DIRECTOR EVALUATION
29/11/2005
Director Evaluation
Media & Communications: AICD Views
The AICD believes that rigorous, transparent and regular evaluation of board performance is critical to maintaining an effective board.
Evaluation is the key to resolving many related problems that attract criticism to boards, such as board renewal, removal of poor contributors, remuneration, boardroom diversity, multiple directorships and lengths of service.
The AICD recommends that the following steps be considered when conducting board evaluation:
Setting performance criteria
- Performance criteria, goals and other issues for the collective board and for individual directors should be aligned with the strategic direction of the company and shareholder interests. Demonstrating the board’s achievements against the criteria can assist in securing shareholder approval of items such as remuneration.
Evaluating the board and individual directors
- The evaluation of directors should take place every two years, at a minimum. It is best for group evaluations and individual evaluations to be conducted as separate exercises. The Chairman may not wish to conduct the evaluation of the collective board, as it could raise issues relating to objectivity.
- The evaluation of individual directors must take into account the strategic direction of the company and the demands of its business. The collective skills of the board and of its directors need to be assessed against what particular competencies the board requires at that time for the company to be successful. If an area of weakness or a skills gap is identified it should be addressed through a proper process of board renewal.
- Evaluating required skill sets of directors with the strategic requirements of the company should form the basis from which new directors are selected, rather than relying on traditional questions such as ‘who do we know for the role’.
- The process of evaluation should be disclosed to shareholders, as recommended in the ASX Principles. However, it is advisable to keep the specific findings of each evaluation confidential, as is the case with most professional reviews.
- The evaluation process can be aided by the use of a professional external facilitator to ensure objectivity and honesty from all participants.
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