Board effectiveness is often viewed as a nebulous area for which there is no blueprint for implementation. Yet on exploring the issue when writing our report Board effectiveness – Continuing the Journey with The Investment Association, we identified two clear business imperatives:
- The importance of boards as a whole keeping up in a constantly evolving environment.
- The responsibility of individual board members to share their ideas, experiences—and often forgotten—ask for support and guidance to help them improve and develop.
While there are several ways in which to achieve these imperatives, a key aspect is the board’s understanding of its current performance and insights on where it might improve.
Boards of listed companies in the UK subject to the Corporate Governance Code have for some time been required to undertake a formal and rigorous annual evaluation of their own performance, of committees and of individual directors. These reviews have become the norm, but are they having the desired impact? After all, boardroom and corporate scandals continue apace.
Scope, execution and follow-through
Performance reviews for employees are used across many businesses and sectors. They are designed to make individuals stop and think about their achievements and development areas for the future.
Board evaluations too should help boards reflect and set goals for the future. However, they need to be set up and executed in the right way to ensure that they have the desired impact.
Boards have a key role to play in setting strategy and for the stewardship of the company. The scope of an evaluation therefore needs to be aligned to these. For example, in terms of strategy, an evaluation should cover the following points:
- The board’s role in setting the strategy;
- The board’s role in assessing progress made in achieving the strategy and the interventions and actions it has committed (or should commit to) to keep on track;
- A forward looking view on whether the board has the right skills and experience for the future to set and achieve the strategy (and if not the plans in place to fill the gaps);
- Whether the board agendas and information packs duly reflect the board’s role in strategy and its achievement;
- The impact of culture on achieving the strategy.
While it is important to have a framework to perform an evaluation, there needs to be some flexibility to allow all involved to be open and balanced in the way they feel most comfortable. Box ticking through an evaluation will not give the right results, and may often lead to “hearing only the music you want to”.
In order to get the most from a board evaluation, gathering views from those who are not on the board but have access to it can be useful. It can provide an outside-in perspective on issues like board dynamic and chemistry, which are at the heart of board effectiveness.
But bringing together high-achieving, successful individuals does not guarantee that they operate as a functional, cohesive team. As boards become more diverse in their make-up, inclusive leadership is key and something that should be tested as part of the evaluation.
An aspect that should also be tested in the process is how well individuals understand each other’s distinctive personal attributes (as opposed to their generic skill set) such that these attributes are actively called upon when deliberating an issue and making a decision.
If they aren’t well understood, then board members are almost relying on chance that an individual will bring to bear a particular attribute when it is needed.
Adequate time and resource also need to be set aside both to perform the evaluation but also to deal with the findings.
We have heard anecdotally that while boards often budget every three years for an externally facilitated evaluation, sometimes there is no budget set aside to implement the actions in the intervening years, some of which may take more than a year to implement fully.
A robust evaluation strategy in a (three-year) cycle is therefore key: how is progress from an externally facilitated review in year one followed through in years two and three?
The process to discuss the findings of any board review needs to be a democratic one. The full report should be circulated to the board and members given time to absorb the findings.
Some points may ultimately end up being dismissed, but this needs to be a collective role, following debate and discussion. This is key to ensuring that any thorny issues are dealt with head-on, for example comments relating to the chairman’s leadership style.
While there is no panacea to prevent corporate scandals, the heart of the matter often lies with the culture of an organisation, driven by the board. This is why it is essential for boards to make sure they are as effective as possible and deal with any problems at the earliest possible point.
Like most things in life, it’s the attitude that matters. Board evaluations can be compliance-focused, resource-intensive and self-congratulatory, or they can be creative and insightful.
The leadership of the chairman is essential to ensure the latter, but he or she must have the backing and commitment of the entire board to change, to improve, to embed any actions—within the boardroom or throughout the organisation.