The yearly board evaluation has become an important process for companies to know how the performance may be improved and for stakeholders and stakeholder to understand whether the board is doing its job well or not.
The performance of boards has attracted a lot of attention during last period especially due to high-profile governance failures, and to transparency issues.
Corporate Governance Codes
Boards are required by applicable corporate governance codes to evaluate their performance. All listed companies need to provide evidence that they are functioning in line with applicable corporate governance code.
Some corporate governance codes require just a confirmation that the evaluation was done on yearly basis, and other (UK Corporate Governance Code) recommend an evaluation using external independent evaluators.
The board evaluation process
The board evaluation should consider several factors:
1. The structure of the board, the number, the type, and the composition of committees.
2. Board composition - the quality of leadership, the mix of skills (keeping and updating a skill matrix), diversity, experience, and independence for each member.
3. How the board works as a team, the attendance to the board works during the previous year and boardroom dynamics.
4. The board efficiency and effectiveness - annual board work plan, the policies and the procedures governing its activities.
5. The communication between board and its shareholders.
6. Risk management oversight.
7. Culture of the company and strategy monitoring.
8. Succession planning for each member of the Board.
9. Code of ethics issues identified for the previous year.
10. Business performance - this includes the key performance indicators that need to be customised to the company and the board as a team and individually.
For analysing the factors above, the questionnaire for evaluation should include questions related to the activity of the chair of the board, and the chair of committees. The respondents for the questionnaire should be not only the members of the board, but also the other stakeholders that interact with the board (management, external consultants of the board).
The last part of the process would involve the discussion of the responses and the final report including recommendations for future changes.
Consequences of not evaluating or improper evaluation of the board
Failure to evaluate the board properly is risky and can have the following consequences:
Ø No succession planning that may lead to issues in the board’s activity
Ø Inadequate leadership at the level of the board
Ø Inappropriate board composition and members that are not attending all board’s meetings
Ø Lack of key knowledge and experience
Ø No appropriate diversity
Ø Inappropriate board and company culture
Ø Lack of confidence of shareholders in the board that may be reflected in significant votes against shareholders resolutions proposed by the board
Ø No transparency
Ø Bad performance of company because the management is responding to the board requests more than working for the best interest of shareholders
Ø Board is not representing all shareholders, but only one or a group of shareholders
Most Boards are performing a self-assessment for the yearly evaluation process. It is good that there is such a process, but is it a process of just ticking off that an activity has been done? How many companies involve external third-party evaluators for an effective evaluation process and how many make public the result of the annual evaluation?