Board Evaluation

Setting high standards of corporate performance and governance benefits companies, the economy and the community. As Kevin Forde reports, a critical element in achieving these outcomes is for boards to adopt a process of rigorous evaluation of their performance and that of individual directors.

Tuning up for a high performance board

Regular evaluation of a board’s performance is now considered an integral part of effective corporate governance. But not so long ago many directors considered that reviewing a board’s performance was unnecessary and irrelevant.

Graham Bradley, chairman of Stockland Group Ltd and a member of the AICD’s corporate governance committee observes that: “A couple of years ago when the ASX Corporate Governance Council’s (ASX CGC) Principles of Good Corporate Governance and Best Practice Recommendations (ASX CGC Principles) were introduced, board evaluation was a new concept for a lot of boards. We’ve found a high level of compliance with the notion of having a board evaluation, but in surveys of director satisfaction with the process, we’ve found less than fulsome satisfaction with how it’s been done. So AICD has come out with some guidelines to help companies do it better.”

Evaluation process

The issue these days is not whether to evaluate a board’s performance, rather it is what kind of evaluation approach best enhances board effectiveness. An essential element of any performance review is for boards to actively choose an evaluation process that best suits their needs. Feedback from directors and chairmen concludes that the best evaluations are those that are tailored to a company’s specific circumstances.

The methodology could vary, for instance, depending on whether a company has conducted an evaluation previously or not. Novices to the evaluation process could find it confronting to embark on a detailed process that involved questionnaires and critical appraisal from senior management.

However, it is essential that board evaluations recognise the significant differences between the accountabilities and responsibilities of board members and executive managers. Managers have individual accountability as well as collegiate accountability. In contrast the board’s responsibility is joint and shared. Directors will contribute individually to the deliberations of the board, but the outcomes are the result of collective decision making.

To assist boards in developing and implementing board reviews, AICD has published a guide titled Evaluating Board Performance: A Guide for Company Directors. This book does not advocate any single process or methodology. Indeed, it opposes practices that involve box-ticking or ratings as being counter-productive.

Most directors come from a corporate environment and so they are accustomed to having their performance regularly evaluated – so being evaluated as a director should not be something new. According to John Story, AICD’s national chairman: “There’s no reason why they should not be part of it when they move into the boardroom.”

Story also believes that evaluations had only become the ‘norm’ during the past five years, and still had to become ingrained into the culture of some boards. “Having board evaluations conducted on a regular basis, and having external facilitators involved may be the next step as an alternative to having them conducted personally by the chairman,” he says.

AICD recommends that boards follow the guidance concerning board performance evaluation as outlined in the ASX CGC Principles. Specifically, Good Governance Principle 8 advocates that companies “fairly review and actively encourage enhanced board and management effectiveness”.

Reporting board evaluation

A more contentious issue is how the outcomes of a board evaluation should be reported to shareholders. According to the ASX CGC, the following material should be included in the corporate governance section of the annual report:

• Whether a performance evaluation for the board and its members has taken place in the reporting period and how it was conducted
• An explanation of any departure from best practice.

John Ralph, who is chairman of the AICD’s corporate governance committee, counsels against reporting on individual directors. “I believe that the process of evaluation should be described as well as what improvements will stem from the evaluation and how these will be implemented. But specific reports on individual directors should not be published. A good evaluation process depends on the participants being able to freely give their views on the performance of others. If these views were published they might not be so willing to be open in their opinions and instead give only bland statements which are of much less benefit,” he says.

For example, the ASX-listed company Healthscope Limited reported on its board evaluation in the following manner:

“The Board undertakes an annual performance review embracing both a collegiate consideration by the full Board and individual appraisals between the Chairman and each Director.

The Board evaluation process involves firstly a self-assessment of Board and Committee performance through each Director completing a [confidential] questionnaire. The questionnaire covers matters such as the adequacy of the structure and operation of the Board; the Board’s contributions to the Company’s strategic direction and key Company initiatives; the appropriateness and effectiveness of Board Committees; the adequacy of the Board skills; and the adequacy of audit, risk and control and information processes.

Results of the questionnaire are then aggregated and reported to the Board as a basis for collegiate consideration of Board performance, Board contributions and any means by which that can be enhanced.

The ‘Board as a whole’ process is supplemented by individual appraisals between each Director and the Chairman – providing opportunities for consideration of personal contributions, development preferences and issues particular to the Director.”

