Putting board evaluations to the test

  • Date:01 Jul 2005
  • Type:CompanyDirectorMagazine
John Massey recalls a speech he made to a business group over a decade ago advocating board evaluations. The reaction among directors in the audience was one of bemusement, if not outright dismay.

By Leo D'Angelo Fisher

"People thought it was quite unbelievable that a board would seek to evaluate its own performance," he says. Massey, chairman of engineering group Cardno and medical device company Ventracor, notes with satisfaction that it's a different story now.

Around the globe, a procession of sensational corporate collapses has placed unaccustomed attention on the performance and competence of company boards and individual directors. The result has been transformative, placing board evaluations at the heart of governance best practice.

The New York Stock Exchange requires its listed companies to conduct annual self-evaluations of their boards, while in key European markets, as in Australia, regulators have introduced corporate governance standards that recommend (but do not mandate) board performance reviews.

For many directors, particularly those with blue-chip pedigrees, the idea of submitting to evaluation and review is a confronting one.

"It can be a threatening process [for experienced directors], but they'd be the very first ones who'd want to appraise a CEO, particularly a CEO who's not performing. If it's good enough for a CEO, why isn't it good enough for boards?" says Massey, himself a former chief executive of Grainco and QDL Pharmaceuticals.

The ASX Corporate Governance Council's best practice guidelines, released in 2003, recommend that ASX-listed companies enhance board (and management) effectiveness by ensuring that "individual and collective performance is regularly and fairly reviewed" against "measurable and qualitative ndicators". Recommendation 8.1 urges companies to, "Disclose the process for performance evaluation of the board, its committees and individual directors". Companies are free not to comply but must explain their reasons in their annual report.

Massey welcomes the ASX-inspired trend to board performance reviews, but concedes that it's "something of an evolutionary process". He recognises that even among companies complying with the ASX guidelines, there are companies with a less than total commitment to board evaluations.

"There would be people doing it because the ASX guidelines say they should, but it seems to me that's the wrong attitude. This [board evaluations] is a performance-related issue that needs to be taken seriously. If it's not taken seriously why do it? It's got to be with the objective of adding value and improving the board's contribution," he says.

It is a measure of the clamour for change at the height of the crisis of confidence in the corporate sector that boardroom evaluations - so unthinkable a decade ago - have become a pillar of corporate governance best practice. In theory at least. Concern remains that the ASX's "if not why not" corporate governance guidelines have given rise to a "governance conformance culture" rather than a genuine embrace of its principles.

This was the conclusion of a survey of the Top 200 ASX companies by Chartered Secretaries Australia (CSA). Released in December 2004, the survey found that 20 percent of companies had chosen to comply rather than explain a departure from any of the recommendations, even when it was felt their original practice was preferable. Similarly, 60 percent were concerned that a "why not" explanation would attract unfavourable public commentary or investor reaction, while 96 percent were concerned that "so-called corporate governance experts" may adopt a checklist approach to assessing their responses the to the ASX guidelines.

"[If] this is the mindset of the Top 200 ... what is happening in smaller companies where there are fewer resources and possibly less commitment to good governance practices?" says CSA chief executive officer Tim Sheehy.

The CSA survey found that 91 percent of companies conducted annual board evaluations and 80 percent conducted annual performance reviews of board committees. But if, as Sheehy contends, companies are "caving into the guidelines", can we be confident in the integrity and robustness of the board evaluations now under way in boardrooms across Australia?

It's a concern not limited to Australia. In the US, a paper released by executive search firm and corporate governance advisers Spencer Stuart acknowledged the problem: "Beyond requiring that boards undertake an annual evaluation, the stock exchanges provide little guidance concerning what that exercise should entail. As a result, boards easily could dispense with the requirement by doing the bare minimum." (Getting the Most from Board Evaluations, 2004.)

For some, the implicit requirement to evaluate board performance is just another box to be ticked, or worse, more corporate governance red tape, another onerous and potentially expensive process to be endured. But for others, says Brisbane performance measurement specialist Dr Robert Lake of Lake Corporate Consulting, it is a valuable process that enhances the organisation's effectiveness and competitiveness.

"The key factors that make an evaluation onerous or valuable are the underlying commitment to the process, and the process itself," Lake says.

"A commitment to evaluation means that it is seen as part of a learning cycle in which improvement and change are sought in response to the results " this is the action-learning process of do, review, change, implement. A lack of commitment means doing an evaluation for the sake of it, with no commitment to improvement or change, which is indeed a waste of time and money."

In these early days of board evaluations, process is a critical key to the effectiveness of board reviews.

George Miltenyi, managing director of EMD consulting group in Sydney, has been conducting board evaluations for five years. Like many of his peers, he has experienced heightened activity since the release of the ASX corporate governance guidelines. He believes most companies are making a genuine attempt to create a "culture of self-assessment", but progress is too slow for his liking.

"It's a beginning, and we need to encourage those companies who are taking steps to do it right, but there needs to be greater rigour and focus [in evaluation processes]. A lot of companies are giving it a good nudge, but are these best practices? I don't think so," Miltenyi says.

According to the CSA survey, of the nine out of 10 Top 200 companies which conduct annual performance reviews, 45 percent use external consultants.

Management consultant Con Livissianis has been assessing the financial skills of executives, staff and recruits since 1999, but this year his Sydney firm, Exemplar Performance Advantage, launched an online skills test for directors comprising 130 questions. Directors are tested on financial literacy, written communication skills and core competencies, including risk management, duties and responsibilities, ratio analysis, foreign exchange, and accounting principles.

"It isn't a simple pass or fail test. The test is designed to balance strengths and weaknesses and to target areas for training and improvement," Livissianis says.

"When we get the brief from the chairman, usually he wants to know what the strength and weaknesses are on his board, he wants to know what he has to do to strengthen the board."

Warren Tapp, managing director of Brisbane board consultants Directors Australia, and an active non-executive chairman and director in his own right, says company chairmen often face resistance to bringing in external consultants to evaluate board performance.

Citing a recent client, Tapp recalls how the chairman of the company had been determined to conduct a board review using an external facilitator, despite the opposition of his fellow directors: "The chairman told me that it had taken him a year to convince them. When we interviewed some of the directors, it was like pulling teeth."

Directors who are comfortable with internal self-evaluations, according to Tapp, are often resentful of outside consultants. "Once they get us involved, it's a different dynamic,' he says. "A lot of directors feel threatened by the involvement of external facilitators. Their attitude is: 'Why do we need to be evaluated, we're the board?' which in itself is a danger sign."

John Grant, chairman of biotechnology company Biota Holdings, technology company Ambri and NZ Venture Investment Fund, says no board is above evaluation. "Reviews benefit even the best boards," he insists.

But evaluations are not ends in themselves. What's critical, says Grant, is the follow up, the process by which issues are discussed and recommendations considered and implemented. That's what separates the box-tickers from the committed.

"There's no point going through the process unless you follow up, communicate concerns and address issues," Grant says.

Dr Wayne Millen, chairman of biotechnology and pharmaceuticals company EpiTan, says pressure for board evaluations is growing from shareholders, regulators and the investment community.

He says the challenge for boards, particularly boards of smaller companies, is to set the goals for the evaluation and to choose an approach that suits a company's circumstances - its culture, size, stage of development, industry, goals and strategy.

"The composition of our board, the expertise and experience of the directors we have appointed at different times, has evolved along with the company. In the same way that strategies evolve, so do boards, and so do the contributions that different directors make. Evaluations in these circumstances can be very subjective," says Millen. 'It would certainly be a mistake to assume that a one-size-fits-all approach to board evaluations is the answer."

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