assesses and reports on the effectiveness of the board, its committees and the directors, both individually and collectively.

Appraisals can highlight weaknesses and address them through recommendations to improve governance and decision-making. They provide assurance to employees and investors alike that directors care about the performance of the business and its stakeholders. They also help ensure that the board operates as a high-performing team, ultimately helping to develop the board as a strategic asset that enhances the success of the business.

Who does it well?

The UK Corporate Governance Code (the Code) is an example of best practice. It states that ‘annual evaluation of the board should consider its composition, diversity and how effectively members work together to achieve objectives. Individual evaluation should demonstrate whether each director continues to contribute effectively.’

Today, board evaluations are an established part of the UK corporate governance landscape, but this was not the case in 2005 when board reviews first featured in the Code. Many directors were sceptical, even hostile.

Importantly, the initial requirement was for internal reviews only – a non-threatening approach that made compliance relatively straightforward. It was not until 2010 that periodic external reviews were included in the Code. The reason is clear: third-party facilitation introduces objectivity and extra rigour into the process.

How are they carried out?

Board evaluations should typically be overseen by the chair and coordinated by the company secretary.

Most internal reviews comprise:

• self-assessment questionnaires completed by each director on the effectiveness of board and committee meetings, and on the performance of the directors individually and collectively
• one-on-one interviews by the chair with each director (the chair is interviewed by the senior independent director).

External reviews involve close liaison between the chair and the third-party facilitator. Techniques include designing tailored questionnaires, interviewing all directors and senior managers, reviewing key documents, observing meetings and assessing board composition.

It should be noted that a board evaluation, whether internal or external, is a highly sensitive exercise. The chair should ensure that the process is kept confidential and the final report anonymised.

What are the key features?

The board is concerned with good corporate governance and its work should always demonstrate strategic alignment and engagement with key business issues. Therefore, board appraisals need the same focus. This involves reviewing both the board’s oversight of current performance and its contribution to the future strategic development of the business.

The key components of an effective board evaluation are listed in the panel.

Evaluations should consider board effectiveness across two dimensions – processes and people. An effective review will bring to the surface issues that might otherwise go unaddressed. Here are some examples:

Processes

• Board packs. Crucial to decision-making, board packs should be distributed at least five working days before the meeting, allowing time for directors to digest them.
• Agendas. Meetings agendas often go unchanged. It is good practice to vary the agenda so the most important matters are covered first, especially those with a strategic focus.
• Induction. Induction processes for non-executive directors should be extended to newly appointed executives, as they too need to understand their legal duties, responsibilities and liabilities.

People

• Discussion quality and focus. Evaluations can highlight issues with boardroom discussions. Chairs are often more concerned with covering the agenda and keeping the meeting running on time rather than with the quality of the discussion. Also, too much board time is sometimes spent reviewing past financial performance rather than future planning.
• Skills. Assessing board experience and expertise during the appraisal often uncovers skills gaps (eg an absence in ESG leadership or digital development).
• Director’s contributions. Third-party facilitation can support the management of poor contributions from directors. For example, mentoring by the chair or another director can quickly improve performance if directors from different, non-corporate backgrounds struggle initially.

Every board should be aiming for continuous improvement. High-quality, rigorous board evaluations provide a powerful and valuable feedback mechanism for improving effectiveness, maximising strengths and highlighting areas for further development. Whatever the size of your business, these evaluations matter.