New proposals call on providers of board evaluations to disclose the measures they take to avoid conflicts of interest and to sign up to a new code of conduct.
There is also a recommendation that companies sign up to a list of good practice principles. The government is also being asked to consider a public register of all the reviewers signed up to the new code.
The measures come in a report from the Chartered Governance Institute following a request by the government to review the world of board evaluations.
According to the institute’s chief executive, Sara Drake, the review found no major failings but did find room for improvement.
“Whilst there is no evidence to suggest that there is widespread market failure that needs to be corrected, we believe that there is scope for broader adoption of good practice and greater transparency on the part of both board reviewers and the companies using their services,” she says.
‘Variable’ information on process
The institute recommends that companies should disclose more information on their annual board performance review. Current guidance is that FTSE 350 companies should undertake a full board review every three years.
There are hints of concern in the report. The review found that the market for board evaluations has a “high level of concentration” with just two organisations handling 40% of the FTSE 350 evaluation market in 2020. One of the suppliers accounts for around a quarter of board reviews.
And there are some worries about disclosure. Only 46% of FTSE 350 companies reported on the outcomes of board reviews in 2020, with no current sign of improvement. Information from companies about the process behind board evaluations is “variable”, though they may be improving.
Maureen Beresford, head of corporate governance at the Financial Reporting Council (FRC), guardian of the UK corporate governance code, says disclosure could mean progress.
“The FRC’s recent review of corporate governance reporting identified that many companies could improve their disclosure and highlighted areas of improvements.”
Good practice for board reviews
According to the institute, reviewers should not be prevented from providing others services to their clients, but the institute remains concerned about potential conflicts of interest.
Reviewers and boards are asked to disclosed how they manage conflicts and “threats to the independence” of the evaluation process while there is also a recommendation that companies disclose evaluation fees and whether they “exceed” fees for other services.
The institute’s eight Principles of Good Practice for companies include ensuring the appointment of board reviewers is ratified by either the full board or the nomination committee. It also asks boards to limit their relationship with a reviewer to no more than six years.
While the institute has resisted a prescriptive approach to what a board review should involve, it has provided a checklist of skills reviewers should possess.
These include being able to judge whether a board and its directors “display rigorous thought processes” that lead to “independence of thinking”; assess “behavioural dynamics” in the boardroom; assess individual contributions of directors; assess “wide succession issues”; analyse the effectiveness of the board’s decision-making processes; gather the views of shareholders and stakeholders.
Peter Swabey, policy and research director at the institute, says it would be wrong to be “overly prescriptive” about the contents of a board evaluation, given the needs of boards vary so much, but there are some common elements. “Excess prescription could deter innovation and competition,” Swabey says, but he adds that evaluations are being watched.
“That said, it is legitimate for shareholders and others to expect greater accountability from both companies and reviewers as to how board reviews are conducted and evidence that they are being undertaken robustly.
“Evaluating the board’s effectiveness may not be an exact science, but nor should it be a black box.”