Role of the chairman

One issue that most experts involved in board evaluation agree upon is that the chairman should not be the person in charge of the evaluation process. A review of the board is often a review of the chairman – and the precise time to do a board review is when the chairman is not doing a good job. Colin Carter, boardroom consultant and director of Wesfarmers says: “The chairman should make sure the process is carried out – but by someone else. Another director or an outside facilitator should actually do the work. I am not saying that the chairman should not sit down with each director and discuss the outcomes of the review – but someone other than the chairman should manage the diagnostic process of the formal board evaluation.”

Another issue is whether the board conducts a self-evaluation or whether it should engage outside consultants. In Bradley’s view: “The best way is the one that’s actually tailored to the individual company and its circumstances and also one that the actual chairman feels comfortable with. After all, the chairman is the linchpin to an effective process, whether or not you include and involve an external facilitator.

“Some companies have taken a route of an internal process and in my experience that works very well where you’ve got a board that’s largely very functional, is looking to make improvements, but nevertheless has a good open and frank dialogue around the board table. In different companies where there’s more dysfunction around the board room, where perhaps the chairman is part of the problem in terms of his personal or her personal style, in those circumstances you can get better value sometimes from having an external facilitator.”

Possible outcomes

The outcomes of board reviews are often not earth-shattering – unless the board has become dysfunctional. Nevertheless, it is wise not to under-estimate the importance incremental changes can have on how a board operates.

Dr. Helen Nugent, a national director of AICD, sees several potential positive outcomes from a board review. “A board evaluation may reveal that individual directors feel they are not contributing as much as they could. This may result in some rotation of positions on board committees as some directors may feel they can contribute more by being on a particular committee, while others might feel they have become stale and would like to take on other responsibilities,” she observes.

In Nugent’s experience, other reforms arising from a review could involve the board’s agendas being restructured so that more important issues are dealt with first and that issues involving long-term strategy are given more time or even a separate quarterly meeting. In addition, the review could uncover that some board members consider that they need more information to contribute to boardroom discussions and this could result in individual directors enrolling in education programs.

So board reviews can not only benefit the company but can also result in a more meaningful and rewarding role for individual directors. According to Professor Geoffrey Kiel, senior deputy Vice Chancellor & Dean, School of Business at the University of Notre Dame Australia: “The benefits of an evaluation to a board are numerous. If conducted properly, board evaluations can contribute significantly to performance improvements on three levels – the organisational, board and individual director level. Boards who commit to a regular evaluation process find benefits across these levels in terms of improved leadership, greater clarity of roles and responsibilities, improved teamwork, greater accountability, better decision making, improved communication and more efficient board operations.”

Pitfalls to avoid

1. The objective to improve board effectiveness gets lost in the administration of the feedback process.
2. Approach taken is ‘too far too soon’ – a staged introduction of evaluations may be advisable.
3. Evaluation is avoided or diluted because it is too confronting – the process is not about ranking directors but improving the effectiveness of the board.
4. Working relationships have not been established to underpin the evaluation with an atmosphere of trust and candour.
5. External evaluators bring personal biases into the evaluation process.
6. Some chairmen have low feedback skills – constructive exchange is essential so it might be advisable for some chairmen to brush up on their interpersonal skills.

Source: Evaluating Board Performance: A Guide for Company Directors, AICD 2007.

Seven tips for effective board evaluation

There is some practical advice from boardroom consultants Colin Carter and Terry Atkinson, both of whom conduct board evaluations.

1. The process should be designed so that it actually works when the board has a problem – ie the evaluation process should be designed so that it can cope with difficult situations.
2. Keep it simple. The main challenge in board assessment is not discovery of the unknown but to make sure problems are placed on the table and addressed.
3. Evaluations should not be done more frequently than they can add value. The appropriate timing for a board evaluation is every two years – although APRA regulated companies must do it every year.
4. Start with a collective view and then add individual feedback. Some directors will be unwilling to commit to an honest and critical assessment of their peers when they are unaccustomed to the evaluation process.
5. Senior executives should be involved – their opinions are important because they invariably have a different view of the board than that held by the directors themselves.
6. A questionnaire is an important part of the process. A questionnaire ensures that the results are transparent and not reliant on an interviewer’s filtered view of what the separate discussions with directors revealed.
7. Individual responses should be kept confidential – most directors and executives will not want to offer critical comment if the sources of these comments are identified.

Source: Evaluating Board Performance: A Guide for Company Directors, AICD 2007.